Hong Kong Trims Budget Handouts With Slowing Economy in View

(Bloomberg) -- Hong Kong’s economic growth is forecast to slow this year as the city grapples with weaker property values and the fallout from U.S.-China trade tensions, leading to a more modest range of budget handouts than last year.

The economy will grow by 2 percent to 3 percent, Hong Kong Financial Secretary Paul Chan said, after the 3 percent pace in 2018. For the final three months of 2018, GDP expanded 1.3 percent from a year earlier. Output contracted when compared with the third quarter.

“As a small and totally open economy, Hong Kong has been susceptible to economic headwinds over the past few months, as evidenced by notable slackening growth and diminishing confidence of enterprises in the future outlook,” Chan said according to a prepared statement online. “Resources are not infinite and trade-offs are inevitable.”

A more turbulent macroeconomic picture has forced Chan and Chief Executive Carrie Lam to deliver a muted budget with fewer goodies and more emphasis on areas of potential growth and need. The fiscal surplus for the current year, which ends March 31, will shrink to an estimated HK$58.7 billion ($7.5 billion), less than half the HK$149 billion last year.

That’s even with cuts to handouts such as a reduction of the amount of personal income eligible for tax reductions. That was cut to HK$20,000 for the fiscal year that started last April, from HK$30,000 in the prior year.

The fiscal surplus will slide further to HK$16.8 billion in the coming year, the government estimates.

Slowing Reserve Growth

“You need to tap into the reserve in difficult times,” said Dong Chen, senior Asia economist with Pictet Wealth Management. “The government is looking ahead and has a sensible way in planning the future, even though there are areas that can be improved, like housing, where we didn’t see a lot of positive surprises.”

Fiscal reserves are expected to reach HK$1.16 trillion by March 31, Chan said.

In his speech announcing the new budget, he emphasized caution on the outlook for the global economy and Hong Kong, while looking ahead to “enormous business opportunities in close proximity” to Hong Kong as a key cog in the Greater Bay Area development spearheaded by China.

Boosting Hong Kong’s stature in the competitive high-tech industry was an area of budget focus, with funds ear-marked for areas including:

  • HK$16 billion to qualifying universities to enhance or refurbish campus facilities such as laboratories, particularly those essential to research and development
  • HK$5.5 billion for the development of Cyberport 5, an expansion of Hong Kong’s tech campus meant to attract technology companies and start-ups, with view to start construction in 2021
  • A two-tiered enhanced tax deduction for eligible R&D spending to encourage more activity in that area

Chan also highlighted Hong Kong’s potential as a dispute resolution platform for the wider Belt and Road initiative, allocating HK$150 million to support development.

The investments in R&D make sense to diversify Hong Kong’s economy, Pictet’s Chen said.

Iris Pang, Hong Kong-based economist with ING Bank NV, found the spending plan a “disappointment,” criticizing Chan for not allocating enough to elderly services and health-care and wasteful tax rebate “candy” handouts.

‘A Disappointment’

Chan will spend HK$10 billion on a public healthcare stabilization fund, and another HK$5 billion for the Hospital Authority to spend on upgrading and acquiring medical equipment. But with a looming aging population problem, the city will need to invest more, Pang said.

She is also concerned about Hong Kong’s investments into research and development and genome studies, with Chan spending HK$1.2 billion to establish a genome institute.

“It’s quite ridiculous - these are not the pillars of Hong Kong,” Pang said. “We are doing things we’re not good at which will actually dampen the growth prospects of the Hong Kong economy.”

The personal income tax reduction scheme cuts personal income taxes by 75 percent up to an annual maximum of HK$20,000, benefiting an estimated 1.91 million taxpayers and reducing government revenue by HK$17 billion.

A few other handouts for the fiscal year starting in April:

  • Reducing profits tax by 75 percent to a ceiling of HK$20,000
  • Waiving property rates for the whole year, up to a ceiling of HK$6,000 for each rateable property
  • An extra allowance to social security recipients
  • A one-off grant to needy students of HK$2,500 to support learning
  • A one-off grant of $1,000 worth of vouchers to some elderly people

Chan also announced HK$6 billion for a waterfront facelift and another HK$600 million to refurbish 240 public toilets over the next five years.

©2019 Bloomberg L.P.