The essence of modern fiscal policy is to use government expenditure and taxation counter-cyclically and strategically to stabilize the economy, meet emergencies, provide necessary socioeconomic support, and facilitate long-term growth.
The ability of a government to adopt proactive fiscal policies is constrained by institutional arrangements, economic structure and political processes. In the past few years, with a solid fiscal base, the Hong Kong Special Administrative Region government has done an admirable job in adopting expansionary fiscal measures to protect society from the shocks of the COVID-19 pandemic and economic recession, thereby registering a consolidated deficit before bond issuance each fiscal year since 2019-20.
While it’s important to emphasize fiscal prudence in this context, we must avoid the trap of unwarranted “deficit scare”. In 2023, despite economic headwinds caused by interest rate hikes and geopolitical tensions, Hong Kong’s economy grew 3.2 percent, with a moderate underlying inflation of 1.7 percent.
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The seasonally adjusted unemployment rate has declined to 2.9 percent. Meanwhile, Hong Kong’s stock market, property market, and exports have remained weak. There are still substantial external risks that may disrupt economic confidence in the near term. At this stage of the cycle, the government should continue to fine-tune its fiscal policies to stimulate growth, providing more efficient and better-targeted support to strengthen socioeconomic recovery. It should also enhance strategic public investment to enhance the city’s long-term competitiveness.
We must adhere to the principles of fiscal prudence and improve fiscal governance by minimizing inefficiencies. … The long-term challenges that Hong Kong faces call for unconventional thinking and bold policy innovation. We need more targeted fiscal policy to support long-term investment for growth, not deficit scaremongering.
As shown in the 2024-25 Budget, the revised estimate on government revenue in 2023-24 is HK$554.6 billion ($70.86 billion), lower than the original estimate by 13.7 percent. Revenue from profits tax and salaries tax is stable and consistent with the original estimates, but revenue from land premium and stamp duty is substantially lower than the original estimates. The revised estimate on total government expenditure for 2023-24 is HK$727.9 billion, lower than the original estimate by 4.3 percent. Overall, Hong Kong is estimated to have registered a consolidated deficit (after bond issuance) of HK$101.6 billion for 2023-24, with fiscal reserves estimated at HK$733.2 billion by the end of March 2024.
Despite the recent budget deficits, Hong Kong’s public finances remain healthy and robust. We need to take a broader and bolder perspective to think about Hong Kong’s fiscal policy space. First, Hong Kong’s current deficit is primarily cyclical rather than structural. The reduction of government revenue was largely driven by the weakness in the local property and housing market, which was not surprising given the aggressive interest rate hikes led by the US Fed. With global inflation easing and the market expecting interest rates peaking or moving downward, Hong Kong property market and land premiums are likely to improve as the local economy continues to recover.
Moreover, the government has announced the cancellation of demand-side management measures for residential properties with immediate effect, which will facilitate the stabilization and strengthening of the property market. In the future, the government is expected to record a consolidated deficit in 2024‑25 and may return to a surplus in subsequent years. Fiscal reserves are estimated to be over HK$832.2 billion by the end of March 2029, equivalent to 21.2 percent of Hong Kong’s GDP.
Second, Hong Kong has ample policy space in debt issuance to support public sector investment. Recent years have witnessed profound changes in policy thinking on debt and deficit in the West. Following the global financial crisis, governments in advanced economies have been running huge deficits and accumulating unprecedented debts. When the COVID-19 pandemic hit, governments in advanced economies further mobilized debt issuance to meet their fiscal needs. Now the US general government debt is over 120 percent of GDP. Japan’s general government debt is over 250 percent of GDP. In the eurozone, the government debt to GDP ratio stands at around 90 percent. In Singapore, while the government has a strong balance sheet with no net debt, it has taken advantage of bond issuance for a variety of purposes, including facilitating debt market development and financing long term infrastructure development.
As of December 2022, the Singaporean government had a gross debt-to-GDP ratio of 168 percent. In comparison, the Hong Kong SAR government has been conservative in using debt issuance to enhance its policy space and resource mobilization capacity. In the future, Hong Kong may consider increasing government gross debt-to-GDP ratio to fund major strategic investment projects in infrastructure.
Third, if we take a broader economic perspective beyond existing statutory arrangements, the investment income of the Exchange Fund can provide a substantial buffer for Hong Kong’s public finances. From the end of 2022 to 2023, the total assets of the Exchange Fund increased from HK$4,008 billion to HK$4,017.8 billion, with the accumulated surplus increasing from HK$556.4 billion to HK$652.4 billion. In 2023, the Exchange Fund recorded an investment income of HK$212.7 billion, with an overall investment return of 5.2 percent. While the interest rate hikes cycle has put downward pressure on the property market and land premiums, the higher interest incomes on the short-term bonds have contributed to the Exchange Fund’s strong investment performance, with the “Backing Portfolio” of the Exchange Fund achieving a rate of return of 5 percent, a record high in the post-2009 period. Moreover, the Investment Portfolio achieved a rate of return of 6.4 percent. The Long-Term Growth Portfolio recorded an annualized internal rate of return of 11.8 percent since its inception in 2009 up to September 2023. Between 1994 and 2023, the Exchange Fund has achieved a compounded annual investment return of 4.5 percent.
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If this investment performance can be sustained, it will not only provide a solid defensive shield for Hong Kong’s financial stability in the future, but also a strong base to enhance strategic investment for long-term growth. As announced by the government, the accumulated investment return of the Future Fund would be gradually reflected in the operating account of the government budget.
Issues concerning budget deficits and debts are at the center of public policy debates. We must adhere to the principles of fiscal prudence and improve fiscal governance by minimizing inefficiencies. We should also avoid losing sight of the bigger picture of promoting Hong Kong’s economic growth, competitiveness and structural transformation. The long-term challenges that Hong Kong faces call for unconventional thinking and bold policy innovation. We need more targeted fiscal policy to support long-term investment for growth, not deficit scaremongering.
The author is an associate professor at the Centre for China Studies, the Chinese University of Hong Kong; and a member of the Chinese Association of Hong Kong and Macao Studies.
The views do not necessarily reflect those of China Daily.
