No country for old men: Singapore and HK budget differences indicate policy divergence

The recent budgets delivered in Singapore and Hong Kong show differing paths to deal with an ageing society.

The Hong Kong and Singapore annual budgets focus on raising potential growth and meeting long-term challenges posed by population ageing, said Andrew Fennell Director of Sovereigns at Fitch Ratings. “Hong Kong's budget signalled a willingness to adopt a more interventionist long-term growth strategy, which would move it closer to the model traditionally applied by Singapore. However, Hong Kong's government indicated that immigration could be used to counteract labour market and demographic challenges, in contrast with Singapore's approach to reducing its reliance on foreign labour.”

Public finances, he added, should remain substantial credit strengths for both sovereigns, given healthy fiscal reserves and credible policy anchors that ensure budgets remain balanced over the medium term. This underscores the priority both governments have given to long-term fiscal sustainability in the face of the looming demographic challenges over the coming decades.

“Slower working-age population growth will act as a drag on GDP growth and could create labour shortages, whilst healthcare costs will increase markedly. These trends are only likely to affect sovereign credit profiles beyond our rating horizon, but could eventually result in structural deficits without a concerted policy response.”

Hong Kong's budget, in Fitch's view, signals a pivot toward a somewhat more interventionist long-term approach that may see the government play a larger role in setting the direction and structure of the economy, while preserving its competitive low-tax structure.

“The government indicated that in light of the rising importance of IT and intense competition between economies, it may look to play the role of a "promoter" of industries in which it sees strong development potential. The government has also identified land and manpower as key supply-side constraints hindering growth, which it intends to help address through immigration and a Task Force on Land Supply.”

Fitch noted further economic integration with China will also be a key part of Hong Kong's development strategy, as illustrated by plans to develop the Guangdong-HK-Macao Bay Area. Hong Kong's ability to capitalise on integration opportunities and remove supply-side constraints will be key to boosting growth - the government is forecasting medium-term GDP growth of 3% per year, up from 2.7% over the last decade. However, continued integration is likely to link Hong Kong's business cycle more closely to China, which could also introduce vulnerabilities, given the territory's already-significant economic and financial linkages with the mainland.

Meanwhile in Singapore's ability to address labour supply shortages is constrained by social discontent over the previous pace of immigration. Accordingly, it has for some years pursued strategies to reduce dependence on foreign workers by raising labour productivity. The latest budget builds on earlier initiatives to support productivity growth, which have included incentives for businesses to innovate and adopt technologies, and support for worker training. In this respect, it has moved earlier than Hong Kong.

“The Singapore budget also included measures to lift revenue, most notably by increasing buyers' stamp duty and setting out plans to hike the goods and services tax rate from 7% to 9% during 2021-2025. Singapore has been moving toward a more progressive income tax regime.”

“Both reported healthy budget surpluses in 2017 - reflecting robust global growth - and outlined expansionary budgets for 2018. Hong Kong is targeting a surplus of 1.7% of GDP, down from an estimated 5.2% in 2017. Singapore is aiming for a small deficit of 0.1% of GDP, versus a 2.1% surplus. Singapore is giving citizens direct cash handouts this year, while Hong Kong has opted for tax cuts and more targeted giveaways. Both are committing considerable funds to infrastructure, innovation and technology to support long-term growth. The Singapore government also announced it will consider providing guarantees to statutory boards and government-owned companies to build infrastructure,” added Fitch.