Hong Kong will record the highest deficit in its history this financial year and must reserve cash to cope with a possible winter resurgence of Covid-19 and escalating tensions between China and the US, the city’s top officials have warned.
The fresh warnings about the dire financial situation were issued by Chief Secretary Matthew Cheung Kin-chung and Financial Secretary Paul Chan Mo-po via their respective blogs on Sunday, and come despite the city recording 11 straight days with fewer than 30 coronavirus cases.
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“The continuing epidemic caused an unprecedented blow to Hong Kong’s economic activities,” Cheung wrote. “We expect that Hong Kong will face severe economic recession pressure, and will record the highest deficit ever this financial year.”
Chan, the financial chief, had announced in February that the budget deficit in the coming financial year of 2020-2021 was estimated to be HK$139 billion. The unprecedented level, which accounts for 4.8 per cent of the GDP, went against the government’s fiscal principle of keeping the deficit below 3 per cent of GDP.
On Sunday, he noted that the two rounds of relief measures from the Anti-epidemic Fund had already swollen the current year’s budget deficit to nearly HK$290 billion (US$37.4 billion), or 10 per cent of the city’s gross domestic product.
The city’s reserve of HK$800 billion – down from HK$1.1 trillion in March – was equivalent to about 13 months of government spending, the same level it was at after the city was hit by the severe acute respiratory syndrome (Sars) outbreak in 2003, according to Chan.
He described the growth of government expenditure as “obviously unsustainable” from the perspective of ensuring healthy public finances and safeguarding market confidence.
“We need to reserve strength to cope with financial needs brought about by future outbreaks or even a possible resurgence in the winter,” Chan said.
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To maintain financial stability, sufficient reserves would also be needed to cope with the growing external risks to the economy and the rising political and trade friction between China and the US, Chan added.
Chief Secretary Cheung, meanwhile, said the administration is preparing to roll out another round of coronavirus relief measures – albeit in a financially prudent manner – to help companies and individuals affected by the epidemic to overcome the difficulties.
As of mid-August, the fund had approved a total of 73 projects with around HK$75 billion in subsidies, Cheung added. This included the HK$44 billion giveaway in the first phase of subsidies under the Employment Support Scheme, which benefited some 1.9 million employees. The two rounds of wage subsidies are expected to cost the government HK$81.4 billion altogether.
The city’s economy is expected to shrink by up to 8 per cent this year following a 9 per cent drop in the second quarter. The unemployment rate for May to July – the most recent figures available – stood at 6.1 per cent, according to the Census and Statistics Department.
Economist Andy Kwan Cheuk-chiu, director of ACE Centre for Business and Economic Research, said the top officials’ warning might imply that the next round of relief measures could shrink markedly under fiscal constraints.
“They are trying to manage public expectation about the reducing scale and scope of one-off cash subsidies in the continuing Covid-19 crisis,” he said.
Kwan said the city’s fiscal sustainability had been questioned for years as annual recurrent expenditure on education, social welfare and health services rose significantly, warning that it was alarming to see the fiscal reserves drop to a level of 13 months’ worth of spending.
“The extra burden of the Covid-related measures might speed up the reserve depletion, to a critical point that the international community loses faith in Hong Kong’s dollar peg system,” he said.
“The worst-case scenario could see a financial crisis.”
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Back in 2014, Chan’s predecessor, John Tsang Chun-wah, warned about the threat of a structural deficit as soon as 2021 in a report by the Working Group on Long-Term Fiscal Planning.
But industries hit hard by the coronavirus since January still expect the government to ramp up its measures to help them weather the challenges. Trade unions across the political divide previously called on the government to give its next round of financial support directly to workers rather than employers, as some have complained they were forced to either take unpaid leave or accept reduced wages in spite of the Employment Support Scheme.
Gordon Lam Sui-wa, convenor at the Hong Kong Small and Middle Restaurant Federation, warned that insufficient subsidies to the businesses could lead to the closure of up to 30 per cent of the city’s eateries in the coming months.
“We were dealt an unprecedented blow since nighttime dine-in services were banned five weeks ago,” he said, referring to social-distancing measures imposed by authorities that have only just begun to ease. “Many restaurants cannot survive without timely rental subsidies.”
Lam also suggested that the government could introduce tax relief to landlords of eateries as an incentive for them to cut rents.
More from South China Morning Post:
- Hongkongers fear for their jobs as Covid-19 pandemic sucks the life out of the economy: Standard Chartered survey
- Coronavirus: Hong Kong financial secretary warns against depleting city’s coffers amid pandemic, as market vendors call for aid