Hong Kong Budget Misses One Thing — the Future

Hong Kongers weren’t really expecting a repeat of last year’s HK$10,000 ($1,290) relief checks. So it comes as a nice surprise that the city’s budget is giving people coupons worth half as much to spend in restaurants and stores. The disappointment lies elsewhere.

Following the lead of rival Asian financial center Singapore, Hong Kong will also taper its budget deficit to HK$101.6 billion — or 3.6% of gross domestic product — from HK$257.6 billion. But unlike Singapore, where assistance is now targeted more sharply toward the worst-affected families and businesses, the territory’s handouts are still rather broad. The spending vouchers, which will benefit 7.2 million permanent residents in a city of 7.5 million people, being a prime example.

The need to revive sentiment in the badly bruised tourism and food-and-beverage industries is undeniable. Where Financial Secretary Paul Chan fell short in the budget unveiled Wednesday is in making a splashy, Singapore-style commitment to getting Hong Kong ready to face its post-pandemic future. His pledge to earmark resources in excess of HK$100 billion to capital works annually is a big headline figure. But with the exception of the coronavirus disruption last year, the government has been spending more than that amount for nearly a decade. 

There probably are three reasons why Hong Kong’s HK$728 billion spending plan suffers from a future deficit. For one thing, Singapore’s jobless situation is more under control, giving the Southeast Asian city-state the confidence to look beyond Covid-19. With 7% unemployment, the highest in almost 17 years, Hong Kong doesn’t have that luxury, not when vaccination hasn’t yet gotten off the ground.

Hong Kong Budget Misses One Thing — the Future

Second, Singapore may raise its 7% goods and services tax as early as next year. While it invests S$24 billion ($18 billion) over three years to beef up talent and firms, Singapore wants to make sure it has enough recurring revenue to pay for permanent costs, such as those related to caring for an increasingly elderly population. Hong Kong, which also has an aging problem but no sales tax, has only been able to overcome its lack of steady revenue by fanning a gigantic real-estate bubble that keeps yielding income from land premiums and stamp duties to finance the budget.

If Hong Kong could get off its property treadmill, it could think of a more innovative growth strategy. But it may already be too late. The projected take of roughly HK$98 billion from land premiums in the coming fiscal year is 50% more than what the government intends to collect from the salary tax. Stamp duties of HK$92 billion are only 27% less important than the profit tax.

The third reason is geopolitics. Having benefited enormously from mediating trade and investment flows between the West and China, the financial hub is now poised to lose big — both from the People’s Republic’s increasingly fraught relationship with the rest of the world and its incursions into Hong Kong’s autonomy. The best hope now is to integrate more with the mainland, or “for Hong Kong to participate in the domestic circulation of our country’s economy,” as the financial secretary said.

Chan’s budget speech had 20-plus mentions of a Beijing-sponsored plan to connect Hong Kong and Macau with cities in Guangdong province. Is the Greater Bay Area, or GBA, a viable model, for the future of Hong Kong and its public finances? The answer may lie with the wealthy. According to Bloomberg News, up to a million people may leave the city for Britain, Canada, Australia, Singapore or Taiwan. Yet, as Bloomberg Intelligence analyst Patrick Wong has shown, developers are optimistic about high-end property, with the government recently selling land at a 20% higher price than in November 2019.

A slight increase in the stamp duties on share transfers — to 0.13% from 0.1% — may have pummeled Hong Kong markets Wednesday. But they show how investors’ wealth, held in stocks and still-sizzling residential real estate, can shore up the budget math and protect the city’s AA+ credit rating. In short, Hong Kong is throwing its weight behind asset-price inflation. To help ring cash registers, the city is enlisting the support of the working classes. Lest they save the windfall, as many did last year, the money comes as spend-or-lose vouchers.

After the pandemic, Hong Kong will also mount a large-scale “promotional campaign at home and abroad” to showcase its strengths. A publicity blitz won’t secure the financial center’s future, but it should complete the picture of vibrancy.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

©2021 Bloomberg L.P.

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