Singapore, Hong Kong budgets unveil divergent responses to intensifying challenges

Singapore is big on welfare, while Hong Kong is propped up by tax cuts.

Regional powerhouses Singapore and Hong Kong last week unveiled divergent responses to the intensifying challenges of rising income disparity, the need to strengthen the supply side to underpin growth, and aging populations.

According to Fitch Ratings, Singapore is adopting a more explicitly redistributionist fiscal policy while Hong Kong is introducing tax cuts as part of its latest budget round.

The emphasis of Singapore's growth policy seems to be on strengthening total factor productivity, partly through fiscal incentives. These include extending a wage credit scheme and corporate income tax rebates.

Hong Kong's approach is to boost infrastructure expenditure to deepen the capital stock, while letting the supply side take care of itself to a greater degree. The government's long-term fiscal plan calls for capex to rise by a compound annual growth rate of 9.9% from FY15 to FY19.

Fitch's analysis suggests Hong Kong is spending slightly less on identifiable social items as a percentage of GDP than in 2000, whereas in Singapore the percentage is about the same. The share of expenditures on social items in both has been rising in recent years after dipping in the early 2000s.

Nonetheless, the fiscal positions for both cities are likely to remain significant sources of credit strength over the medium term.

Fitch expects that policymakers will continue to place a high priority on long-term fiscal sustainability.
Hong Kong continues to forecast surpluses through to FY20, which means it will accumulate fiscal reserves in nominal terms over the medium term.

In Singapore, the budget plan includes a deficit of SGD6.7bn in FY15, however non-budget sources of revenue will mean that the overall general government balance will remain in surplus.

It is also notable that both governments have a tendency to budget on the conservative side, and have historically outperformed their fiscal plans. In the case of Singapore, the fiscal balance has outperformed the budget for the past 11 consecutive years.