Last updated on February 23rd, 2023 at 01:30 pm
Hong Kong is under pressure to reign down spending as it announces its annual budget on Wednesday, February 22. This is due to its massive fiscal deficits accrued during the COVID-19 epidemic, as well as its efforts to stimulate the economy and reclaim its financial luster.
After spending over HK$600 billion on limiting the spread of illnesses and giving economic relief to companies and individuals impacted by pandemic restrictions, the sustainability of the city’s budgetary reserves has come under scrutiny.
This reduced the Asian financial hub’s fiscal reserves to about HK$800 billion ($102 billion) – equivalent to one year’s worth of government expenditures – almost half of what they were three years earlier.
In a recent blog post, Finance Secretary Paul Chan stated, “As our economy and market came under duress, we took extraordinary steps in extraordinary circumstances to protect people’s livelihoods.” But, as our economy stabilizes, we must alter our budgetary policies accordingly.
PWC projects a HK$109 billion budget deficit for 2022-2023. Compared to the shortfall of HK$56,3 billion, or 1.9% of the gross domestic product, forecast in the government’s budget for the previous fiscal year, this deficit is significantly smaller.
Chan, who will submit the budget on Wednesday at 11 a.m. (0300 GMT), acknowledged the need to reduce expenditure now that several COVID-related constraints had been lifted, but he stated that any changes will be thoroughly evaluated.
“Even if the government is under enormous pressure to decrease public spending, it may not be fair to eliminate all forms of aid,” he continued.
Hong Kong adhered closely to China’s zero-COVID policy, enforcing among of the world’s strictest restrictions, such as extended quarantines for arriving passengers and social distancing regulations that harmed the tourism, retail, and catering industries.
Hundreds of thousands of Hong Kongers have departed since China’s adoption of a comprehensive national security law in 2020 that significantly curtailed individual liberties, adding greater uncertainty and longer-term economic challenges to Hong Kong’s regional competitiveness.
Hong Kong’s shortfall has been exacerbated by a dramatic decline in land sales, which have traditionally been a primary source of revenue; PWC expects this to reach HK$80 billion, or 33% less than the original government forecast.
In one of the most expensive real estate markets in the world, home prices declined by 15.6% in 2017 after more than a decade of rapid appreciation.
In the last three months of 2022, Hong Kong’s economy dropped for the fourth consecutive quarter, declining at an annual pace of 4.2%, which was worse than what experts had predicted due to slow global demand and rising interest rates, which impacted exports and expenditure.
It was the second-deepest recession since the second quarter of 2020, when the gross domestic product contracted by 9.4% due to the global impact of COVID-19.
The reopening of the city’s border with China, according to KPMG China, might present a chance for a turnaround in the city’s economy.
In addition, KPMG advised the government to do more to attract foreign talent and investment, including cutting tax rates for companies establishing regional headquarters in the city.