HONG KONG -- The Hong Kong government will introduce stimulus measures totaling 120 billion Hong Kong dollars ($15.5 billion) to jump-start the coronavirus-stricken economy in the new financial year.
Hong Kong Financial Secretary Paul Chan on Wednesday said the budget deficit for the fiscal year ending March 31 will reach HK$257.6 billion, marking the city's largest deficit on record due to coronavirus relief measures worth more than HK$300 billion rolled out over the past year.
Forecasting an end to the recession that started in mid-2019, Chan forecast that growth will reach 3.5% to 5.5% this year with normal business activities resuming thanks to expected mass vaccination against COVID-19.
"Even though our deficit has reached a historical high, countercyclical measures are still much needed to give fresh impetus to our economy," Chan said in his annual budget speech. "Days have not been easy for everyone, and I can feel the pain of general citizens... We have to sail through the storm together."
Chan warned that Hong Kong will have to brace for budget deficits at least until 2025 due to pandemic-related measures and rising recurrent expenses. The next fiscal year's deficit is expected to hit HK$101.6 billion, or 3.6% of gross domestic product.
The stimulus package includes HK$5,000 in digital spending coupons for each city resident, tax rebates and low-interest loan guarantees for the unemployed. The government also will raise the transaction tax levied on stock trades from 0.1% to 0.13% to boost revenue.
Government departments will be required to reduce expenditures by 1% in the fiscal year starting April 2022, in light of falling revenue expectations. The government will expand issuance of green bonds to HK$200 billion, as well as pursue new sales of inflation-linked bonds and higher interest debt securities for elderly investors.
While Chan maintained that it was "the wrong time" to change tax rates on salaries and profits amid an economic downturn, experts have called for tax reform in order to increase government revenue in the long run.
"For years we have been urging the government to broaden the tax base and consider tax hikes," said William Chan, tax partner at Grant Thornton Hong Kong. "Society needs to kick-start such discussions as soon as possible. It has to be done sooner or later to achieve fiscal balance."
Meanwhile, Hannah Jeong, head of valuation and advisory services at real estate consultancy Colliers International, suggested that the government increase land sales to boost revenue and tackle the perennial housing problem.
"The government only earmarked 15 residential sites for sale this year, compared with over 20 sites five years ago," Jeong said. "Residential property prices won't experience much relief in the near future."
Despite the huge deficits, Hong Kong's ample fiscal reserves allow the authorities to continue pumping out stimulus measures to shore up the economy. By the end of March, Hong Kong's fiscal reserves, among the largest of any government, will stand at HK$902.7 billion, down from HK$1 trillion a year ago.
Hong Kong's GDP contracted 6.1% in 2020, a worse decline than the 5.9% posted during the Asian financial crisis in 1998. The unemployment rate also neared a 17-year-high of 7% in January.
An appendix to the budget address stated that a special fund of HK$8 billion will be allocated to "safeguard national security." Chan did not mention the new allocation in his speech.
In a news conference after his speech, Chan said the new funding would be spent "over the next few years" and will be discussed in the legislature, without going into details on the use of the fund.
Beijing imposed a sweeping national security law on the city last June following widespread anti-government protests in 2019. Both the national and city governments have set up new law enforcement units in Hong Kong to implement the law's prohibitions on secession, subversion, terrorism and collusion with foreign forces.
Chan reiterated in his speech that the "one country, two systems" policy will continue to be Hong Kong's competitive edge, and that some Western countries have had "misunderstandings" over the principle, a nod to Washington's decision to revoke trade and investment privileges for the city following the implementation of the security law.
He pledged to strengthen economic partnership with mainland China and actively pursue joining the Regional Comprehensive Economic Partnership -- a trade alliance consisting of 15 Asia-Pacific nations.