Hong Kong Grapples with Record Deficits Amid Economic and Political Challenges

Hong Kong is grappling with unprecedented fiscal challenges as it records annual deficits surpassing US$20 billion in three of the past four years. The most significant deficit was HK$252 billion (US$32.4 billion) during the 2020 to 2021 fiscal year. This marks the city's most severe financial test in three decades, reminiscent of the late 1990s Asian financial crisis, though the current deficits far exceed those of the past. The situation is compounded by a turbulent international reputation following Beijing's suppression of anti-government protests and the imposition of a national security law in 2020.

The changing business environment has prompted an exodus of companies and high-paid workers, further straining the city's economy. As businesses migrate to Singapore, the latter has managed to outperform its fiscal targets by maintaining a balance between spending and income. Hong Kong, however, faces a unique challenge as it is constitutionally required to "strive to achieve a fiscal balance", according to its mini-constitution.

Paul Chan, Hong Kong’s finance chief, attributed the deficits to "multiple internal and external challenges". These include not only the economic impacts of the pandemic but also geopolitical tensions and a slowdown in China's economy. The recent budget announcement aims to tightly control public spending in response to these challenges.

"In the past, we assumed that Hong Kong was geopolitically well-positioned… Now we have to be more careful about such presumptions." – Anthony Cheung

Hong Kong’s fiscal woes are "not just due to economic cycles" spurred by the coronavirus pandemic, as noted by a former government minister. The city's predicament highlights the broader struggle for fiscal sustainability amidst US-China tensions and economic uncertainties.

Since its return to China in 1997, Hong Kong has maintained low taxes and relied heavily on land-related revenue to refill its coffers. However, restoring fiscal balance requires more than traditional revenue streams. It necessitates strategic adjustments, addressing both immediate fiscal responsibilities and long-term sustainability.