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Thursday, February 27, 2020, 10:36
SAR’s latest countercyclical budget is bold and timely
By Ho Lok-sang
Thursday, February 27, 2020, 10:36 By Ho Lok-sang

The financial secretary has responded to the calls for a cash handout to all Hong Kong permanent residents from legislators across the board. The proposed HK$10,000 (US$1,280) handout meets the popular demand. Just on this account, I trust the budget will be well-received.
I do not normally support such cash handouts, preferring to focus on helping the neediest, such as those suffering from rare diseases. But these are very difficult times, and the financial chief has done the right thing.

I hope that the cash handout will cheer up the community, and that they will put aside their differences, open up their purses, and spend more. The community sorely needs to work together to fight the COVID-19 epidemic, and to get the economy humming again.
At a briefing on the budget that I attended, we were reassured that even though the projected deficit for the fiscal year 2020-21, at HK$139.1 billion, or 4.8 percent of the projected GDP, appears shocking, when all the one-time items — on both the revenue side and expenditure side — are disregarded, the fiscal deficit is only about 2 percent of the GDP, which is consistent with what is deemed acceptable when the economy faces such downward pressures as we see today. 

Although the cash handout is appropriate given the circumstances, I would urge every Hong Kong citizen to appreciate the fact that such handouts are not sustainable, and that there are many challenges ahead of us that we need to deal with. These include: the continuation of the US-China trade war as the two countries enter another phase of difficult negotiations; the shrinking labor force because post-World War II baby boomers will continue to retire in large numbers over the next few years — which cannot be made up for by entrants into the labor force due to an aging population; the need to invest to enhance our competitiveness; huge and rising healthcare and elderly care expenditures — among other things. We need to remind ourselves that Hong Kong is still vulnerable to speculative attacks by hedge funds, and that the existence of a large fiscal reserve will help ward off such attacks. In 1998, the government spent HK$1.2 billion buying in the Hong Kong stock market fighting hedge funds that shorted the stock market. That was the beginning of the Tracker Fund of Hong Kong.

Although the cash handout is appropriate given the circumstances, I would urge every Hong Kong citizen to appreciate the fact that such handouts are not sustainable, and that there are many challenges ahead of us that we need to deal with

The Hong Kong economy contracted by 1.2 percent for 2019 as a whole, and is expected to grow by -1.5 percent to +0.5 percent in 2020. The government expects that, over the medium term, economic growth will average 2.8 percent. It is important to realize that the kind of increases in expenditures that have outpaced GDP growth since the handover cannot be sustained.
Among the different expenditure areas, healthcare received a big boost. The government has designated about HK$500 billion for two 10-year hospital development plans, providing over 15,000 additional hospital beds and more than 90 operating theaters to meet projected service demand up to 2036. While these plans had been announced before, in 2016 and 2018, I would add these are sorely needed today, not only because of our aging population but also because of the need to boost our preparedness for possible epidemic outbreaks. I would also point out that the increase in hospital beds and other healthcare infrastructure have to be complemented with a huge increase in doctors, nurses, and other medical employees. For 2020-21, healthcare expenditures will increase by 8 percent in real terms, and HK$180 million will be allocated to enhance university facilities and strengthen professional healthcare training. I hope the government will shortly announce its plans to increase admissions to medical schools and nursing schools, as well as other healthcare programs. Moreover, the government should focus on boosting support for our public hospitals. Private hospitals serve largely a supplementary role. As demonstrated in the current COVID-19 crisis, it is always public hospitals that the community can depend on in times of crises.
Perhaps not surprisingly, the area receiving the biggest boost is support to the economy, which rises by a staggering 223.9 percent in real terms. The rise includes the cash handout, salary tax and profit tax reductions, additional funding to the Employees Retraining Board, low interest loans to businesses, support for innovation and technology, tourism, trade, cultural and creative industries, etc.
Social welfare spending continues to rise rapidly, 18.2 percent in real terms, but a big surprise is that spending on education will fall by 13.2 percent. But this decline could be due to a large increase in previous years. There is reference to “over HK$100 billion were allocated to support innovation and technology”. But it is not clear how much of this money went to education. For the 2020-21 fiscal year, the government will expand the Researcher Programme and Postdoctoral Hub to cover all companies doing research and development. Some HK$40 million is earmarked for short-term internships for both undergraduate and graduate students taking STEM (science, technology, engineering and math) programs in our universities.
We are facing headwinds, and the latest budget will certainly help. But we all need to work together, thankful for the fact that we still have plentiful fiscal reserves, and remain cautious to ensure that fiscal prudence still prevails.

The author is a senior research fellow at the Pan Sutong Shanghai-Hong Kong Economic Research Institute at Lingnan University.

The views do not necessarily reflect those of China Daily.

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