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Hong Kong Should Continue 'Prudent Fiscal Policy': IMF

by Mary Swire, Lowtax.net, Hong Kong
17 January, 2017

In concluding its 2016 Article IV consultation with Hong Kong, the International Monetary Fund said that the Government's fiscal policy "needs to strike a balance between supporting aggregate demand and preserving a buffer for the longer-run challenge posed by aging."

The IMF's report noted "prudent fiscal policy" in recent years has lifted Hong Kong's fiscal reserves to 35 percent of gross domestic product, or about 23 months of total government expenditure. It assessed that those reserves could be used to provide support if economic activity weakens significantly in the short term, but "a positive fiscal buffer is desirable to cope with adverse shocks, provide room for countercyclical fiscal policy, and sustain confidence."

To address the current global economic conditions, it therefore recommended, for the coming year, "a fiscal impulse broadly in line with the 2016/17 Budget to support the economy through subdued conditions." Such an impulse, the IMF suggested, could provide additional fiscal support for "vulnerable households and the elderly, in the lower income deciles, … [and] small businesses, which has been effective in previous Budgets."

In the medium-term, however, the IMF added that measures to broaden the tax base may be necessary to raise revenue and help other expenditure policies alleviate the fiscal impact of aging, particularly as the Government's working group on long-term fiscal planning estimated that, under current policies, fiscal reserves would be depleted by 2035-40, with the start of structural deficits at around 2025-2030.

With regard to the recent renewed signs of overheating in Hong Kong's property market, the IMF confirmed that the new 15 percent ad valorem stamp duty rate for residential property transactions introduced by the Government in November last year has "had an immediate impact on sentiment and appears to have curbed market exuberance."

However, while "stamp duties can be an effective part of the toolkit to stem excessive price increases and speculation in the real estate market," it was suggested that "they should be rolled back once the trend has shifted towards reduced price and speculative pressures."

In welcoming the overall approval by the IMF of Hong Kong's current policy framework, Hong Kong's Acting Financial Secretary, K C Chan, stated: "With strong economic fundamentals and a robust financial system, Hong Kong is well positioned to tackle the challenges ahead. We will continue with efforts to strengthen Hong Kong's status as an international financial center, capitalizing on our competitive advantages and close economic ties with the Mainland."

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