Hong Kong to tackle deficit, slower economic growth in Budget
The city has historically relied on the property sector to drive receipts, and make up for low income taxes and lack of consumption levies
HONG Kong officials this week will unveil plans on how they will solve the mounting challenges facing Asia’s financial capital – chief among them slower growth and the longest string of fiscal deficits in two decades.
Financial Secretary Paul Chan, who will deliver the city’s annual Budget on Wednesday (Feb 26), has already flagged a focus on reining in spending that helped push the Budget deficit into the red for the third year in a row.
The government is also considering tweaks to increase capital, from raising taxes on the highest earners to capping a transport subsidy for seniors and legalising basketball sports betting.
“In the face of the fiscal deficit caused by multiple internal and external challenges in the past few years, this Budget will propose an enhanced ‘fiscal consolidation’ strategy,” Chan wrote on Sunday in a brief blog post, adding that the city will balance the need to “strictly control” public spending while maintaining services that residents rely on.
Policymakers in Hong Kong are nearing a crossroads, with dwindling avenues for generating revenue and an economy that is expected to remain under pressure this year.
While officials may be wary of raising the low taxes that have made Hong Kong an attractive place to live and visit, there may be limited options for generating the kind of revenue needed to plug an expected shortfall of HK$100 billion (S$17.2 billion) for the current fiscal year ending March.
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The city has historically relied on the property sector to drive receipts, and make up for its low income taxes and the lack of consumption levies.
At its peak in 2018, land premium – what developers pay for land use – contributed more than HK$165 billion to government coffers, but it fell to just HK$20 billion last year. The sector remains in a protracted downturn, with prices plunging since 2021 and nearing the lowest levels since 2016 in recent months.
That has provided one of the biggest drags on Hong Kong’s economy, with gross domestic product growth slowing to 2.5 per cent last year from a 3.3 per cent pace in 2023. While officials expect continued expansion, the outlook was revised lower by groups including the Asean+3 Macroeconomic Research Office.
Meanwhile, consumer spending remains constrained, with the total value of retail sales plummeting for 10 straight months to December, the longest streak since the pandemic.
Officials had last year announced a variety of policy tweaks – both big and small – across technology, entertainment, housing and trade to encourage activity.
Chief Executive John Lee in October relaxed mortgage rules for some homebuyers and investors, and slashed a tax on some hard liquor. His administration has also sought to attract visitors with a pair of baby pandas and large events. The city is set to open its biggest stadium next month, which will host major acts including Coldplay later this year.
Hong Kong has rarely been in a deficit outside of major economic shocks including the pandemic, the 2003 Sars outbreak and the fallout from the 1997 Asian financial crisis. The three straight years of deficits would be the longest string of Budget shortfalls since 2004.
So far, the persistent deficit has not raised major red flags at credit-rating companies or among investors.
In a January interview with the Hong Kong Economic Journal, Fitch Ratings analyst George Xu said that the government’s total fiscal debt was still far below levels for other “AA-” rated regions assessed by the firm. The government also maintains a HK$664 billion fiscal reserve – about a quarter of the city’s GDP – which is one of the highest among advanced economies.
Still, the International Monetary Fund (IMF) has flagged the deficit as an issue, cautioning that risks were tilted to the downside largely due to a range of factors largely out of control of domestic policymakers, including US-China trade tensions and a potentially longer-than expected property sector downturn.
IMF staff also highlighted higher-for-longer interest rates in the US as inflation pressures linger there, limiting how much the Hong Kong Monetary Authority can cut rates as it follows the Federal Reserve in lockstep. BLOOMBERG
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