Financial Secretary Paul Chan Mo-po is on the show to explain the rationale and philosophy behind the proposals made in the latest Budget.

Check out the full transcript of TVB’s Straight Talk host Dr Eugene Chan’s interview with Financial Secretary Paul Chan:

Eugene: Good evening! I'm Eugene Chan and welcome to this special Budget edition of Straight Talk. Our guest today is Financial Secretary Paul Chan. He needs no introduction, and was on this show about a year ago to talk about the 2024 budget. Last week, Chan released the 2025 Budget with the theme, “Accelerating Development through Reform and Innovation”. So, we have invited him again to break down for us what this Budget means for our economy, businesses and ordinary Hong Kong people. Welcome, FS!

FS: Yes, thank you, Eugene!

Eugene: Paul, this must be one of the most difficult budgets with the unrelenting geopolitical tensions and prolonged economic challenges coupled with our decreasing reserve. So, it is important that we have to strike the right balance between innovation and financial prudence. Maybe you can share with us what your thoughts are behind this, and how to achieve this?

FS: Well, the overriding consideration is progress with stability and unity. So, on the one hand, we have to take into consideration the geopolitical challenges to make sure financial stability and long-term physical sustainability while, at the same time, expedite our development, expedite our economic development, particularly embracing technology and innovation as a main driver for our future economic growth. And in this area, artificial intelligence is the main lever to use.

Eugene: Right. FS, spending cuts are never going to be popular. And, I mean, you're always going to encounter a lot of resistance. But to be honest, the cuts that you have proposed are actually quite mild compared to what some were expecting. Why not go further? Do you have something along the line that you will introduce in a few months' time?

FS: Well, I do think we have to do this on a sustained and progressive basis. So, cumulatively from this year 2024/25 up till 2027/28, we cut recurrent expenditure by about 7 percent and likewise on staff establishment in the year 2027/28. These few years together, we are cutting over HK$63 billion in expenditure, which is not easy, and at the same time, we need to give our people, our colleagues, the time to use more technology to get re-trained, as well as to streamline their process so that they can, on the one hand, maintain and enhance the level of public services, but at the same time, help us achieve expenditure savings.

Eugene: Right. So, Paul, you have mentioned a few times in an interview that the actual economy is improving.

FS: Yes.

Eugene: Is this all that is needed? You think so far, I mean, a sort of ... a milder proposal to make Hong Kong work again.

FS: Well, I'm optimistic about our economic development in the coming few years. Despite geopolitical challenges, we are seeing increasing investment from overseas, for example, the number of foreign companies in Hong Kong increased to about 10,000 compared to last year. It’s a 10 percent increase across the board. At the same time, our stock market, say, for example, in the recent weeks, have been performing very strongly, which reflects international investors’ confidence in Hong Kong.

Eugene: Someone said that they were expecting a more daring and more aggressive sort of cut on the government expenditure. Some say that you have to raise tax on the wealthy and also have performance pay cuts on the civil servants. I mean, all these are, I think, suggestions. Have you considered them at all?

FS: Each and every suggestion we have given them very careful consideration. I think it is a balancing act on ... say, for example, some people ask us to increase the tax rate, but, you know, we are in the process of attracting talent, so in the process of attracting more and more companies and investments coming to Hong Kong. So, any significant increase in tax rate in our tax system will be counterproductive, and also in terms of expenditure cuts, we need to move with the community and the civil service together, stability and unity is important. So, I think what is important to us is we must be cautious of the fact that, on the one hand, we need to enhance our level of services, use more technology, streamline the process, but at the same time, keep our expenditure growth down by increasing the revenue and controlling expenditure growth that will return us to balance in the operating account this year, 2025/26 and, thereafter, will be positive balance as well. When it comes to operating accounts, it means the regular daily income of the government will be able to meet and exceed our daily expenditure. The deficit in the coming few years, mainly comes from our expedited investment in the Northern Metropolis. And these are all related to capital works.

Eugene: Paul, I know that you've been working very hard to making sure it works for Hong Kong, but a lot of people are always like ... a quote about President Xi, that we have to be “bold in reform and we have to dare to break new ground and innovate continuously”. I'm sure you have got that in mind, because even freezing the salary for me all across the board is the first time, isn't it?

FS: Well, we are very grateful to the support from the Civil Service and the other bodies like the Legislative Council, the Judiciary. We all acknowledge the challenging public finance situation we are facing, but we do think this is transitory and we are confident in our economic future, so at this stage, perhaps freezing the salary level to demonstrate our determination to control expenditure growth is good enough, but at the same time, let's focus on growing our economy.

Eugene: Right. Okay, we'll move on to that right now. And the color of this year's Budget cover is aquamarine. Why did you choose this color?

FS: Well, you know, there is a blue ocean for us to explore in terms of technology and innovation, and also moving forward, we will continue to grow, but must be on a solid ground, and with the motherland, China, growing steadily, and also the internal circulation and the external circulation reinforcing each other. We are confident that the motherland will be registering steady growth in the coming few years, and that will also give us tremendous support. So, for us in Hong Kong, we need to play to our strengths, meaning connecting with the mainland and the international world, and acting very well in the process. Being a super-connector and value-adder, we will find our niche to grow our economy.

Eugene: Paul, you have highlighted innovation as a key driver. Yes, it seems to be the word the government has used for last year, you have pledged HK$10 billion innovation at technology industry guidance firms, and also HK$1 billion to establish the Hong Kong AI Research and Development Institute (AIRDI). How would this position Hong Kong as a global AI hub?

FS: In terms of AI, we are in a unique position, because, on the one hand, proximity … we are part of China, proximity to such a huge market. For international companies who are interested in the mainland market, Hong Kong is naturally their first choice at your beachhead to tap that market. And on the other hand, for mainland AI companies with global ambition, naturally, Hong Kong will be the best platform for them to build their regional or international headquarters, and from here, expand overseas. So, we are very confident in that, and also in terms of AI, the main contributor to its success is computing power, algorithm, data, talent and capital, and we have all these critical success factors gathering into Hong Kong, what we need to do is to expedite the concentration of talents and capital to propel this development.

Eugene: Right, you know with AI, it seems like, I mean, it's quite amazing with the news we have read about what they can do. But does that mean more unemployment?

FS: Well, AI brings opportunities and challenges, so we need to get our people up skilled and properly trained. And in fact, this is a trend you can't stop, AI+, meaning that applying AI to not just industry, not just at the workplace, but also at home. So, we need to enable our people. So, say for example, in the civil service, we ask the Civil Services Bureau to conduct more training for our colleagues, and at the same time, we give more support for the other training institutions to offer such courses to our people.

Eugene: So, Paul, with all these funds you put into AI, how do you translate it into actual opportunities for the younger generation and younger talents? Because very often, with all the funds, it always goes to the big players and the smaller startup may not get it. So, how to ensure that this time the money will be going to the people.

FS: We have to do this on a multi-pronged approach. On the one hand, top AI companies are important because they will bring along the whole ecosystem, and that will expedite our development in this respect. But at the same time, we need startups. We need to enable people to innovate. So, in the Science Park, we groom startups in the Cyberport, we do the same, and we also put money to co-work, to co-invest with general partners in the fund management sector, to encourage this capital to go to the sectors that we want to develop. And this will enable not just the research, not just the those in the Science Park, but we are using this money to help universities, say, for example, for their research to turn into not just basic research, but translational research, and help the academics and the students to start their own business and in the funding area, it is a full range of support from private equity, venture capitalists as well as different venue for listing.

Eugene: Thank you, FS. Let's take a short break now. Viewers, stay with us. We will be right back.

Eugene: Thank you for staying with us. We have been talking with Financial Secretary, Paul Chan, about the Budget 2025. So, Paul, thank you very much to explain to us the rationale behind with all the challenges, and also the importance of AI. But I am sure one of the areas that I will have to ask you today is the consolidated deficit for 2024/25 is forecast as HK$87.2 billion. It is quite a big amount for a lot of people. So, how are you going to, or what specific measures are you going to address this deficit? How would you balance revenue generation with expenditure control?

FS: Well, when you look at the government account, you must distinguish between operating account and non-operating account. Operating account are all the tax collections and government fees and charges. And the operating expenditure are our daily expenditure. And for the capital account, the main income is from land-related income. And then the expenditure are all the capital works expenditure, infrastructure expenditure. So, on the operating account, we aim to achieve not just balance, but operating surplus. So, for this year … the coming year, 2025/26, we will be able to return to balance.

Eugene: Right.

FS: And from the year 2026/27, we will be registering operating surplus, meaning that our daily income will be more than able to cover our daily expenditure. But at the same time, because we need to invest into the future, we need to expedite the development of Northern Metropolis, and the income from the land sale needs time to pick up. That is the gap. So, what we are trying to do is: we do not want to stall the progress of Northern Metropolis development. So, in between, we issue bonds to help us bridge the cashflow gaps.

Eugene: So, that must be the reason why we have the pay freeze for the civil servants, so that the operating account can be getting a more positive balance. This has been a bit controversial because someone say they should have a bold cut, someone said they shouldn't freeze it at all, there have been different talks. Maybe you can tell the viewers, is this a purely cost-saving measure or part of a broader reform of the public sector?

FS: Well, for the public sector, salary fees is just one. But at same time, more importantly, enhancing productivity, and also reviewing the various services that we are providing and try to streamline. For some of the services that may no longer be required, we may just drop it and redeploy the resources to provide new services to respond to the community needs. And at the same time, to upskill the civil service by providing more technology training, as well as a more service-oriented mindset.

Eugene: Right. Paul, we know that last year there had been a cut of 1 percent to the Bureau's expenditure. This year, it’s falling to they said it is accumulative for like 7-odd percent.

FS: Yep.

Eugene: It is quite a large amount as well. So, how can we ensure our public service delivery is not impacted? And are there other alternatives that have been considered to make this as good as before?

FS: Number one, we give the flexibility to the department head and bureau head, to decide which area the savings are to be achieved. And in the process, they can take an overall strategic view of their services area and do the redeployment. And at the same time, we ask the Director of Audit to provide assistance to them, because Director of Audit has the experience of value for money audit and in terms of re-engineering. So, that is another thing. And thirdly, in terms of technology innovation, there will be more training from the Civil Services Institute.

Eugene: Right. Another area that has sort of created some discussion is your increase of your air passenger departure tax of HK$200, and also some of the departing tax for the cars. I am sure this is one way of generating more revenue, but not to sort of widespread effect on the community. Are you trying to boost local spending by discouraging people from going overseas, to be direct?

FS: That is not our policy objective. In increasing revenue or cutting expenditure, we have some guiding principles. For increasing revenue, firstly we must be mindful of our competitiveness vis-à-vis recent territories. So, we have to be careful, not so easy task. For example, the tax rate, the tax base, which is number one, the competitiveness. And secondly, when it comes to increasing the net revenue, we need to pay attention to affordability and stick to the principle of user pay. And the third consideration is whatever we do, we try to minimize the impact on general public. That is the guiding principle. So, for the airport departure tax and the boundary facility tax, it is on this premise we make this proposal.

Eugene: Right. One area that there have been an increase is the residential care service vouchers. You have increased it for HK$6,000, which is a very positive step for the elderly population. So, what additional measures have you planned to support this aging population that we have?

FS: Well, apart from technology adoption, it is more, say for example, for medical services, as Secretary Professor C.M. Lo (Health Secretary Professor Lo Chung-mau) mentioned the area, to promote the community-based medical system, so that people would be more health conscious, preventing development into more serious disease, looking at the operating model of the Hospital Authority to rationalize the services. These are some of the areas, say for example, on the medical sector. And on the welfare sector, we give the flexibility also to the secretaries of Bureaus to see what can be done. On the one hand, the various cash subsidy schemes, CSSA, for example, we won't touch it.

Eugene: Yes.

FS: But at the same time, there are areas that could be streamlined. So, the Bureau secretaries will take a hard look into those and see what could be done.

Eugene: Yeah, thank you for looking after the aging population as it is increasing. So, another area that has been much talked about is the proposed cut in the HK$2 transport subsidies. So, how has the public reaction so far? Is it what you anticipated so far?

FS: I think by and large, the community understand why we need to do so. And the proposal from us is basically maintaining the HK$2 fare.

Eugene: Right.

FS: And at the same time, maintaining the eligibility requirements, so that for most of the people, what they have been enjoying has not been affected. But at the same time, we put a cap. This cap is put on a more generous side, I would say, to take care of those who really need to travel a little bit more. Say for example people living in New Territories coming to city to work, they may need to change into different transport mode in the process. For some of the carers who need to take care of their seniors in the elderly home or in the hospital, they may travel a little bit more. All those could be covered. But at the same time, with this modified scheme, we will be able to control the future expenditure growth.

Eugene: Right. Another area that you have sort of cancelled, in terms of allowance, is the HK$2,500 allowance for the primary and secondary school and kindergarten children. A member of my family has said to me that a lot of the parents, they do treasure the HK$2,500 because it helps with buying textbooks or buying anything needed for their studies. So, how are you going to ensure the lower income families will be supported?

FS: For the lower income families at the moment, they are eligible for different subsidy schemes, in terms of, say for example, the beginning of the academic year, in terms of purchasing books. So, there are different funding schemes to help those in need.

Eugene: And you have sort of said that you are not going to … no commercial site will be available for sale, so what other alternatives have you also considered to support the businesses as well? Because you can see people are trying to work very hard to pick up, and anything else you will help the businesses?

FS: Well, the reason not to put commercial sites for sale is to enable the market to digest the stock at the moment, and the stock coming up to the market. Well, with the current supply in offices and commercial, I think rental are more affordable. At the same time, to help business, we take a multi-pronged approach. Number one, provide them with liquidity support. Say, for example, the SME Guarantee Loan Scheme, the moratorium on principal repayment, we have extended it at the policy address last October. In terms of helping them to get new business, we have additional injection into the BUD Fund, and expand the scope of the BUD Fund to also facilitate their expansion in terms of internet sales. Apart from getting more business, providing liquidity support, we also help them to transform themselves.

Eugene: Right.

FS: So, there are subsidies with the Cyberport and the Productivity Council to assist SMEs to use more tailor-made software solutions to enhance their efficiency.

Eugene: Right. Paul, we are now at the end of the show. Maybe you can use this opportunity to speak to the viewers what would be the core message you want them to take away after reading your Budget and how you will want them to support you?

FS: Well, you know, our economic future is still very positive, despite the geopolitics. And the country is growing steadily, providing us with a lot of support. So, let's focus on our strength and work together to grow our economy for the benefit of all.

Eugene: Paul, thank you very much for walking us through this all your measures of the 2025 Budget. While some of these proposals may spark debate, it is clear the focus is on embracing innovation and reform, to open up a new chapter for Hong Kong. Change is never easy, but we hope that these efforts will help Hong Kong stay competitive and resilient in the years to come. Have a good evening and see you next week!