Published February 26, 2009

HK's shrinking economy gets a cautious Budget

GDP may contract up to 3% this year; no big bang measures to stem the tide

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(HONG KONG) Hong Kong's economy shrank 2.5 per cent in the last quarter and is set for a downward spiral in 2009, likely posting its first full-year contraction since the Asian financial crisis a decade ago, the government said yesterday.

Mr Tsang: Hong Kong's economy is expected to face more pain as job losses mount, exports slump and property prices tumble

The Chinese territory's economy, battered by the worst global economic slowdown in decades, is expected to face more pain as job losses mount, exports slump and property prices tumble, Financial Secretary John Tsang said in an annual budget address which offered few handouts despite the global crisis.

'This once-in-a-century financial turmoil has spread from the financial markets to the real economy, leading to a synchronised global recession,' Mr Tsang told lawmakers. 'Being a small open economy, Hong Kong will inevitably be hit.'

Mr Tsang was reluctant to spend a lot more following a series of fiscal stimulus steps in recent months, as government finances are under pressure as the financial centre's economy contracts. He did announce a rebate of up to HK$6,000 (S$1,182) for 2008-2009 income taxpayers but raised tobacco duty by 50 per cent.

For 2009, gross domestic product (GDP) will likely shrink between 2 per cent and 3 per cent - its first full-year contraction since the Asian crisis in 1998, Mr Tsang said. GDP eked out a 2.5 per cent gain for all of 2008.

Hong Kong's economy, which slipped into recession in the third quarter, contracted 2.5 per cent in the fourth quarter of 2008 from a year earlier, he said. That was the worst performance since the first quarter of 1999.

On a seasonally adjusted basis, GDP fell by 2 per cent in the October-December quarter from previous period - marking the third straight quarter of decline.

To cope with the slowdown, Mr Tsang announced temporary cuts on salary taxes and waivers on property fees as part of a budget estimated at more than HK$300 billion for the fiscal year starting April 1.

Also included is spending to create 62,000 jobs and internships and HK$39.3 billion for capital works.

Mr Tsang stressed the importance of maintaining Hong Kong's competitiveness, announced a programme to sell government debt and confirmed it would amend tax laws in 2009-2010 to promote Islamic finance.

The government posted a provisional HK$4.9 billion fiscal deficit for 2008-2009, which would widen to a HK$39.9 billion deficit for 2009-2010.

But Guy Ellis, a tax partner at PricewaterhouseCoopers LLP, said that might be optimistic. 'Tsang is forecasting a 30 per cent drop in profits tax (in 2009-2010) but is assuming salary tax collection will be at the same level, even though in the past few months we've seen significant numbers of taxpayers requesting to defer tax payments.'

Clement Leung, an official at the Financial Services Bureau, later told the media that salary tax revenue in 2008-2009 would be depressed by a big tax rebate announced in last year's budget.

Mr Tsang said the government would largely achieve fiscal balance by 2013-2014.

Critics say Hong Kong, which has vast cash reserves, can do far more to help lift its sagging economy. Goldman Sachs economists described the budget measures as 'modest'.

'The positive stimulus effects from the expansionary measures in the budget would be greatly hampered by the strong macro headwinds the Hong Kong economy faces,' they wrote in a note. Roddy Sage, head of financial group AFP, was unimpressed: 'There was nothing of any detail in this budget,' he said. 'What is he going to do to give us a head start on our competitors when the economy picks up?'

Mr Sage said he had been hoping for tax breaks for fund management companies, lower taxes for small companies, and support for small companies to keep jobs along the lines of a subsidy scheme for staff retention in Singapore.

'Given the severity of the global downturn and given the urgency other governments have displayed in stimulating their economies, this budget falls short,' said Kelvin Lau, an economist at Standard Chartered Bank plc in Hong Kong. 'It's a conservative budget.' - AP, Reuters, Bloomberg