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Hong Kong's economy is expected to grow 3 to 4 percent this year as the financial hub known for its amped up capitalism debates the sustainability of its longer-term finances amid calls to boost welfare spending and narrow the wealth gap.

In his budget speech focused on maintaining Hong Kong's competitiveness, Financial Secretary John Tsang said the city's GDP grew 2.9 percent last year compared with 1.5 percent in 2012, and will likely expand between 3 and 4 percent in 2014.

A Reuters poll of analysts had estimated the city's GDP growth this year to be at an average 3.5 percent.

Headwinds from economic uncertainty in the United States and the tapering of the Federal Reserve's quantitative easing policy could trigger capital outflows and volatility to the free and open economy straddling southern China's coast.

PROPERTY COOLING MEASURES TO STAY

Tsang said the government would not loosen a raft of property cooling measures that have begun to show signs of moderating the once red-hot market even as a bulk of Hong Kong's revenue comes from the key real estate sector.

Home prices have more than doubled since 2008 in one of the world's most expensive property markets, putting a strain on business costs and worsening income gaps.

"Before the supply-demand situation of the property market regains its balance, the government must continue with its demand-side management measures. These serve to forestall an increased risk of a property bubble that would hamper our macro-economic and financial stability," Tsang said.

A targeted 470,000 residential flats would be built in the coming 10 years and 71,000 private units are also expected to come onto the market within four years to help supply.

MILD SURPLUS

The city recorded a provisional surplus of HK$12 billion ($1.6 billion) for the 2013/14 fiscal year, in line with expectations, but far less than the bumper HK$64.8 billion last year, prompting Tsang to remind of the need to preserve Hong Kong's revenue base, though without raising taxes.

"We have to ensure that our expenditure growth keeps pace with economic and revenue growth. We should also strive to forge a consensus in the community on preparing for Hong Kong's fiscal challenge in the short, medium and long term," he said.

The government previously said it was expecting a mild deficit of HK$4.9 billion.

Hong Kong's fortunes are closely tied to the mainland where growth is slowing. Efforts by the Chinese government to boost Shanghai as a financial centre may also pose a drag on the city which has the largest pie of the lucrative offshore yuan business and wants to retain it.

With respect to Hong Kong's role as China's largest offshore yuan hub with total yuan deposits of more than 1 trillion yuan ($163.2 billion), Tsang said it would work with China to deepen reforms and diversify and strengthen its yuan products in Hong Kong, though without giving specifics.

PUBLIC FINANCE "PRESSURE"

While Hong Kong's government has handed out billions, including cash handouts in previous years, another bumper "giveaway" budget didn't materialize this time.

Tsang did, however, budget around HK$20 billion in one-off relief measures including tax concessions, rent subsidies for public housing tenants and welfare handouts.

As one of Asia's richest cities flush with billionaires and gleaming skyscrapers with fiscal reserves of over HK$745.9 billion, Hong Kong has nevertheless struggled in past decades to contain a yawning wealth gap that has seen around 1.3 million of its 7 million population pushed below the poverty line, according to a government-commissioned report.

Last month, Hong Kong's leader Leung Chun-ying announced a multi-billion dollar raft of poverty alleviation measures including a low-income working family allowance, which while lauded as long overdue, also raised concerns the city's reserves might be run down by the new recurrent expenditure.

"The community's rising aspirations in an evolving environment will inevitably put increasing pressure on public finances," said Tsang.

He said recurrent expenditure on welfare in 2014/15 would hit HK$56.9 billion, a nearly 10 percent jump from last year.

Noting public concerns that the famously open and free Hong Kong economy might be nudging towards more "welfarism", Tsang nevertheless said more targeted handouts were unavoidable.

"I understand their concern. However, I would like to point out that government's welfare spendings are meant to help the needy by providing them with short-term relief, so that those capable of working could re-enter the labor market, make a living on their own, and leave the safety net as soon as possible," he told the city's lawmakers.

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The above article is a repost from Reuters.