Hong Kong’s economy is struggling – will $1,200 handouts for each citizen help?

Hong Kong’s embattled government unveiled a budget packed with giveaways including a one-time cash handout, as the city struggles to stabilize an economy battered by political unrest and the coronavirus.

The main feature of Chan’s annual budget is a payment of HK$10,000 ($1,284) to each permanent resident of the city aged 18 or older, aiding the population “overwhelmed by a heavy atmosphere,” Financial Secretary Paul Chan said. Chan estimated the deficit will reach a record HK$139.1 billion in the coming fiscal year.

The administration of Chief Executive Carrie Lam is seeking to put a floor under the collapsing economy, rolling out the boldest budget in recent years after criticism of government inertia. Months of political unrest over China’s role in the city pushed Hong Kong last year into its first annual recession in a decade, with economists forecasting a second annual contraction in 2020 as disruptions from the coronavirus outbreak further depress output.

“In these unprecedented times, I am confident that the 2020-21 budget proposals will provide effective and targeted support to help the Hong Kong community withstand the current difficulties and gear up for a brighter tomorrow,” Lam said in a statement welcoming the spending plans.

However, the handout immediately came in for criticism from economists.

“This is obviously untargeted and regressive and will not solve the problem of those most severely hit,” said Alicia Garcia Herrero, chief Asia Pacific economist at Natixis SA. “It is like throwing a drop in the ocean for many while you could have used that amount to cure the injuries of only a few.”

Ahead of the budget, accounting firm KPMG LLP pushed for handouts but in the form of electronic vouchers to encourage direct spending, rather than saving or moving the cash abroad.

Kevin Lai, chief economist for Asia excluding Japan at Daiwa Capital Markets, is also skeptical Hong Kong locals will rush out to spend their cash windfall.

“That sounds a lot, but would you go out and spend it? The answer is no,” he said. “The economic benefits will only be marginal. Shops and restaurants are screaming for business. It’s not going to help.”

The budget contained a range of measures aimed at alleviating the impact of the recent downturn. Home buyers, students, investors, and small businesses all were targeted for support in the budget. In all, the package is worth 4.2% of 2018’s gross domestic product, according to Bloomberg Economics.

“In view of the tough economic environment, we will adopt an expansionary fiscal stance and make optimal use of our fiscal reserves to implement counter-cyclical measures,” Chan said. The objective is “supporting enterprises, safeguarding jobs, stimulating the economy and relieving people’s burden, so as to help Hong Kong tide over the difficulties,” he said.

Chan unveiled an official forecast for economic growth this year of between -1.5% and 0.5%, and confirmed a contraction of 1.2% in 2019. The 2019-2020 fiscal deficit came in at HK$37.8 billion, the first since 2004.

Here are further details from the budget:

“If the benefits from the cash handouts and tax cuts are distributed this year and everyone spends them this year the economic boost could be 0.5% to 1% of GDP,” said Tommy Wu from Oxford Economics in Hong Kong.Hong Kong’s embattled government unveiled a budget packed with giveaways including a one-time cash handout, as the city struggles to stabilize an economy battered by political unrest and the coronavirus.