Surplus of $60bn to $80bn may be achieved for the full FY2011

Most if not all of the to-be reported FY11 surplus could be viewed as a windfall ready to be saved or spent.

According to Standard Chartered, Financial Secretary John Tsang will deliver his fourth budget speech on 23 February. Just as the economy’s 2011 outlook is more or less an extension of that of 2010 – i.e., more liquidity-driven domestic growth, with external concerns including sustainability of US recovery, sovereign debt crisis in Europe, and policy tightening in China looking set to linger – the budget for FY12 (ending 31 March 2012) also bears a great resemblance to the one announced last February, in our view. We see Tsang once again being blessed with great flexibility to spend, if he chooses to. The government is likely to report a sizeable surplus for FY11 – a rare feat in the post-crisis world that is not shared even by regional neighbours such as Singapore, and potentially the second-largest surplus in Hong Kong’s history. Stress about pre-empting the risk of asset-price bubbles is likely to be prominent.

With a strong April-December performance to build on, and the January-March period traditionally being a typical tax-collection season, chances are that a surplus of around HKD 60-80bn (3.5-4.5% of GDP) can be achieved for the full FY11. This, if true, will be second only to the pre-crisis FY08, driven by strong growth (an estimated 6.5% for 2010 versus the budgeted 4.5% medium -term annual rate) and surprise windfalls from land sales and stamp duty receipts thanks to ample liquidity. The highly cyclical nature of Hong Kong’s fiscal performance is once again in full display.

Compared with the original government projection of a deficit of 1.5% GDP, effectively most if not all of the to-be reported FY11 surplus could be viewed as a windfall ready to be saved or spent. Furthermore, the last budget’s medium-term fiscal projections now look too conservative and are probably in for an upward revision. Considering also that the economy is likely to grow by 5.0% (versus the 4.5% trend growth) in 2011 and in 2012, in our view, the upcoming budget can be expansionary without undermining the principles of financial prudence. The key here is to spend the money wisely – i.e., one-off concessions targeting the households most vulnerable to the higher cost of living.