- Paul Chan says the city could remain in the red for ‘a number of years’ and the government will be cautious in boosting recurrent spending
- But experts say there is no need to worry about a possible ‘record deficit’ as Hong Kong sits on huge reserves
Hong Kong is likely to see its biggest ever budget deficit in the next financial year in the face of a "tsunami-scale" blow dealt by the coronavirus outbreak after months of social unrest pushed the city into recession, the financial secretary has warned.
Paul Chan Mo-po said the city could remain in the red for "a number of years" to come and the government would be more cautious in boosting recurrent spending "to maintain fiscal sustainability".
Chan, who is expected to deliver the budget later this month, sounded the warning on his official blog on Sunday.
"It is likely that the budget deficit for the new financial year (2020-21) will be the biggest ever," Chan wrote, not specifying how large it could be.
He attributed it partly to the need to launch countercyclical measures to boost the economy and partly to the increase in the government's recurrent expenditure in recent years.
He said the impact of the outbreak on the city's economy would probably be bigger than that during the severe acute respiratory syndrome (Sars) outbreak of 2003.
"The impact is not only felt in the retail, catering, or tourism-related sectors. Such a tsunami-scale blow could cause the unemployment rate to deteriorate rapidly," he wrote.
Hong Kong's biggest deficit so far was about HK$63.3 billion (US$8 billion) in 2001-02. That was followed by a deficit of HK$61.7 billion in 2002-03 and HK$40.1 billion in 2003-04. The city reported a surplus of HK$21.4 billion in 2004-05.
The government's total expenditure grew by 174 per cent from 1997-98 to 2018-19, compared with a 113 per cent growth in total revenue.
Between 2014-15 and 2018-19, the city's recurrent expenditure grew by 32 per cent from HK$305.1 billion to HK$403 billion. Recurrent spending on social welfare saw the biggest jump, growing by 46.4 per cent during this period, according to official data.
Last month, Chan warned that the deficit for the current financial year could be as much as 3 per cent of gross domestic product (GDP), at about HK$80 billion.
Financial secretary warns of job losses from coronavirus outbreak
But on his blog on Sunday, Chan downplayed the significance of going into the red, noting that the city was backed by reserves of HK$1.1 trillion.
"The government's current fiscal reserves allow it to launch countercyclical measures in the near future to stabilise employment and support the economy," Chan wrote.
"But, to ensure the stability of the public finances, we have to pay more attention to fiscal sustainability as well as keeping expenditure within the limits of revenues, when we consider new expenditure, especially recurrent expenditure."
The city government announced last Friday it would offer a HK$25 billion relief package to ease the impact of the outbreak on people's livelihoods and the business sector.
The package included handouts for businesses in the hard-hit catering, retail and tourism sectors, as well as allowances for poor families and students.
Hong Kong's economy shrank by 2.9 per cent in the fourth quarter of 2019, in the second consecutive quarter of contraction. For the whole of 2019, GDP was expected to shrink by 1.2 per cent in real terms, the first annual decline since 2009.
Hong Kong sits on huge reserves. And during economic downturns, it is right for the government to boost spending to support the economyTerence Chong, Chinese University
Professor Terence Chong Tai-leung, executive director of Chinese University's Lau Chor Tak Institute of Global Economics and Finance, said there was no need to worry too much about a possible "record deficit".
"Hong Kong sits on huge reserves. And during economic downturns, it is right for the government to boost spending to support the economy," Chong said.
"While the Basic Law asks us to achieve a fiscal balance, having a deficit for a couple of years is not the end of the world. It should not be a problem if we can achieve a fiscal balance in a longer run of five years or so."
The city's mini-constitution states that the government should strive to achieve a fiscal balance by following "the principle of keeping expenditure within the limits of revenues in drawing up its budget".
Dr Billy Mak Sui-choi of Baptist University's school of business echoed Chong's views.
"Hong Kong has a lot of fiscal reserves, which can keep the city afloat for several years even if the government has zero revenue," he said. "But a huge deficit could affect Hong Kong's credit rating in the short term, while also giving a bad impression to the international community."
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