Hong Kong budget conservative yet practical amid economic uncertainty and reduced government revenue
Published: 27 February 2019
Today, Hong Kong's Financial Secretary Paul Chan delivered a conservative, practical budget that manages public finances in response to reduced government revenue and prepares Hong Kong for emerging economic uncertainties.
Hong Kong continues to invest substantially in innovation and technology development, and offers short-term relief measures, albeit at a reduced scale, for citizens. If economic challenges continue to intensify, the government might start to face pressure to spend its fiscal reserves. This means it needs to adopt an approach that strikes a balance between investing for the future and adhering to its long-held principle of fiscal prudence.
"The likely resolution of US-China trade talks has removed a major overhang for regional asset markets. As a result, much improved sentiment coupled with the US Fed's much less hawkish stance have further fueled rallies in equity and property markets," says Deloitte China Chief Economist Sitao Xu.
"Such a relatively favorable macro backdrop should bring social issues to the fore. The Hong Kong SAR government is still in a good fiscal position, and is able to use fiscal levers to help SMEs and even jumpstart certain sectors like fintech. This will help strengthen Hong Kong's role as a leading financial center."
Deloitte China Tax Partner Sarah Chan adds: "It is understandable, given economic uncertainties, that the Financial Secretary adopted a relatively conservative tone in his third budget. The government has not taken on board our proposed measures to support the middle class and the business community. Also, we did not expect the government to reduce the scale of short-term relief measures for citizens, for instance by reducing the tax reduction ceiling to HKD20,000 from the previous financial year's HKD30,000."
Chan worries that the government could be forced to consume its fiscal reserves if there is no improvement in the global economy. To ensure the long term health of its financial position, the government should reconsider reviewing the exisiting tax regime and exploring new revenue sources, she believes. The government forecasts a surplus of HKD16.8 billion for 2019/20, which includes a Housing Reserve of HKD20.6 billion for the same fiscal year. In other words, it would be facing a deficit without the Housing Reserve.
"It is also important for the government to take more concrete steps to drive technology development, support Hong Kong in seizing new opportunities in the Greater Bay Area and strengthen our competitiveness to thrive in Asian markets."
Deloitte welcomes the government's determination to invest in innovation and technology, which are pivotal to driving Hong Kong's economic diversification and raising its competitiveness to seize opportunities in the digital era. The government has set aside HKD16 billion for universities to enhance campus facilities, particularly for research and development. It will also inject HKD20 billion into the Research Endowment Fund of the Research Grants Council under the University Grants Committee to provide research funding.
The government continues to strive to address the long term, thorny problem of housing in Hong Kong. It will set aside HKD22 billion to implement the first batch of government projects under the "single site, multiple use" initiative. Separately, it will allocate another HKD2 billion to support NGOs' construction of transitional housing.
"There was a dearth of comprehensive housing measures. However, we should applaud the government for respecting the public's view that keeping the Housing Reserve outside fiscal reserves may not fully reflect its financial position. The Financial Secretary agreed to bring the Housing Reserve back into fiscal reserves, and earmarked the same amount in fiscal reserves for public housing development to demonstrate the Government's commitment, " concludes Deloitte China Tax Director Alfred Chan.