Hong Kong launches big fiscal stimulus to counter external shocks.

This is a remarkable example of a direct fiscal stimulus to help offset the impact of domestic and external shocks.

The Hong Kong government is giving 7 million people $1,200 in cash to boost its recession-hit economy in a stimulus programme estimated to be worth more than $15 billion. Income taxes are also being cut for some households and residents of public housing are being given a one month rent holiday in a bid to lift disposable income and support consumer spending. The Hong Kong economy has been hit hard by the impact of civil unrest and political process and now the economic contagion from the spread of the coronavirus.

The city economy is expected to run their first fiscal (budget) deficit in more than a decade although Hong Kong has one of the lowest government debt ratios expressed as a percentage of GDP.

Will the fiscal stimulus be effective? Much depends on the propensity to save and consume of the millions of households directly affected.

Other nations hit by the negative demand and supply-side shock of the virus have also announced plans for a fiscal stimulus to aggregate demand. Here is the Italian government response reported in the Financial Times.