Fiscal capacity is the foundation of government capabilities to provide public goods and safeguard social stability and prosperity. It shapes the amount and types of resources that the government can potentially mobilize to perform its functions and cope with various unexpected shocks. The development of fiscal capacity is a dynamic and path-dependent process that is constrained by the underlying institutional arrangements and economic structure. Strong fiscal capacity depends on past public investment in maintaining and strengthening robust institutions and economic competitiveness.
With an efficient and low-tax regime supported by a mature administrative and legal system, Hong Kong has always prided itself in its ability to prudently keep a robust fiscal base. The new 2022-23 Budget has again demonstrated Hong Kong’s fiscal resilience, notwithstanding the formidable headwinds that Hong Kong’s economy has faced over the past two years.
The revised estimate on government revenue in 2021-22 is HK$682.7 billion ($87.3 billion), 15.5 percent higher than the original estimate, with the land premium and profits tax higher than the previous estimates by HK$43.5 billion and HK$32.4 billion respectively. With a surplus of HK$18.9 billion for 2021-22, Hong Kong’s fiscal reserves are expected to be as high as HK$946.7 billion by the end of March.
We need agile, targeted, and creative measures that can not only help us cope with the short-term disruptions not least caused by the pandemic, but also lay a solid foundation for strengthening Hong Kong’s structural competitiveness in the future
The total government revenue and expenditures for 2022-23 are estimated to be HK$715.9 billion and HK$807.3 billion respectively. The recurrent expenditures on education, social welfare and healthcare account for around 60 percent of the total, with the expenditure on healthcare recording the largest increase. In the longer term, Hong Kong is expected to have a fiscal surplus from 2023 to 2026, with the real economy growing by an average of 3 percent per annum during this period. Fiscal reserves are estimated to be over HK$1 trillion by the end of March 2027, equivalent to 28.9 percent of Hong Kong’s GDP.
By global standards, the Hong Kong Special Administrative Region government is in an admirable financial position, with ample fiscal resources for pandemic relief measures and countercyclical policies. At the core of the government mobilization efforts to fight the pandemic, the Budget involves over HK$54 billion for anti-pandemic work, including strengthening testing, vaccination, inspection, hygiene services and relevant facilities. It provides a broad package of relief measures to support ailing businesses and consumers, such as various forms of tax reduction and fee waivers, a new round of the Consumption Voucher Scheme, as well as earmarked financial support for the temporarily unemployed through the Anti-epidemic Fund. All of these are welcome measures to buffer the ongoing socioeconomic disruptions caused by the omicron outbreak.
The Budget also highlights the importance of the government to invest more for the future. In 2020, the government decided to use part of the Future Fund to establish a “Hong Kong Growth Portfolio” to make strategic investments in projects that can raise Hong Kong’s long-term productivity and competitiveness. The Budget will further increase the funding allocated to the Hong Kong Growth Portfolio by HK$10 billion, of which HK$5 billion will be deployed to set up a “Strategic Tech Fund”, and the remaining HK$5 billion will be used to set up a “Greater Bay Area Investment Fund”.
To promote innovation, the government has given a particular strategic emphasis on life sciences and the healthcare sector, earmarking HK$10 billion funding support to enhance technological innovation in this area, involving hardware, talent, clinical trials and data application. The government will set aside another HK$10 billion for upgrading and increasing the healthcare teaching facilities of leading local universities. It will also inject an additional HK$200 million into the Green Tech Fund to subsidize projects in such priority areas as net-zero electricity generation, green buildings, green transport and waste reduction. Moreover, an additional HK$1.5 billion will be injected to promote the installation of electric vehicle charging-enabling infrastructure.
An adequate land and housing supply would be crucial to support Hong Kong’s efforts to promote strategic industrial development. The Northern Metropolis development strategy is a key initiative for addressing the land-supply bottleneck. The Budget has committed to deploy HK$100 billion from the cumulative return of the Future Fund to set up a dedicated fund to support infrastructure development in the Northern Metropolis.
It seems clear that the government has begun to explore, articulate and implement an increasingly coherent framework of industrial policies and innovation policies, capitalizing on its fiscal resilience by using various financialized policy instruments, channels and vehicles to support its strategic investment. There is still plenty of demand and space for such public investment to further grow and play a bigger role in the next phase of Hong Kong’s economic development.
Some analysts were concerned that the multiple rounds of fiscal stimulus, subsidies and investment initiatives would deplete the fiscal resources and may erode fiscal discipline. These views are problematic as they underestimate Hong Kong’s fiscal and economic resilience. In the current environment, proactive fiscal policies are not only necessary to repair the damage that COVID-19 has inflicted, but are also important to facilitate economic revival, which would strengthen the fiscal base in the longer term.
There are two types of fiscal conservatism traps that we need to guard against. The first trap is fiscal rigidity that is blind to the responsibility and adaptability of spending resources flexibly to cope with unexpected disruptions. The second trap is fiscal passivity that is inimical to proactively deploying resources for long-term strategic investment.
Fiscal resilience and prudence is a virtue and a blessing for Hong Kong, which has long adhered to the principle of keeping expenditures within the limits of revenue, steadily building up its fiscal reserves over the years. However, the extraordinary challenges that Hong Kong faces now call for unconventional thinking and bold policy measures. This is not the time to overstress the preservation of fiscal resources and shy away from strategically deploying the accumulated past savings as the SAR is engaged in an uphill battle against the lethal COVID-19 virus. Instead, we need agile, targeted, and creative measures that can not only help us cope with the short-term disruptions not least caused by the pandemic, but also lay a solid foundation for strengthening Hong Kong’s structural competitiveness in the future.
The author is an associate professor at the Centre for China Studies at the Chinese University of Hong Kong, and a research fellow (by courtesy) at the Lau Chor Tak Institute of Global Economics and Finance.
The views do not necessarily reflect those of China Daily.