In 1980, when the then British prime minister, Margaret Thatcher, addressed the Press Association in London, she spelt out the homespun wisdom for which she was famous. She said “monetary control” and “cash limits” were not novel, but were simply new terms for something “very old-fashioned”. They meant “living within our means, and nobody has been able to escape that need indefinitely”.
Although Thatcher’s words were not rocket science, her message was incontrovertible. Every responsible government, like every ordinary household, must try to balance its earnings and expenditure. The alternative could often be too awful to contemplate.
In the United States, the Peter G Peterson Foundation (whose mission is to increase public awareness of fiscal challenges threatening America) reported (Feb 26) that the national debt exceeded $36 trillion (over six times its 2001 level), which was approximately $106,124 for every person in America. The national debt now dwarfs the Federal Reserve, which is potentially calamitous.
Every year there is a mismatch between spending and revenues, with the US government having to borrow extensively to cover its annual debt. And the more money borrowed, the greater the interest the government pays. Indeed, every day in the US, over $2.6 billion is spent on interest, with interest now being the fastest growing part of the federal budget.
As the US president, Donald Trump, has realized, this situation is intolerable, and would never be countenanced in the private sector. Money that should be invested in the country’s future is instead being used for debt-related purposes. This is why Trump has tasked his right-hand man, Elon Musk, with slashing government spending, including cutting civil service posts, with the ultimate aim of achieving a balanced budget.
As Musk explained (Feb 26), the country’s interest payments now exceed its defense budget, and unless the situation is remedied, it faces bankruptcy.
Like Thatcher before him, Trump recognizes that it is a recipe for disaster for any government to continuously accumulate debts (his predecessor, Joe Biden, spent cash like there was no tomorrow, including on overseas conflicts), and a day of reckoning is inevitable. If, at some point soon, the books are not balanced, disaster beckons.
It should, therefore, surprise nobody that the US is cutting its defense commitments in Europe, or that the defense secretary, Pete Hegseth, has instructed the Pentagon to cut defense spending by 8 percent (Feb 27).
When the financial secretary, Paul Chan Mo-po, delivered his new budget on Feb 26, he said he expected there would be “a consolidated deficit of HK$87.2 billion ($11.21 billion) for 2024-25”. This was the third shortfall in a row, following a deficit of HK$122 billion in 2022-23, and HK$101.6 billion last year. He attributed the situation to “multiple internal and external factors”, and he knew the trend must be reversed.
As in the US, recurrent deficits threaten Hong Kong’s economic well-being and eat up fiscal reserves. Although it is fortunate to have substantial reserves (HK$734.6 billion in March 2024) and low government debt in comparison with many other countries, it does not take a Milton Friedman to work out that if sizable deficits continue, they will imperil the reserves before too long.
This is a harrowing prospect. It would, for example, adversely affect Hong Kong’s world-class public services, including its health, welfare and education sectors. Indeed, some former civil servants are already fretting over what will happen to their pensions once the reserves are exhausted. Such an alarming situation cries out for drastic governmental action.
Therefore it was reassuring that Chan announced radical plans to cut the Hong Kong Special Administrative Region government’s spending by 7 percent over the next three years, including cuts of HK$2.8 billion in university funding. There will be a pay freeze for government employees in the next fiscal year, including civil servants, judges, and those in the executive and legislative branches (as well as people at the district council level). Although some of those affected may be dismayed, they can be comforted that Chan did not take a leaf out of the book of the former chief executive, Tung Chee-hwa.
In 2002-03, Tung cut civil service pay, saying it would “alleviate the severe deficit and demonstrate our determination to share the burden with the rest of the community” (an option Chan still has up his sleeve, if the deficit persists).
Chan also indicated that, as in the US, civil service posts will be deleted, with a view to reducing its size by 10,000 by April 1, 2027 (from 191,000 to 181,000). This was unavoidable, and the figures speak for themselves.
Whereas the total staff-related expenditure of the civil service was HK$149.1 billion in 2022-23 (21.6 percent of the government’s operating expenditure), this rose to HK$156.2 billion in 2023-24 (25.98 percent of the operating expenditure). Had Chan not acted, it would undoubtedly have continued to escalate.
The governments challenge now is to seek to do more with fewer personnel, while ensuring that standards are not compromised.
Whereas Hong Kong has traditionally tried to avoid budget deficits, Chan said he hoped to achieve a “fiscal balance in the operating account, in a planned and pragmatic manner”. He said he expected GDP to grow by 2-3 percent this year, versus 2.5 percent last year. Although he avoided raising profit or salary taxes, this may be unavoidable in the future, if the deficits are not tamed. However, economic growth is vital, and anything that might be a dampener is best avoided, at least for now.
The UK’s former chancellor of the exchequer (finance minister), George Osborne, once said that “cutting budget deficits can never be just an exercise in economics”, and Chan’s holistic approach suggests he agrees. For example, while he prudently said little (or nothing) about some of the major capital projects earlier foreshadowed (including the Lantau Tomorrow project), he indicated that, in line with Beijing’s technological ambitions, he would “step up the development of the AI industry” (with HK$1 billion earmarked for an AI research and development institute).
Moreover, tourism has always been a major economic stimulant, and Chan announced that HK$1.23 billion will be spent on promoting the tourism industry to attract “high-end visitors” (meaning people from the Middle East and Southeast Asia).
As Chan would have appreciated, a balanced budget is not only economically desirable but also constitutionally imperative. The Basic Law (Art.107) requires the SAR to “follow the principle of keeping expenditure within the limits of revenues in drawing up the budget, and strive to achieve a fiscal balance, avoid deficits and keep the budget commensurate with the growth rate of its gross domestic product”. This could hardly be clearer, and, coincidentally, it enshrines the financial prudence that Thatcher (who co-signed the Sino-British Joint Declaration on Hong Kong with Deng Xiaoping in 1984) so ardently advocated.
A classic example of what can happen when the national debt gets out of hand is, unfortunately, the UK, where it currently stands at 2.8 trillion pounds ($3.52 trillion) — and rising. In the last financial year (to March, 2024), the UK government borrowed 125.1 billion pounds (some of which is being rashly diverted to fund the Ukraine conflict). With a national debt on this scale, the government has to pay ever higher interest rates, which is economically crippling.
Indeed, the BBC pointed out (Feb 21, 2025) that the UK’s national debt equates to “the value of all the goods and services produced in the UK in a year”. The debt level is more than double that from the 1980s to the financial crisis of 2008, and the impact of Britain’s indebtedness is sadly there for all to see.
Its public services have been massively affected, including, for example, its once-vaunted National Health Service (NHS). After an eminent physician and former health minister, Lord (Ara) Darzi, at the government’s request, conducted an independent investigation into the NHS, he reported last September that it was in a “critical condition” amid surging waiting lists and a deterioration in the nation’s health.
Darzi concluded that the NHS was “starved of capital” and “in serious trouble”. Its buildings were “crumbling”, its Accident and Emergency services were “in an awful state”, and long hospital waiting times had become “normalized”. Whereas people were “struggling” to see a doctor, public satisfaction in the NHS was “now at its lowest ever”. (The BN(O) passport holders who moved to UK from Hong Kong in search of Eldorado will have had a rude awakening).
This dismal story is repeated across other key sectors in UK, including schools, policing, and public infrastructure. It is little wonder that the finance minister, Rachel Reeves, is desperately trying to turn things around by stimulating economic growth (hence her recent overtures to China).
However, despite its ongoing deficits, Hong Kong is fortunate that its situation is nowhere near as dire as the UK’s. As in the US, Chan realizes the importance of belt-tightening in tackling deficits. Like the UK, Hong Kong must grow its economy, and not simply rely on land sale revenues. In this it enjoys the full support of the central authorities, who value its potential. As innovation and technology are essential for its economic growth, the city is now able to pursue both through the Guangdong-Hong Kong-Macao Greater Bay Area, and beyond.
If, moreover, Hong Kong’s burgeoning ties with the Middle East bear fruit, and it can join the Regional Comprehensive Economic Partnership, the world’s largest free trade agreement, there is every reason to suppose that sustainable economic growth will ensue in the not-too-distant future.
Although everybody will hope that Chan’s measures succeed, it is not guaranteed, and various imponderables are at play (including global tensions). While he confidently predicted a return to surplus within “three or so years”, the best laid plans can sometimes go awry. If deficits persist, greater stringency will be unavoidable, and he may also have to undertake a comprehensive tax base expansion study.
To his credit, Chan is nothing if not a realist, and he has shown he is not afraid to bite the bullet. While hoping for the best, he must also prepare for all contingencies. If, for whatever reason, his budget does not do the trick, nobody could blame him for devising alternative strategies to steady the ship and rejuvenate Hong Kong.
The author is a senior counsel and law professor, and was previously the director of public prosecutions of the Hong Kong Special Administrative Region.
The views do not necessarily reflect those of China Daily.
