EY sees HK$70 bln HK budget deficit, moots 'job credit' scheme

January 17, 2020 11:08
Agnes Chan (middle), Managing Partner, Hong Kong and Macau at EY, presents the audit firm's outlook and proposals as the Hong Kong government prepares to unveil the annual budget next month. Photo: HKEJ

Ernst & Young (EY) expects the Hong Kong government to record a budget deficit of HK$70 billion for the fiscal year 2019-2020, the first deficit in 15 years, due to an adverse economic environment and months of social disturbances in the territory.

“The US-China trade tensions and ongoing social incidents placed enormous strain on Hong Kong last year, both economically and socially,” Agnes Chan, Managing Partner, Hong Kong and Macau at EY, said on Thursday.

As the economy is likely to remain unstable, there is a good chance the government will record another budget deficit in the next financial year, she said.

EY, which is one of the ‘Big Four’ global audit firms, projected revenues from land sales, profit tax and stamp duty in the current fiscal year to come in below the government’s original forecasts.

According to the firm's estimates, the slowdown in land sales will cause land premiums to fall short of the government’s original estimates by HK$18 billion. The profits tax and salaries tax receipts will be lower than the original budget by HK$28 billion and HK$7.6 billion respectively. Receipts from stamp duties will fall short of the original estimate by HK$8 billion.

Coupled with the HK$25.2 billion relief measures unveiled since August 2019, the government's originally anticipated surplus of HK$16.8 billion in the financial year 2019-20 will become a deficit of HK$70 billion, equivalent to 2.5 percent of Hong Kong’s estimated GDP in 2019.

The expected budget deficit this year would reduce Hong Kong’s fiscal reserves to HK$1.101 trillion at end-March 2020, amounting to 39.2 percent of the city’s GDP.

In order to support enterprises and preserve jobs in the face of the external and internal threats,  EY proposed multiple relief measures including reducing profits tax, salaries tax and tax under personal assessment, waiving rates for the financial year 2020-21, and a one-off electricity charge subsidy, among other things.

The mentioned one-off relief measures are estimated to cost the government HK$67 billion in total.

"It is of utmost importance to safeguard jobs in the face of the forthcoming economic winter,” said Chan, unveiling a suggestion to introduce a “job credit scheme” which would cost the government HK$11.8 billion.

Under the scheme, the government will make 5 percent of the mandatory contribution fund (MPF) scheme, capped at HK$1,500 for each employee, for each of the about 340,000 qualifying SME employers for six months.

“We believe the proposed measure will encourage SMEs to preserve jobs amid Hong Kong’s current economic situation,” said Chan.

The proposed initiative is similar to the universal “wage credit scheme” which the Singapore government introduced in 2013. In order to support businesses, the government co-funded 40 percent of the increase in gross monthly wages of Singaporean employees, with each eligible employer to receive the payout automatically from the government. The co-funding ratio later dropped to 20 percent in 2017, and 15 percent for 2019, and will be down to 10 percent for 2020.

EY also suggests that the government should do more than offering short-term support and relief measures, as it needs to strengthen and foster an innovative and vibrant economy, tackling the challenges facing the city.

Key proposals include relaxing the deduction rules for enterprises’ qualifying R&D expenditures, fostering the development of an intellectual property trading hub, enhancing the regional headquarters tax incentive, among others.

Despite strong calls for a universal cash handout initiative from various sectors, Chan expressed doubts about the benefit of the measure to the local economy, also noting that implementing the proposal would entail huge administrative costs.

She suggested that the government "should take well-targeted measures and make better use of fiscal reserves.”

Ahead of the budget speech that Hong Kong’s financial secretary Paul Chan will deliver next month, Chief Executive Carrie Lam Cheng Yuet-ngor announced on Tuesday a further multi-billion-dollar relief package, targeting the elderly, unemployed and low-income residents, with plans to provide cash handouts among other benefits.

Asked about the government’s latest economic relief measures, Chan noted that the measures announced on Tuesday would increase the government’s recurrent expenditure by HK$10 billion a year, which will be an ongoing financial liability, considering Hong Kong’s aging population.

“For now, these measures involve a recurrent expenditure by HK$10 billion a year, but by 2030, these measures will involve a lot more,” she said, adding that she hopes the government will focus more on ways to boost the recurring income.

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