By Jessie Pang and Donny Kwok

HONG KONG (Reuters) – Hong Kong is under pressure to rein in spending when it unveils its annual budget on Wednesday, after racking up huge fiscal deficits during the COVID-19 pandemic and as it struggles to kick-start the economy and regain its financial lustre.

The sustainability of the city’s fiscal reserves has come under the spotlight after the authorities spent more than HK$600 billion containing the spread of infections and providing economic relief for businesses and families struggling with pandemic restrictions.

This whittled down the Asian financial hub’s fiscal reserves to around HK$800 billion ($102 billion) – equivalent to 12 months of government expenditure — around half the levels three years ago.

“As our economy and market came under pressure, we took exceptional measures during exceptional times to safeguard people’s livelihood,” Financial Secretary Paul Chan wrote in a recent blog post. “However, as our economy stabilises, we have to make adjustments to our fiscal measures accordingly.”

PWC estimates a budget deficit of HK$109 billion for 2022/23. That compares with a shortfall of HK$56.3 billion or 1.9% of GDP, projected by the government in its budget last year.

Chan, who will present the budget at 11 a.m. (0300 GMT) on Wednesday, noted a need to rein in spending now that many COVID-related restrictions have been lifted, but he said any moves would be carefully considered.

“Even though the government is under tremendous pressure to reduce public expenditure, it may not be appropriate to abolish relief measures across the board,” he added.

Hong Kong hewed closely to China’s zero-COVID policies — imposing some of the world’s toughest measures including lengthy quarantines for inbound travellers and social distancing rules that hurt the tourism, retail and catering sectors.

Since China’s imposition of a sweeping national security law in 2020 that markedly curbed individual freedoms, hundreds of thousands of Hong Kongers have emigrated abroad, bringing further uncertainty and longer-term economic pressures on Hong Kong’s regional competitiveness.

Exacerbating the shortfall for Hong Kong has been a sharp drop in land sales that have long been a core source of revenue — with PWC expecting this to hit HK$80 billion — 33 percent less than the original government estimate.

Home prices fell 15.6% last year after more than a decade of red-hot price increases in one of the world’s priciest property markets.

Hong Kong’s economy shrank for the fourth straight quarter in the final three months of 2022, contracting an annual 4.2%, worse than economists’ estimates as sluggish global demand and higher interest rates hit exports and spending.

It was the second deepest contraction since the second quarter of 2020 when gross domestic product shrank 9.4% as COVID-19 took a toll around the world.

One bright spot, however, could be the city’s reopening of its border with China, that KPMG China said could “provide an opportunity for an economic turnaround”.

KPMG also urged the government to do more to attract international talent and investment, including by slashing tax rates for firms establishing regional headquarters in the city.

($1 = 7.8306 Hong Kong dollars)

(Reporting by Jessie Pang and Donny Kwok; Writing by James Pomfret; Editing by Jacqueline Wong)

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