Opinion

Downsides to Hong Kong’s untargeted cash handout

The stimulus is regressive in nature, as the bulk of expenditure is a one-off cash disbursement per adult

By: Date: March 4, 2020 Topic: Global Economics & Governance

After enjoying 15 years of fiscal surplus, Hong Kong is now running a deficit due to plummeting growth. The economy contracted by 1.2% in 2019, and this year will most likely be the same, if not worse.

Last week’s budget shows that Hong Kong’s sweet dilemma has come to an end. It is a test for whether Hong Kong really has adopted a “new fiscal philosophy,” as mentioned by Chief Executive Carrie Lam back in 2018, on bolder spending, if necessary.

The answer seems to be yes. The headline relief measures amount to HK$120 billion (US$15.4 billion, 4.2% of gross domestic product), with HK$71 billion (2.5% of GDP) handed out as cash. As such, the fiscal deficit may reach 4.8% of GDP on the basis of the official growth forecast, which is very optimistic (minus-1.5% to 0.5% year on in 2020). Fiscal reserves meanwhile look set to meet only 15 months of government expenditure.

The best part of the budget is that the amount is no longer small, as opposed to the piecemeal approach in the past. The government is now willing to play a larger role, including the establishment of a relief fund and bolder future spending.

Strong fiscal expenditure is indeed meaningful in easing short-term liquidity needs, especially for the low-income population and small firms. The choice of a universal cash handout instead of targeted measures has the advantage of quicker implementation, but this will largely hinge on how quick the measures can be put in place and whether the government can avoid a backlash in the Legislative Council.

The downside though is that the stimulus is untargeted and regressive in nature, as the bulk of money spent is a one-off cash disbursement per adult, independent of income or damage from the Covid-19 outbreak. The same amount targeted to small and medium-sized enterprises in the hardest-hit sectors could have a bigger impact on household income as it might help protecting their jobs or ease their burden directly.

Furthermore, the one-off nature of the cash handout also increases the likelihood of having this stimulus leaving Hong Kong rather than being used for consumption. In macro-economic terms, this equates to burning fiscal space and potentially feeding capital outflows. In fact, a monthly subsidy targeted at consumption would ease this concern.

Crucially, it does not address the future challenges of weaker revenue generation and higher expenses. Because of economic headwinds, fiscal revenue for the current financial year may be the largest and steepest since 2001.

The high reliance on land-related income may pose risks if there is any large downfall in the property market. Stamp duty and land premium has surged from 8% in 2003 to the peak of 42% in 2017. Although the lower land price may be offset by a larger land supply, lower transactions or any potential easing measures in the future could reduce revenue.

Profit tax and salaries tax meanwhile form 40% of revenue but are generally much correlated to the macro environment, meaning revenue could fall if business and consumer confidence is not restored as expected.

Then there is rising expenditure, driven by aging demographics, health care and housing. In the past 20 years, the share of expense on social welfare and health care has remained almost unchanged while the population is aging rapidly. The working population has already started to decrease, with the elderly population making up a higher proportion. More public-housing construction will also mean higher expense. Thus solving long-neglected problems and catching up on social investment that was missing in the past will be key to restoring business and consumer confidence.

What really matters for Hong Kong’s fiscal situation is economic activity. If Hong Kong remains in recession as we expect, which means negative-5% YoY in the first quarter of 2020 and -3% YoY for the full year from the more challenging environment compared with the SARS (severe acute respiratory syndrome) crisis in 2003, the fiscal deficit could further widen.

With stricter global measures implemented on people’s movement during the Covid-19 scare, the hit on retail, hospitality and airlines will be significant. The Chinese economy is now on a decelerating trajectory, which is very different from 2003 when growth was accelerating. Policy room is also limited as measures similar to the launch of the Individual Visitor Scheme seems unlikely. Therefore, the momentum of a rebound will be weaker than in the past.

Down the road, it all depends on Hong Kong keeping its competitive edge, which looks increasingly difficult as no major measure announced by the government targeted the future but only provided relief. The world is evolving and exerting new challenges on Hong Kong, including the structural problem that the retail sector is too reliant on a single market and the international role in trade if the US-China decoupling continues because of the trade war or supply-chain localization as a result of the Covid-19 outbreak.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article More on this topic
 

Opinion

Disease, like poverty, does not stay at home

To fight the Covid-19 pandemic, best practice responses in Africa need to be implemented around international collaboration. These include the need to activate emergency operations centres, to establish a surge capacity in health systems, and to mitigate the economic and social consequences of the pandemic.

By: Yonas Adeto, Karim El Aynaoui, Thomas Gomart, Paolo Magri, Greg Mills, Karin von Hippel and Guntram B. Wolff Topic: Global Economics & Governance Date: April 8, 2020
Read about event More on this topic
 

Past Event

Past Event

POSTPONED: The Sound of Economics Live: Can the Eurogroup save the day?

In this episode of The Sound of Economics, we analyse the Eurogroup's 'rescue plan' amidst the economic fallout brought about by the COVID-19 health crisis.

Speakers: Maria Demertzis, Giuseppe Porcaro, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 8, 2020
Read article More on this topic More by this author
 

Blog Post

Social distancing: did individuals act before governments?

Using online searches for restaurants as a proxy to assess whether and to what extent individuals were practicing social distancing before strict lockdown measures, we identify substantial differences between countries. In some countries, including Denmark and Portugal, searches for restaurants were considerably down before restaurant restrictions were put in place. Countries where social distancing started earlier, regardless of when policies were enacted, can expect a flatter coronavirus curve.

By: Catarina Midões Topic: European Macroeconomics & Governance Date: April 7, 2020
Read article More on this topic More by this author
 

Blog Post

A green recovery

Government policy faces various challenges. Before the COVID-19 outbreak, the European Union set ambitious targets to reduce carbon emissions. Now in the midst of the pandemic, the EU has temporarily lifted state-aid rules allowing governments to steer companies through the crisis and to minimise job losses using public money. This column suggests combining these policies by attaching green conditions to state aid. In that way, we can aim for a green recovery.

By: Dirk Schoenmaker Topic: Energy & Climate Date: April 6, 2020
Read about event More on this topic
 

Past Event

Past Event

A European response to the coronavirus crisis with Paolo Gentiloni

This is the second event in our series with the Financial Times, where Paolo Gentiloni will discuss the European response to the coronavirus crisis.

Speakers: Paolo Gentiloni, Mehreen Khan and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 6, 2020
Read article More on this topic
 

Opinion

A European approach to fund the coronavirus cost is in the interest of all

We had not seen a common challenge as clear as this pandemic. The sum of national actions and programs is likely to be insufficient.

By: Agnès Bénassy-Quéré, Arnoud Boot, Elena Carletti, Jan Krahnen, Miguel Otero-Iglesias, Lucrezia Reichlin, Dirk Schoenmaker and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: April 6, 2020
Read article More on this topic More by this author
 

Opinion

A temporary, common fiscal stimulus to answer the mayhem of COVID-19

We are not in normal times and we have to surpass, albeit only for the duration of the COVID-19 shock, the hurdles that did not allow the euro-area to endow itself of a common fiscal policy.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: April 2, 2020
Read about event More on this topic
 

Past Event

Past Event

Find my virus: Mobilising AI and big data to fight COVID-19

At this event, the panellists will discuss the role of AI and big data in the fight against the coronavirus crisis.

Speakers: J. Scott Marcus, Alex Sandy Pentland, Georgios Petropoulos and Marietje Schaake Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 2, 2020
Read about event More on this topic
 

Upcoming Event

Apr
28
18:00

The Sound of Economics Live: On emerging market crisis with Barry Eichengreen

At this online podcast recording, Guntram Wolff and Barry Eichengreen will discuss the impact of the COVID-19 crisis on emerging economies and the corresponding policy responses.

Speakers: Barry Eichengreen, Giuseppe Porcaro and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author
 

Opinion

Will the economic strategy work?

Because even thriving companies can be killed in a matter of weeks by a recession of the magnitude now confronting the world, advanced-economy governments have reacted in a remarkably similar fashion to the COVID-19 crisis. But extending liquidity lifelines to private businesses and supporting idled workers assumes a short crisis.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: April 1, 2020
Read article More on this topic More by this author
 

Podcast

Podcast

The macroeconomic policy response to the COVID-19 crisis

From the European Stability Mechanism (ESM) to "coronabonds", the EU seems to be struggling to find an appropriate mechanism to tackle the economic crisis created by the COVID-19 pandemic. What is really the best option? And how do we ensure that, once the pandemic is over, we return to sustainable debt levels and competitive economies? This week, Giuseppe Porcaro is joined by Lucrezia Reichlin, professor of Economics at the London Business School, Grégory Claeys and Guntram Wolff to discuss the macroeconomic policy response to the COVID-19 crisis.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: March 31, 2020
Read article More on this topic
 

Opinion

Why are some stock markets in Asia less affected by coronavirus?

While Asian markets are in a sea of red, mainland China, New Zealand, Hong Kong and Taiwan are all defying the gravity.

By: Alicia García-Herrero and Gary Ng Topic: Global Economics & Governance Date: March 31, 2020
Load more posts