27th February 2024 – (Hong Kong) With deficits ballooning, Hong Kong must balance fiscal prudence and stimulus in its upcoming budget to sustainably revive growth. While increasing revenue is imperative, calibrated policy relaxation in areas like property and infrastructure can judiciously support activity without overheating markets. Targeted relief for the disadvantaged is also vital amid hardship. With thoughtful calibration, the city can overcome present storms.

Gloomy economic conditions have battered Hong Kong’s finances, with this year’s deficit projected to top over HK$100 billion. Land sales and stamp duties – traditional fiscal linchpins – have plummeted as the property market languishes. Diminished reserves provide little buffer, barely covering one year of public expenditure now.

Meanwhile, debt issuances plug gaps, with green bonds spuriously counted as revenue. Stripping these out reveals years of concealed deficits. Further borrowing looms as officials predict a prolonged recovery, while loan guarantees could saddle the government with additional bad debt.

This bleak backdrop awaits the upcoming budget. With expenditures locked in, balancing the books hinges on boosting income. However indiscriminate revenue-raising risks smothering Hong Kong’s competitiveness. Delicate policy calibration is vital to nurse the economy back to health.

Public spending has held steady around HK$600 billion in recent years even as revenues declined. Additional outlays have been multifaceted, including social relief like public housing and consumption vouchers. Special allocations such as HK$130 billion for national security over 2020-2021 also contributed.

Ongoing expenditures remain high, with monthly public outlays around HK$50 billion. Some suggest payroll cuts for senior civil servants, but with total annual bureaucratic salaries below HK$1 billion, savings would be marginal. With expenditures solidly entrenched, balancing requires revenue growth.

Falling land sales and property taxes amidst weak markets have battered revenues. With income lagging spending, reserves now barely cover one fiscal year of expenditures at about HK$90,000 per capita. This defies prudent practices of maintaining a one-year buffer regardless of income fluctuations.

Concealing deficits, recent budgets counted green bond issuances as income. But these represent future liabilities, not revenue. Net of such borrowing, budgets would show years of shortfalls instead of occasional surpluses. The practice continues, with HK$650 billion green bonds projected over the next five years. The government also suggests expanded deficits up to 10% of GDP, implying added debts nearing HK$200 billion. This risks significant burdens on future generations unless resources are deployed judiciously.

Beyond direct borrowing, government-guaranteed loans to aid small businesses during the pandemic may also hit public finances. With such lending showing bad debt rates exceeding 5% thus far, potential defaults requiring government payouts could emerge as another “debt bomb”.

State-affiliated corporations face separate woes from the economic downturn, with several reporting losses lately. Key infrastructure entities like MTR and Airport Authority also shoulder heavy debts, further pressuring public resources.

Given these brewing threats, officials must craft balanced policies in the coming months. Some considerations merit highlighting. Firstly, cooling measures should be unwound gradually to stabilise property, not scrapped hastily. Phased relaxation sustains activity while monitoring for overheating, given weakened market confidence. With property integral for government revenue, calibrated support aids fiscal rebuilding.

Secondly, easing land and housing supply shortfalls through streamlined regulations provides a balanced stimulus. This unlocks new construction opportunities to revive a lagging sector. However, maintaining market discipline remains vital to prevent misallocation.

Thirdly, relief should target vulnerable groups, not general subsidies. Across-the-board handouts strain finances with limited impact. Focused assistance for lower-income residents and ailing sectors maximizes social equity.

Finally, expanding the narrow tax base requires judicious timing. While essential long-term, raising revenue now risks hampering recovery. However, preparatory reviews could pave way for implementation upon stronger growth. Fundamentally, Hong Kong must balance immediate relief against competitiveness and fiscal health.