Mike Rowse

Opinion | The hardest budget Hong Kong has ever had to produce

The scale of the financial secretary’s challenge is monumental. Hong Kong needs to spend more to tackle the health and economic crises even as revenue drops with people out of work, businesses falling apart and property prices softening

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Financial Secretary Paul Chan has his work cut out. Photo: Nora Tam

Mike Rowse

Published: 9:15am, 21 Sep 2020Updated: 9:24am, 21 Sep 2020

Financial Secretary Paul Chan Mo-po faces a monumental challenge as he looks ahead to the 2021 budget. It will probably be the hardest task anyone in his position has faced since the end of the second world war.

At its core, the budget builds on three things: a mid-range economic growth forecast, new spending proposals and new revenue proposals. On all three counts, Chan is in very serious trouble, as all the currents are against him.

The economic growth forecast is critical because it determines how much room there is for additional spending without increasing the government’s share of the economy or the need for extra taxes. Normal practice is to use the five-year average to smooth out any short-term fluctuations.

Thus, if the medium-range forecast is for 3 per cent growth, that is the amount public expenditure will be allowed to grow each year even if the forecast for any one year is higher or lower.

The last time our economy was hit by a serious virus outbreak was in 2003 with the severe acute respiratory syndrome (Sars). Then, the second quarter was simply dreadful as various economic sectors virtually came to a stop. However, the recovery in the third quarter was so robust – triggered by a huge surge in mainland tourists and the government’s imaginative economic relaunch programme – that the full-year economic growth figure was actually slightly higher than the pre-budget forecast. Normal growth resumed thereafter.

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Chan’s problems are different this time because our economy is in recession and a strong recovery soon is unlikely. The coronavirus is not yet under control globally and we are also caught up in the Sino-US trade and economic war. So the medium-range forecast is probably for zero growth: it could even be negative.