Natixis: Hong Kong Budget 2021-22

Living in the shadow of the coronavirus, Hong Kong government has opted for a more conservative role in fiscal spending amid the economic challenge. The positive side is the relief measures have switched from an all-rounded to targeted approach, which could mean better reallocation of resources unlike the previous universal cash handout. But it is not only about the way to spend as the amount is essentially important. The lower fiscal spending in the new budget poses the question of whether the support is adequate as Hong Kong is the only economy facing two consecutive years of recession in Asia.

In terms of sectoral impact, financial is still the biggest winner, which makes sense as it is the most important pillar. More encouraging policies are seen in green financing, the launch of Southbound Bond Connect, broader coverage of Stock Connects and REITs. However, the vision and support in other sectors remain largely unclear.

For livelihood demand, the HK$5000 spending coupons will be more efficient than universal cash handout, but the impact is still dependent on the speed of implementation. The jobless loans can offer an alternative path for short-term liquidity with a repayment period of maximum 5 years without fiscal pressure for the government. Still, the government have stayed passive in providing further support, making residents the biggest losers from the budget. That said, the government could have taken an active role in temporary unemployment benefits. For medium-term challenges, there is no clear direction on how to meet the demand for aging and housing. The share of elderly population will grow from 18% in 2020 to 31% in 2040. The average waiting time for public housing has also surged from 3.3 years in 2015 to 5.7 years in 2020. Such livelihood demand remains in the backseat of the budget.

Lastly, the budget comes with a sting in the tail on a hike in stock trading stamp duty from 0.1% to 0.13%. Considering the higher need for future government expenditure, the move can improve the fiscal spending power and slightly rebalance the sectoral divergence, especially as the growth in equity markets has outpaced the economy. In 2020, the market turnover in Hong Kong has increased 1.6 times comparing to the past five years on average. We expect the impact to be limited for market turnover as capital gain has been huge in equities. The hike of stamp duty can bring an extra HKD 15 bn to fiscal revenue1. For other taxes, any increase may hurt household income and drive firms away.

From relief to recovery, the Hong Kong government has projected a narrowed fiscal deficit from 9% of GDP in 2020 to 3.6% in 2021. The budget is sweetened by opportunities for finance but also tastes bitter in limited livelihood support. The hike on the stock trading stamp duty is a bittersweet move if the government is serious in preparing for the challenges in aging and health care. But whether it is worthy will depend on how the government spend the additional revenue.