Downsides to Hong Kong’s untargeted cash handout

Alicia Garcia Herrero, Natixis Asia Pacific Chief Economist, Bruegel Senior Fellow

After enjoying 15 years of fiscal surplus, Hong Kong is now running a deficit due to plummeting growth. The economy contracted by 1.2% in 2019, and this year will most likely be the same, if not worse.

Last week’s budget shows that Hong Kong’s sweet dilemma has come to an end. It is a test for whether Hong Kong really has adopted a “new fiscal philosophy,” as mentioned by Chief Executive Carrie Lam back in 2018, on bolder spending, if necessary.

The answer seems to be yes. The headline relief measures amount to HK$120 billion (US$15.4 billion, 4.2% of gross domestic product), with HK$71 billion (2.5% of GDP) handed out as cash. As such, the fiscal deficit may reach 4.8% of GDP on the basis of the official growth forecast, which is very optimistic (minus-1.5% to 0.5% year on in 2020). Fiscal reserves meanwhile look set to meet only 15 months of government expenditure.

The best part of the budget is that the amount is no longer small, as opposed to the piecemeal approach in the past. The government is now willing to play a larger role, including the establishment of a relief fund and bolder future spending.

Strong fiscal expenditure is indeed meaningful in easing short-term liquidity needs, especially for the low-income population and small firms. The choice of a universal cash handout instead of targeted measures has the advantage of quicker implementation, but this will largely hinge on how quick the measures can be put in place and whether the government can avoid a backlash in the Legislative Council.

The downside though is that the stimulus is untargeted and regressive in nature, as the bulk of money spent is a one-off cash disbursement per adult, independent of income or damage from the Covid-19 outbreak. The same amount targeted to small and medium-sized enterprises in the hardest-hit sectors could have a bigger impact on household income as it might help protecting their jobs or ease their burden directly.

Furthermore, the one-off nature of the cash handout also increases the likelihood of having this stimulus leaving Hong Kong rather than being used for consumption. In macro-economic terms, this…