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Hong Kong will refund taxes, suspend property rates and boost spending on infrastructure as the economy heads for its first full-year contraction since 1998, the government said.

The city will also spend HK$1.6 billion ($206 million) on a program aimed at creating 62,000 jobs and internships, Financial Secretary John Tsang said in his budget speech today.

Gross domestic product may shrink 2 percent to 3 percent in 2009, after a 2.5 percent expansion last year, Tsang said. The Hang Seng Index of stocks pared gains on investors’ concern the government needs to do more to counter a deepening recession as the global financial crisis cuts exports and jobs.

“Given the severity of the global downturn and given the urgency other governments have displayed in stimulating their economies, this budget falls short,” said Kelvin Lau, an economist at Standard Chartered Bank Plc in Hong Kong. “It’s a conservative budget.”

The Hang Seng pared an earlier 2.7 percent gain to close 1.6 percent higher at 4 p.m. in Hong Kong.

Standard & Poor’s said that while the outlook for the government’s debt rating of AA+, the second-highest grade, remains stable, a prolonged period of economic weakness would increase the likelihood of a cut.

Hong Kong’s financial reserves, forecast by the government to be HK$448.1 billion at the end of March 2010, “will limit the damage to its fiscal profile” as the city begins posting deficits, Standard & Poor’s said after the budget announcement.

‘Disappointing Budget’

Tsang forecast a HK$4.9 billion budget deficit for the year ending March 31, climbing to HK$39.9 billion in 2009-10, and continuing for four more years.

“It’s a disappointing budget; people are going to doubt if the government has done enough,” said Guy Ellis, a tax partner at PricewaterhouseCoopers LLP in Hong Kong. “Given the government’s fiscal reserves, they could afford to be a little braver.”

GDP fell 2.5 percent in the fourth quarter of 2008 from a year earlier, the most since 1998, the Census and Statistics Department said today on its Web site, after growing 1 bad credit unsecured personal loans.7 percent in the third quarter. Economists surveyed by Bloomberg News had estimated a 2 percent contraction.

The economy shrank a seasonally adjusted 2 percent in the fourth quarter from the previous three months. That was the third straight quarter-on-quarter contraction.

Worse Than 2003

Hong Kong’s slump is deeper than during 2003 when severe acute respiratory syndrome killed 299 people in the city. Unemployment jumped by the most in a decade in the three months through January.

The government plans a 50 percent cut in salaries tax for 2008-09, with a ceiling of HK$6,000, benefiting 1.4 million taxpayers and costing about HK$4.1 billion, Tsang said. Property rates will be waived for two quarters.

Capital-works spending will be “very high,” including HK$39.3 billion in 2009-10. The government will also start a program selling government bonds.

“The government has the ability to stomach a much larger fiscal deficit for the next two years,” said Standard Chartered’s Lau. “They could run record deficits of HK$60 billion for two consecutive years without breaching fiscal prudence.”

That view was echoed on the street.

“The government is very stingy,” said Szeto Mei-sim, a 25-year-old receptionist. “What are they doing holding so much money? They should give some back to us citizens.”

Plunging Export Demand

The global financial crisis has sent export demand plunging and driven a 53 percent decline in the Hang Seng Index since the start of last year.

PCCW Ltd., Hong Kong’s largest phone company, said last week that it fired about 80 workers. HSBC Holdings Plc, Europe’s largest bank by market value, announced in November that it was cutting about 450 jobs in Hong Kong. Standard Chartered Plc, a U.K. bank, said in December that it was trimming 200.

“We won’t see a recovery until exports start to stabilize, which is likely to happen in the second half of this year,” said Sean Yokota, an economist at UBS AG in Hong Kong.

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