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Adopting the right fiscal policy at the right time

The upcoming Budget will be announced in less than a month and the related public consultation exercise is still under way. Yesterday morning, I attended the Radio Television Hong Kong (RTHK) programme “Voices from the Hall” to exchange views on the Budget with around 100 participants. Their concerns covered a wide range of topics, including healthcare, people’s livelihood, housing, economic development and public finances. I also took the opportunity to explain some of the matters in which participants were interested. In short, three main aspects are of common interest: the sustainability of public finances, the progress of economic recovery and the actual needs of the community.

Attending the RTHK programme “Voices from the Hall” yesterday to exchange views on the Budget with around 100 participants.

Our economy has been plagued by the epidemic over the past few years. As such, government revenue from taxes as well as fees and charges has fallen. At the same time, the anti-epidemic efforts and relief measures implemented in the past three years have incurred an expenditure of more than $600 billion in total. Taking into account these two factors, the fiscal deficit was brought to a record high of over $200 billion in 2020-21. It is also anticipated that the deficit will reach some $100 billion in 2022-23. In the face of the epidemic and economic downturn, we decisively adopted an expansionary fiscal policy to step up support for the people and small and medium-sized enterprises (SMEs) through the introduction of counter-cyclical measures, thereby maintaining public and market confidence. The measures have delivered the expected results and won recognition from the market and rating agencies.

As our community has entered the post-epidemic stage, with anti-epidemic measures having been gradually removed, and normal travel between the Mainland and Hong Kong resumed in an orderly manner, our economy will surely perform better this year than the last. We therefore have to adjust our fiscal strategy accordingly. After adopting an expansionary fiscal policy for the past few years, our fiscal reserves have drastically dropped to the level of $800 billion, which is equivalent to around 12 months of government expenditure, and far lower than the level three years ago which was equivalent to more than 20 months of government expenditure.

As our economy and market came under pressure, we took exceptional measures during exceptional times to safeguard people’s livelihood. However, as our economy stabilises, we have to make adjustments to our fiscal measures accordingly. This is a responsible act, and in line with the principle set out in Article 107 of the Basic Law. The sustainability of our public finances is one of the fundamental elements of Hong Kong’s stable and prosperous social and economic development. As a small and fully externally-oriented economy, Hong Kong needs to maintain strong financial strength in order to withstand the risks posed by the external changing environment. As proven in cases of other countries, unsustainable public finances would undermine the stability of the local economy and the financial system, which would in turn affect people’s livelihood.

Attending the RTHK programme “Voices from the Hall” yesterday to exchange views on the Budget with around 100 participants

The tightening of the expansionary fiscal policy adopted in recent years is both inevitable and necessary. The key issue is how far such policy should be tightened to be commensurate with the current economic situation, as well as how such adjustments could be made more acceptable to members of the public, SMEs and the society at large. All these require our careful consideration.

On the other hand, although the economy this year will do better as compared to the last, we must closely monitor the speed and extent of post-epidemic economic recovery, especially during the initial stage when market confidence is still relatively weak. Sharp reductions in expenditure at this stage would not be conducive to consolidating the recovery momentum. In addition, as the business environment of different sectors and the income of wage earners from different strata may improve at a slower pace, the “sensory temperature” of the public towards economic recovery may vary. Taking these factors into consideration, even though the Government is under tremendous pressure to reduce public expenditure, it may not be appropriate to abolish relief measures across the board.

Hence, as regards our fiscal policy for the coming financial year, we will switch from a “considerably loose” expansionary approach to a “moderately loose” one. On the one hand, we have to focus on providing support for the underprivileged, creating stronger impetus for economic growth and further strengthening public confidence in our efforts to improve the economy. On the other hand, we have to strive to control public expenditure to maintain market confidence in our healthy public finances.

However, simply cutting expenditure will not help us increase revenue in future. We have to make an all-out effort to pursue the two objectives together at full steam, with a view to achieving vibrant economic development and bringing sustained impetus for growth while maintaining financial sustainability. Development is of overriding importance. Only with robust economic development could we have the financial resources to address the various needs of the people.

Our strategy is to promote better integration of a “proactive and capable government” and an “efficient market”. From the measures to invest heavily in innovation and technology (I&T) in the past few years as well as the current measures to attract enterprises and talent, our aim has been to create strong impetus for economic growth by using I&T to facilitate the upgrading and transformation of traditional industries and foster the growth of emerging industries. As Hong Kong enters a new development stage, whether we can maintain the competitive edges and vitality of our economy and ensure the long-term prosperous and stable development of Hong Kong hinges on the success of such measures.

Another major line of thinking for the upcoming Budget is pursuing economic diversification and enriching industrial development, which are conducive to a balanced economic structure and hence the creation of more quality employment opportunities. This is not just about economic development, but also about people’s livelihood.

The greatest challenge in the preparation of this Budget is a huge fiscal deficit. While it is essential to reduce expenditure, it is even more crucial for us to increase revenue. Under such circumstances, some of the relief measures which have been implemented for years may need to be adjusted. When considering various measures, we will try to minimise the impact on the underprivileged. That said, we do ask for understanding and support in circumstances where certain expenditures have to be cut, and where additional tax burden may have to be shared by the community.

Looking forward, we hope that our financial position will take a turn for the better as our economy heads towards full recovery and regain impetus. We need to foster greater and stronger economic growth, that is to say, “to make a bigger cake and share it among all”. We should sustain the recovery momentum of each sector at this stage, as well as create stronger impetus for economic growth in future. Entering a new development stage, Hong Kong is set to embrace new opportunities, new potentials and new strengths. We will adopt a proactive approach, stepping up our efforts to make known Hong Kong’s new positioning and developments to the rest of the world. As put forward in the Policy Address, we should tell the good stories of Hong Kong. The Task Force on Promoting and Branding Hong Kong, led by myself, was officially set up last week. The team comprises relevant government officials, prominent individuals with diverse backgrounds and a number of Hong Kong Inc. partner organisations. Through devising promotion strategies with concerted efforts, as well as direct communication and public relations promotion, the team aims to allow people in Hong Kong, the Mainland and overseas countries and regions to have a more comprehensive understanding, better knowledge and fuller recognition of Hong Kong’s advantages and opportunities, thereby enabling Hong Kong to soar high, reach new milestones and scale new heights in its future development.

January 29, 2023