Hong Kong might face a fiscal deficit of HK$70 billion for 2019-20

Amount is equivalent to 2.5% of Hong Kong’s estimated GDP in 2019, according to EY

EY estimates that the HKSAR Government will record a deficit of HK$70 billion (US$9 billion) for the financial year 2019-20, the first budget deficit in 15 years. Based on the EY figures, the estimated deficit would reduce Hong Kong’s fiscal reserves to HK$1,101 billion by March 31.

Agnes Chan, managing partner, Hong Kong and Macau at EY, says, “We estimate that the originally anticipated surplus will become a deficit because of the adverse economic environment. The US-China trade tensions and ongoing social incidents placed enormous strain on Hong Kong last year, both economically and socially.”

Chan adds, “The slowdown in land sales will cause land premiums to fall short of the original estimates by HK$18 billion. Noting that most trade sectors have been adversely affected to varying degrees by the current economic environment with certain sectors being hit particularly hard while jobs and employment income being consequentially affected, we estimate that profits tax and salaries tax receipts will be lower than the original budget by HK$28 billion and HK$7.6 billion respectively.”

“Furthermore, receipts from stamp duties will fall short of the original estimates by HK$8 billion owing to the less active stock and property markets. Coupled with the rounds of one-off relief measures unveiled since August 2019 of more than HK$25 billion in total, we estimate that the government will record a deficit of HK$70 billion in the financial year 2019-20, equivalent to 2.5% of Hong Kong’s estimated gross domestic product (GDP) in 2019. A deficit of 2-3% of GDP is acceptable by international standard,” says Chan.

Hong Kong’s fiscal reserves will stay above HK$1 trillion by March 31, amounting to 39.2% of Hong Kong’s GDP.

The expected budget deficit this year would reduce Hong Kong’s fiscal reserves to HK$1,101 billion as of March 31, amounting to 39.2% of Hong Kong’s estimated GDP in 2019.

Challenges facing Hong Kong

Looking ahead, the difficult economic environment that Hong Kong is currently facing may persist in the near term. The government has announced four rounds of one-off relief measures since August 2019 to support enterprises, safeguard jobs and seek to relieve people's financial burdens, costing over HK$25 billion in total.

The EY consideration is that in the face of the current social and economic environment, the government has to make better use of fiscal reserves. Therefore, key proposals include (i) introducing a job credit scheme; (ii) relaxing the deduction rules for qualifying R&D; (iii) fostering the development of Hong Kong as an intellectual property trading hub; (iv) offering tax incentives to qualifying green bonds; and (v) further enhancing a regional headquarters tax incentive; and (vi) enhancing the dependent parent and grandparent allowance.   

Considering internal and external threats looming ahead, EY says it is cautiously optimistic about the prospect of Hong Kong's various sectors. Derived from the EY theme in this proposal, "Relaunching Hong Kong through concerted efforts", the above-mentioned key measures seek to help Hong Kong’s economy to tide over the forthcoming economic winter.

Date

20 Jan 2020

Channel

Capital Markets

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