Professor Lawrence J. Lau - How Can Hong Kong Emerge From Its Recession?

Professor Lawrence J. Lau Shares Expert Views on
 ‘How Can Hong Kong Emerge From Its Recession?’

(18 May 2020, Hong Kong)  With the Covid-19 outbreak tipping Hong Kong into recession, the HKSAR Government has introduced several rounds of economic stimuli and relief measures, which may result in a current-year budget deficit of about HK$300 billion (about 10% of the local GDP). Amid rising unemployment rate and business closedown, the Government’s cash pay-outs and wage subsidy schemes may not be enough to ensure full economic recovery. 

In the second session of its new ‘INSIGHT FORUM’ series that invites heavyweight experts to speak on a range of pressing societal issues, today the Our Hong Kong Foundation (OHKF) has invited Professor Lawrence J. Lau, Ralph and Claire Landau Professor of Economics, Lau Chor Tak Institute of Global Economics and Finance, The Chinese University of Hong Kong to share his views on additional fiscal measures needed to jump-start the economy, turnaround business expectations, and promote the city’s long-term growth.   

Severe Blow Dealt by the Covid-19 Crisis to Economic Activities in Hong Kong

Following months of social unrest, Hong Kong economy has been further battered by the Covid-19 outbreak. In 2020Q1, the local GDP contracted by 8.9% year-on-year, the third quarterly decline in a row. The Government’s latest economic outlook projects real GDP to contract by between 4% and 7% in 2020. 

The Budget Deficit Is Not a Problem for Hong Kong

In this live webinar, Professor Lau allayed public concerns about running a big budget deficit as long as the money is well spent. He highlighted that the U.S. current-year fiscal deficit is expected at 18% of GDP, while its debt is huge and fast growing. In contrast, Hong Kong’s accumulated surplus is close to HK$1 trillion, with other untapped means of budget financing. If Hong Kong were to run a high fiscal deficit of HK$300 billion—it is still affordable and a well-justified response to the Covid-19 crisis, Professor Lau explained.

Targeted Public Investment Necessary in the Post-Crisis Period

With a weakening economy, rapid unemployment increases and business closedown, Professor Lau warned that while the Government’s cash pay-outs and wage subsidy schemes may temporarily ease the cash flow problems for households and firms, they will not be enough to lead to full economic recovery.

He foresaw no strong rebound in the traditional service sector pillars after the end of Covid-19 epidemic, and underlined the need for targeted public expenditure to raise aggregate demand by way of accelerating investment projects in the pipeline (e.g. the Third Runway System and reclamation and construction of an artificial island east of the Lantau Island), launching additional public housing projects, as well as building more public hospitals and expanding medical and nursing schools.

Professor Lau added that a surge in public investment will restore public confidence, raise expectations and create more jobs, all combining to lift the economy—with a more enduring impact than a wage subsidy alone.

Easing Cash Flow Problems for Households and Firms

To ease the burden of individuals and small and medium enterprises (SMEs), Professor Lau gave credit to the Government for granting a blanket extension of time to filing their fiscal 2019 tax returns and an automatic 3 month tax payment deferment. Furthermore, he suggested that the Government should encourage landlords to help their tenants, especially SMEs, with more rent reductions and longer grace periods. This should help to alleviate the short-term cash flow problems of individual SMEs, with fewer emergency loans needed to be made.

‘How Can Hong Kong Emerge From Its Recession?’
Presentation slides: https://bit.ly/2X0T5Kw