Hong Kong's Financial Secretary Paul Chan Mo-po (2nd left), together with Permanent Secretary for Financial Services and the Treasury (Treasury) Alice Lau Yim (1st left), Secretary for Financial Services and the Treasury Christopher Hui Ching-yu (2nd right) and Government Economist Andrew Au Sik-hung, pose for photos with booklets featuring details of the 2021-22 Hong Kong Budget during a press conference at the Central Government Offices in Hong Kong, Feb 24, 2021. (CALVIN NG / CHINA DAILY)

Hong Kong's government will fork out a financial stimulus package of HK$120 billion (US$15.47 billion) for the 2021/22 financial year to shore up a beleaguered economy battered by the COVID-19 pandemic even though the city is poised to register a budget deficit for three successive financial years.

“Although I forecast an improvement in revenue for the next financial year (2021/22 financial year), I expect that the fiscal deficit will be HK$101.6 billion, accounting for 3.6 percent of gross domestic product, due to the counter-cyclical fiscal measures and the continued increase in recurrent expenditure,” Financial Secretary Paul Chan Mo-po said when delivering the fourth budget of the current-term Special Administrative Region government on Wednesday.

Deficits occur when rising government expenditure outpaces increases in government revenue, especially in terms of recurrent expenditure.  

The budget has also put forward effective measures to ensure prudence in public finance, which in turn will enhance confidence in Hong Kong’s fiscal strength and is conducive to maintaining our monetary stability. I support the pragmatic approach in adopting a deficit budget amid the prevailing economic downturn.

Carrie Lam Cheng Yuet-ngor, Hong Kong's chief executive

The government also announced a revised record budget deficit forecast of HK$257.6 billion for the 2020/21 financial year, compared to the original forecast of HK$139.1 billion. Fiscal reserves are expected to be HK$902.7 billion by March 31, 2021.

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As the novel coronavirus roils the local economy, the administration dished out nearly HK$ 318 billion in sweeteners last year, including four rounds of the Anti-epidemic Fund and the HK$120 billion relief package under the 2020/21 Budget. The city’s fiscal reserves dwindled sharply in two years from the equivalent of 23 months of government expenditure to 13 months.

Hong Kong recorded a budget deficit of HK$37.8 billion, about 1.3 percent of GDP in the 2019/20 financial year. Hong Kong achieved a budget surplus for 15 years and the last time Hong Kong experienced a budget deficit was between 2000 and 2003, after the Asian financial crises and before the outbreak of SARS.

“The budget has also put forward effective measures to ensure prudence in public finance, which in turn will enhance confidence in Hong Kong’s fiscal strength and is conducive to maintaining our monetary stability. I support the pragmatic approach in adopting a deficit budget amid the prevailing economic downturn,” Chief Executive Carrie Lam Cheng Yuet-ngor said in a statement. 

“While weighing up public spending based on our revenue, the public expenditure in areas related to people’s livelihood is not reduced. It is important to infuse energy in sustainable economic development and maintain confidence in the market to enable businesses to rebound and ensure stable employment when (the) economy recovers,” the Association of Chartered Certified Accountants said.

The financial secretary said government expenditure should enter a consolidation period, and the long-term financial commitments should also be commensurate with the increase in revenues.

Chan said Hong Kong’s economy is expected to resume positive growth this year, but the progress of economic recovery will hinge on the development of the epidemic.  

“As long as the community gathers together to control the epidemic and social stability is maintained, economic recovery will likely gain a stronger momentum in the second half of the year in tandem with an expected rebound in the global economy,” Chan said.

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The administration estimates the city’s economy will grow by 3.5 percent to 5.5 percent in real terms in 2021, citing the latest internal and external situations as well as the stimulus effect of the fiscal measures. The headline inflation rate and the underlying inflation rate will be 1.6 percent and 1 percent respectively this year.

In the medium term, Hong Kong’s economy will grow by an average of 3.3 percent per annum in real terms from 2022 to 2025, while the underlying inflation rate will average 2 percent.  

Hong Kong economy shrank at a record annual rate of 6.1 percent in 2020.