A year ago, Financial Secretary Paul Chan announced the launch of the Employment Support Scheme (ESS), part of a HK$300 billion government relief fund to fight the pandemic-induced recession.
Back then, many of us thought that such an unprecedented measure would be sufficient to tide over the economic decline, which – like with SARS in 2003 – was not expected to last beyond the warm summer months.
But more than a year on, there is still no shortage of bad economic news and the unemployment rate has hit a 17-year high of 7.2%.
Going forward, Hong Kong’s economic fortunes will depend on our ability to curb the pandemic. While light is beginning to emerge at the end of this long, dark tunnel with the roll-out of a mass vaccination programme, the road to recovery will likely be bumpy as it will take time to achieve herd immunity at the programme’s current rate of progress.
In particular, businesses such as those in the retail, hospitality and leisure sectors will remain vulnerable as they are likely to take longer to recover, even after social distancing restrictions have been relaxed and normalcy restored.
For many businesses in these badly hit sectors, the pandemic has served to compound the woes resulting from the social unrest of a year earlier. These back-to-back events have created a double whammy of lost revenue and a drain on resources.
In his fifth budget, Financial Secretary Chan gave himself two major tasks: stabilise the economy and relieve the burden on Hong Kong people. This comes against the backdrop of a persistently narrow tax base and the risk of a drawn-out fight to defeat the pandemic.
Since the onset of the pandemic, Hong Kong has utilized almost 30% of its fiscal reserves. Under the assumption that the economy will grow, in real terms, by an average of 3.3% annually from 2022 to 2025, the Government has estimated that it will record a deficit for four more years until 2024-25. This would lead to a decline in reserves from the equivalent of 33.3% of GDP to 22.6% in five years.
For the Financial Secretary, drawing up the latest Budget was a delicate balancing act – providing fiscal stimulus to prop up Hong Kong’s fragile economic recovery while practising fiscal discipline as stipulated under Article 107 of the Basic Law.
It therefore came as no surprise that the 2021-22 Budget was less generous than last year’s. With the pandemic continuing to make its presence felt, it is understandable that the Financial Secretary has chosen to shift gears from dishing out universal cash aid in favour of more targeted measures aimed at helping more vulnerable segments of the community.
The ESS provided businesses with a critical lifeline by subsidising a portion of wage bills for a six-month period up to November 2020, and thereby prevented a drastic increase in unemployment. However, its indiscriminate nature was also the subject of criticism. Businesses, such as supermarket chains, that had managed to escape the pandemic’s effects were also able to draw on this government support.
In his latest Budget address, the Financial Secretary included a section on the digital economy, emphasizing the need to address structural changes across virtually all sectors. This is timely, as the coronavirus brought into sharp relief the importance of digitization. Providing financial support to encourage businesses, in particular SMEs, to adopt digital technology is good policy as it helps to improve our productivity, an important catalyst for sustained economic growth and competitiveness over the longer run.
Similarly, the pandemic has changed the future of jobs and occupations. From an economic standpoint, attempts during the early stages of the pandemic to save jobs of all stripes did not represent the most efficient use of public resources. As the pandemic continues, these should be redirected to help workers reskill and equip students for the future. To his credit, the Financial Secretary has made efforts to futureproof Hong Kong’s workforce, although initiatives such as the Love Upgrading Special Scheme and other similar measures should be reviewed from time to time to ensure that they remain relevant and effective.
Private consumption plays an important role in driving economic recovery. Considering that the retail and hospitality sectors have borne the brunt of the pandemic, the idea of distributing HK$36 billion in electronic spending vouchers to boost local consumption is therefore a good one. Execution, however, is another matter. It will be interesting to see the Government’s approach, in terms of speed and design, to roll out the programme and to ensure it fulfils its purpose of boosting the local economy.
When the Covid-19 pandemic has finally receded, the Financial Secretary will likely be training his focus on shoring up public finances to prepare for the next Black Swan event, which may be lurking just around the corner. However, in order for his efforts to achieve their intended outcomes, he must bear in mind that the optimal solution to reversing deficits is to grow the economy. This, in turn, depends on persuading businesses to invest, so that a bigger pie can be created for all.
It is therefore of critical importance that the Government, in its efforts to relaunch Hong Kong, invests more in burnishing Hong Kong’s reputation and promoting business confidence.
Wilson Chong, email@example.com