Prudence urged, though projected deficit is small

PUBLISHED : Thursday, 28 February, 2008, 12:00am
UPDATED : Thursday, 28 February, 2008, 12:00am

The budget handouts - expected to result in a HK$7.5 billion deficit in 2008-09 - will reduce the fiscal reserves from HK$484.9 billion to HK$477.4 billion, the government estimates. Still, the latter figure is equal to 18 months' expenditure.

Standard & Poor's credit analyst Kim Eng Tan said fiscal prudence should be exercised given the uncertain economic environment.

'Should the 2008 economic growth in Hong Kong fall far short of the government's forecast of 4 to 5 per cent, the expected consolidated deficit could rise much higher than the HK$7.5 billion projected currently,' Mr Tan said.

'We do not expect this to affect the credit ratings of the government, given its strong financial position. However, it highlights the volatility associated with the structural weaknesses in Hong Kong's public finances.'

Loretta Shuen Leung Lai-sheung, vice-president of CPA Australia's Hong Kong China division, said the reserves should ideally cover more than 20 months' expenditure.

The 2008-09 fiscal reserves were estimated to equal 27.7 per cent of Hong Kong's gross domestic product, compared with 35 to 36 per cent before 1997, said James McCormack, head of Asia sovereign ratings at Fitch Ratings. The International Monetary Fund recommends fiscal reserves equal 25 per cent of GDP.

'The reserves came down so quickly during the downturn in 2002 and 2003. This suggests that Hong Kong needs sizeable fiscal reserves,' Mr McCormack said.

The record HK$115.6 billion surplus this fiscal year also reflects the volatile nature of the government's revenue sources, such as land sales and stamp duty. It should study ways to smooth out its various revenue streams, Mr McCormack said.

However, New York-based Steven Hess, lead analyst for Hong Kong at Moody's Investors Service, believes Hong Kong can live with lower reserves since 25 per cent of GDP was quite high. Hong Kong was the only government to boast virtually no debt and large reserves, he said.

The president of the Taxation Institute of Hong Kong, Peter Kung, also supported holding robust reserves, but accountants dismissed the notion of a budget deficit next year.

Ernst & Young partner Owen Chan Shiu-shing said 2008-09 would probably see a balanced budget or a small surplus.

Tim Lui Tim-leung, a tax partner at PricewaterhouseCoopers, said that with a likely surplus next year, the government could afford to return more wealth, although HK$200 billion could easily be wiped out if the economic situation changed quickly.

Profits tax, for example, could be lowered by another 1 or 1.5 percentage points, even though Chief Executive Donald Tsang Yam-kuen had already announced the 17.5 per cent rate would be cut to 16.5 per cent, Mr Lui said, adding: 'This can help widen the gap with Singapore.'

PricewaterhouseCoopers estimates a 1 percentage point drop in profits tax would cost the government about HK$4.4 billion.