The Hong Kong Special Administrative Region’s financial secretary has two chief responsibilities: formulating a strategy for growth and implementing sound public finance management. Both tasks were much simpler 40 years ago, when the global economy was benefiting from progressive trade and investment liberalization under the aegis of the General Agreement on Tariffs and Trade and its successor the World Trade Organization. Globalization and international division of labor enabled developing economies to make full use of their comparative advantages to jumpstart economic growth.
Hong Kong enjoyed high-speed growth during this era and was frequently cited by American economist Milton Friedman as a shining example of a free-market economy.
In recent years, the accelerating pace of the digital revolution and the rise of protectionism, unilateralism and weaponization of tariffs have upended the global economic order. Hong Kong can no longer rely on its traditional advantages of open markets, free trade and simple, low taxation to retain its competitive edge. Hong Kong risks being left behind if it is unable to harness technology to drive efficiency, and thus deliver greater value.
Financial Secretary Paul Chan Mo-po was on the right track in stressing in his budget speech the importance of leveraging the Chinese mainland’s spectacular achievement in innovation and technology to spur growth. The mainland is now a world leader in multiple technologies — generative artificial intelligence (GAI), drones, robotics, solar panels, e-vehicles and batteries — just to name a few. While Hong Kong cannot possibly expect to replicate the mainland’s success in precision and low-cost manufacturing, the city’s best way forward is to leverage new opportunities unleashed by the mainland’s advancement in GAI, its burgeoning low-altitude economy and low earth orbit satellites development, and step up collaboration in life and health sciences.
Accelerating Hong Kong’s integration into the mainland’s technology-fueled development, while strengthening the city’s existing strengths as “three centers” (global financial, trading and shipping centers) and as a magnet for top talent, are the only way to ensure its economic revival amid the new forces that are transforming the global economy.
At the heart of this strategy is the development of the Northern Metropolis, an area comprising 30,000 hectares (a third of Hong Kong’s total area) bordering Shenzhen, not just for housing but also greater integration with the mainland’s tech-driven economy. Chan was doing precisely the right thing when he declared in the Legislative Council that the government would prioritize the Northern Metropolis development, and would explore innovative ways to reduce costs and speed up construction.
The skills of government officials in navigating likely complaints will be tested in the next few weeks, when legislators carry out their duty conscientiously in scrutinizing the budget. The financial secretary has pledged to continue to listen. Let the two branches of government work together to hammer out a budget that will put Hong Kong firmly on the path of high-quality growth and return to fiscal balance
Despite public complaints about cutbacks in popular welfare programs such as the “two-dollar” transport fare concession program, and the much-needed grant of HK$2,500 ($322) for every student, it is imperative for the financial secretary to rein in runaway recurrent operating expenditure, which surged 288 percent between 1997-98 and 2024-25, while recurrent revenue (including stamp duties, investment income, profits tax and salaries tax) registered much lower growth rates ranging from 8.9 percent to 31 percent.
More recently, from 2019-20 to 2024-25, recurrent government expenditure continued to grow by 32 percent, with social welfare, health and education recording the highest growth rates. Years of living beyond its means led Hong Kong to run fiscal deficits from 2022-23, depleting the city’s fiscal reserves to a historic low of HK$647.3 billion by March 31, 2025, equivalent to 10 months of government expenditure.
The financial secretary announced that, for the year 2024-25, there would be a consolidated final deficit of HK$87.2 billion. But taking into account net proceeds from bond issuance and repayment, plus transfer of funds of about HK$130 billion, the fiscal deficit accrued by the government in 2024-25 is substantially higher.
Out-of-control recurrent government expenditure has serious implications for the economy. While expansion of the bond program could boost the development of the local bond market, interest payments add to the government’s financial burdens. The government’s crowding out of resources for growth could lead to higher interest rates for the private sector, the downgrading of Hong Kong’s credit ratings and the weakening of its ability to withstand financial turmoil. These are worrisome scenarios that no government can afford to brush aside.
The financial secretary has no option but to implement cutbacks and raise revenue, despite a probable backlash from those affected. To increase revenue, Chan announced plans to raise government fees and charges and add new administrative fees in connection with immigration applications, in accordance with the “user pays” and “affordable user pays” principles. In addition, he will invite the Hong Kong Jockey Club to submit plans to regulate basketball betting, and explore the introduction of a boundary facilities improvement fee of HK$200 per private car to generate revenue of HK$1 billion per year.
Acutely aware of calls for the government to cut back on spending on itself, Chan announced a pay freeze for all three branches of the government, steeper cuts of government expenditure, and the deletion of 10,000 civil service posts by April 1, 2027.
After years of overspending, there is no painless way of achieving fiscal balance without making some tough decisions. It is a question of making cuts where it makes the greatest sense, in terms of justifications, size of savings and ease of implementation.
Likewise in raising revenue, the key questions are how quickly you can do it and how best to lessen the pain of those affected. Convincing arguments and skills in presentation are vital.
The skills of government officials in navigating likely complaints will be tested in the next few weeks, when legislators carry out their duty conscientiously in scrutinizing the budget. The financial secretary has pledged to continue to listen. Let the two branches of government work together to hammer out a budget that will put Hong Kong firmly on the path of high-quality growth and return to fiscal balance.
The author is convener of the Executive Council and a legislator.
The views do not necessarily reflect those of China Daily.
