Blog

Deficit budget

As the HKSAR government and the society make every effort to deal with the outbreak of the new coronavirus, the economic cold winter is another imminent challenge to us. The public is now avoiding going out and gatherings with a view to limiting virus spread, which at the same time reduces consumption and economic activities, and pose severe impact on businesses. There were reports last week on companies offering unpaid leave to employees, cutting pay, laying off staff, or even shutting down businesses. Many retailers also chose to close their outlets temporarily given the thin business. Financing is currently the biggest pain point experienced by small and medium enterprises. Even large companies are very cautious about the business prospects and have been cutting costs to survive the downturn.

As I pointed out last week, the actual impact of the disease on Hong Kong's economy is quite substantial and may be higher than that of SARS in 2003. The impact is not limited to retail, catering or tourism-related industries. Such "tsunami-like" shocks may cause the unemployment rate to deteriorate rapidly.

The Chief Executive has announced the setting up of a $25 billion fund for virus fight to help local sectors and businesses tide over the coronavirus situation, and strengthen the city's epidemic prevention work, We hope to support the sectors and industries that have been hit hard by the outbreak, so as to avoid large-scale business closures and layoffs.

In terms of anti-epidemic measures, to ensure the proper supply of masks and other personal protective gear, the government will continue to step up its global sourcing efforts and subsidise firms to set up local production lines for producing reusable masks and conducting related R&D work. The government will also allocate an additional $4.7 billion to the Hospital Authority to ensure that they have sufficient resources to tackle the epidemic. In terms of supporting enterprises, companies in the various industries directly affected by the epidemic will receive one-off allowances, covering travel agencies, licensed food premises, retailers, licensed hawkers, etc. We will also provide support to the exhibition, culture and arts, innovation and technology sectors, kindergartens and childcare centres, as well as front-line cleaning workers.

Following the launch of the four rounds of relief measures in the second half of last year, the announcement of the 10 new livelihood policies at $10 billion by the Chief Executive last month, and the latest $20 billion fund for virus fight, there have been discussions on the affordability of the government in the long run given the surging government spending. Indeed, the projected fiscal deficit for the new fiscal year (2020/21) may be a record high in terms of dollar value. Apart from the introduction of counter-cyclical support measures as the main reason, the significant increase in recurrent expenditure in the past 10 years and the reduced tax and land revenue due to the weakening economy also contributed to the deficit. In fact, the average annual growth rate of government expenditure has exceeded that of government income since 1997. Nonetheless, one of the major reasons for the increase in government expenditure in the past period of time is for improvement in public services (such as social welfare) or investment in the society so as to catch up with the need of the people. Further increase in spending has to take into account government’s affordability in the long run, that is to commensurate with the growth in revenue.

Over the past few years, government's recurrent expenditure has increased significantly to improve public services.

In recent years, the increase in recurrent expenditure on social welfare and healthcare has been particularly high among public services.

Due to the complex and volatile external economic environment, the economic impact of the disease on the Mainland remains to be seen. Besides the virus outbreak, our society has not yet recovered from the social unrest last year, making it necessary for us to be cautious towards the short-term economic outlook. Fiscal deficits is expected for a period of time. More details and figures will be provided in the upcoming Budget. Concerns about whether the fiscal discipline of the HKSAR Government is following the principle of keeping the expenditure within the limits of revenues enshrined in the Basic Law, and the views of international rating agencies on Hong Kong's public finance are expected.

When interpreting fiscal deficit, we cannot only consider its magnitude or its percentage against GDP. The cause behind the deficit is also important. For example on the nature of expenditure, whether it is for essential operating expenses or flexible relief measures; whether it is recurrent, one-off or additional spending for special needs; how flexible and compressible the amount is; the growth trend of the expenditure, such as whether its growth will hinge on the aging of the population; or whether the expenditure is indeed for investment. On revenue, its volatility with economy and market fluctuations, and the room for upward adjustment and expansion should be considered. It is through analysis from different aspects that we can have a more thorough and accurate understanding of the deficit of a particular year, and an outlook of the public finance.

Although government revenue has increased over the past two decades, it has not grown as fast as expenditure.

Based on experience, government revenue fluctuate significantly with economic changes.

The current fiscal reserve of the HKSAR Government allows us buffers to launch counter-cyclical measures sustainably to stabilise employment and support the economy. However, in order to ensure the stability of public finance, we must pay more attention to fiscal sustainability in considering new expenditure items in future, in particular those with a recurrent nature, and keep expenditure within the limits of revenues. On the other hand, it continues to be pivotal for us to develop our economy, maintain the momentum of economic growth, and identify new growth drives to increase government revenue for supporting various public services and infrastructure. In addition, we need to work hard to break through various constraints that hinder economic development, including shortages of land, talents and labor, so as to create capacity and more favorable conditions for economic development.

February 16, 2020