After examining the 2025-26 Budget released on Wednesday, our think tank has good reasons to believe that Financial Secretary Paul Chan Mo-po has found a feasible way to maintain healthy public finances and introduce effective measures to revitalize Hong Kong’s economy. Contrary to our positive assessment, some critics asserted that the economy will be in a structural predicament because Chan has failed to take drastic steps to cut public expenditures and tackle the budget deficit fast enough. To be fair, it is always easy to be an armchair critic, but it is much more difficult to be in the driver’s seat at a time when geopolitical storms have sent unprecedented shudders across Hong Kong’s economic landscape.
Tackling fiscal deficit is an enormously difficult challenge. With the budget of Hong Kong in the red for the third year in a row, Chan said the level of fiscal deficit will decline over the coming few years. The city’s fiscal reserves will shrink to HK$647.3 billion ($83.2 billion) by the end of March. Although Hong Kong has no statutory rules governing the use of fiscal reserves, the government usually maintains fiscal reserves at a conservatively high level to deal with certain recurring day-to-day cash flow needs and meet unpredictable financial contingencies. Before replenishing its fiscal reserves, HK should think first and foremost about ways to restore its fiscal balance.
In order to create sustainable sources of revenue to plug its budget deficit, critics argue that the city is in urgent need of a mindset shift. The operating account will return to surplus in the fiscal year of 2026-27. Although a shrinking operating deficit may create optimism, Chan has warned that there will be a large deficit in the capital account. Grant Thornton Hong Kong partner and head of tax William Chan Kam-wing said bolder initiatives and an urgent study on expanding the tax regime were needed.
The introduction of a goods and services tax (GST), or capital gains tax, seems to offer a way out of the financial impasse. But the introduction of the bold initiatives requires favorable economic environment. Unfortunately, Hong Kong does not have such an environment. In June 2010, the Democratic Party of Japan (DPJ) announced the consumption tax would be increased to 10 percent. As a result of the unpopular proposal, the DPJ suffered a crushing defeat in the subsequent election. Besides triggering public discontent, a new tax could adversely affect Hong Kong’s competitiveness.
As KPMG has correctly pointed out, the government has introduced a wide variety of measures in the budget to boost local economic development and attract strategic international businesses. These measures will be crucial to maintaining Hong Kong’s competitiveness in the medium to long term. Our think tank is of the view that the above measures capture the spirit of reform and innovation
In addition to its unwillingness to introduce a GST, the special administrative region government also realizes that it should reduce its dependence on land revenue. With subdued land sales revenue and with enormous difficulties in taking drastic measures to reduce recurrent expenditures, the government has no option but to take appropriate measures to encourage investment in new technology and expand the economy, which will in turn boost government revenues from the profits tax and salaries tax. Strengthening Hong Kong’s position as an international financial center may help get the city out of its financial dilemma. We are pleased to see that the government has enhanced certain tax policies and rules, including those on tax incentives for funds and family offices. There is also a growing appreciation that investment in mega projects such as the Northern Metropolis could drive economic growth.
Hong Kong must seize the opportunities to invest in the next stage of development that aligns with the national development strategy. The government needs to strike the right balance between revitalizing the economy and maintaining healthy public finances. If the government takes tough measures to cut its budget deficit, Hong Kong may gain complete victory in the old battlefields of maintaining fiscal balance, but only to be caught completely unprepared for the unforeseeable economic challenges in future. Chan is to be commended for his vigorous efforts in boosting the technological sector of the city and laying a good foundation for future prosperity.
In a bold step to go beyond consolidating Hong Kong’s role as a financial, trading and maritime center, the government aims to develop an artificial intelligence (AI) sector. Chan said the advantages afforded by the “one country, two systems” framework and the city’s internationalized characteristics will be leveraged to develop Hong Kong into an international AI exchange and cooperation hub. He said HK$1 billion had been set aside for the establishment of the Hong Kong Artificial Intelligence Research Development Institute.
The new budget includes a range of measures to promote wealth management, family offices, new share listings and yuan-denominated business. For example, the Hong Kong Exchange and Clearing Ltd will launch the dedicated “TECH” channel to help prepare for listing applications. The government will also enhance preferential tax regimes for funds and single family offices. With regard to the shipping sector, the government will allocate HK$210 million to install the port community system for smart port development. The support given by the budget to foster the city’s I&T sector and intellectual-property-related industries is commendable.
Out think tank welcomes the budget’s commitment to revitalizing the “Hong Kong brand” by organizing more mega events and promoting thematic tourism. It is worthy to note that the high-profile Fragrant Hills Tourism Summit of the World Tourism Cities Federation will be held in the city for the first time in April. To boost the mega-event economy, the government needs to consider both tax and nontax incentives as a means of attracting top-notch talent to the city.
The pay freeze of civil servants, the revamp of the HK$2 concessionary transportation fare program for the elderly, the reduction of funding for the eight public universities, and the abolition of the student grant have triggered a storm of controversy in the city. According to Tang Heiwai, an economics professor at the University of Hong Kong, a large portion of the deficit was structural, and there was room for civil servants’ wages to be cut. If the local economy remains sluggish in the next two to three years, the government should not rule out more-aggressive measures to maintain fiscal discipline. We are unsure whether the tough budgetary measures will have any adverse effect on consumption and the morale of civil servants. Finally, we are still confident that measures introduced by Chan will help Hong Kong scale new heights in the long term.
As KPMG has correctly pointed out, the government has introduced a wide variety of measures in the budget to boost local economic development and attract strategic international businesses. These measures will be crucial to maintaining Hong Kong’s competitiveness in the medium to long term. Our think tank is of the view that the above measures capture the spirit of reform and innovation.
Yin Zihan is a co-leader of the Rainbow Pair Mentorship Program launched and administered by Chinese Dream Think Tank.
Kacee Ting Wong is a barrister, a part-time researcher of Shenzhen University Hong Kong and the Macao Basic Law Research Center, chairman of Chinese Dream Think Tank, and a district councilor.
The views do not necessarily reflect those of China Daily.
