The Hong Kong Special Administrative Region government’s budget has been in the red for several years, and it is forecast that by the end of March, the city’s fiscal reserves will have contracted by 45 percent from the level in 2019.

Amid a deteriorating public fiscal situation, calls for reductions in civil servants’ remunerations are getting stronger. While such a proposal seems to be reasonable, the issue is more complex than it appears.

As the efficiency of the SAR government hinges on the performance of civil servants, maintaining a stable, effective, and law-abiding civil service is crucial. Relying solely on salary reduction, which will yield limited positive outcomes while risking a multitude of repercussions, is far from optimal.

Whether there will be a pay cut for civil servants should be determined based on an objective assessment of such a move. While a pay cut would help slash public expenditures, its adverse effects are multiple.

First, salary cuts are inconsistent with the city’s longstanding practice of “discouraging corruption by paying civil servants well”, which has been credited with the Hong Kong civil service’s reputation as one of the most incorruptible governing teams in the world.

Furthermore, the current economic downturn and the subsequent fiscal deficits have been caused by multiple factors; it is unfair to punish civil servants by imposing pay cuts on them.

Second, a pay cut could be counterproductive to the current administration’s efforts to pursue proactive governance. The establishment of key performance indicators to motivate civil servants has helped enhance administrative efficiency, as evidenced by the achievements in attracting foreign businesses, trawling for talent, combating public housing abuse, increasing the availability of subsidized housing, and addressing the issue of subdivided flats, all of which were brought about by the hard work and dedication of civil servants.

Third, a blanket salary reduction could demoralize civil servants. The nature, requirement and effect of civil servants’ work differ greatly; a pay cut across the board would be unfair to those hardworking civil servants and could demoralize them.

The use of incentives and penalties are suitable performance drivers, particularly during the current economic downturn. It is, therefore, imperative for the SAR government to implement the necessary “addition” and “subtraction”.

“Addition” entails rewarding competent civil servants with greater opportunities and higher remuneration. The SAR government should review the performance appraisal system adopted from the private sector two and a half years ago, with the aim of increasing the rewards for competent civil servants.

“Subtraction” involves replacing or laying off those whose performance is not in line with proactive governance, or who have underperformed. There is an abundance of disciplinary measures that can be readily enforced.

As of March, there were 192,000 posts on the civil service establishment and a headcount of 173,000 civil servants, indicating approximately 20,000 vacancies. Some argue that these vacancies should be kept vacant, or slashed outright, in the next three years. This, however, is an oversimplistic approach.

The fiscal deficit should also be tackled from a longer-term perspective, taking into consideration the future economic benefits of long-term investments

In practice, “addition” and “subtraction” should be conducted concurrently and strategized from two perspectives. First, personnel addition or reduction should be based on the workload of the civil service. For example, the latest Policy Address has listed a number of priority areas for future development that necessitate sustained government input, and thus there is a need to increase staffing for relevant government bureaus or departments. Areas that are not developmental priorities, or are witnessing a decline in significance, should see a reduction in staffing.

Second, technology, particularly artificial intelligence, should be harnessed to optimize the civil service. The SAR government should also carry out a comprehensive review to identify civil service posts that can be replaced by AI, thereby streamlining civil service and its payroll.

Fiscal deficit needs to be tackled at its root. The three-year COVID-19 pandemic triggered the current economic down cycle and brought many households financial hardship. Subsequently, the SAR government had to splash out on stimulating the economy as well as relief measures for enterprises and residents. Hong Kong’s economic recovery has been sluggish and has yet to reach its pre-pandemic level, while the property and stock markets remain stagnant, resulting in lower revenues from land sales, property stamp duties and stock transaction taxes. These are the primary causes of the fiscal deficit.

A 45-percent contraction in Hong Kong’s fiscal reserves over the past five years seems alarming.

But maintaining a moderate fiscal deficit during the economic downturn to meet the immediate needs of stimulating economic growth and relieving residents’ financial hardship is necessary. As long as the fiscal deficit does not reach a critical threshold, it does not constitute a major concern. Moreover, we should realize that the government recorded significant fiscal surpluses five years ago when the economy was in good shape.

The fiscal deficit should also be tackled from a longer-term perspective, taking into consideration the future economic benefits of long-term investments. Over the years, the SAR government has invested in numerous major infrastructure projects, which promise substantial returns in the long run, instead of immediate benefits. For instance, the investment in the city’s airport’s three-runway system reached HK$141.5 billion ($18.23 billion), but its value becomes evident only when the direct and indirect benefits, as well as the resulting impetus for Hong Kong’s future development, are taken into consideration.

Curtailing expenditures and creating new revenue streams are central to addressing fiscal deficits. The SAR government has already exercised ingenuity in trimming fiscal deficits with measures designed to cut government spending.

As I see it, creating new revenue streams is the fundamental solution to the root cause of fiscal deficits and should be prioritized. For instance, since the central government resumed the multiple-entry Individual Visit Scheme for Shenzhen residents to visit Hong Kong, the number of visitor arrivals from the mainland has surged, contributing to the revival of local hospitality industries.

When addressing the 2024 National Security Education Day in April, Xia Baolong, director of the Hong Kong and Macao Work Office of the Communist Party of China Central Committee, said that Hong Kong’s transition from governance to prosperity is essentially a path of innovation and change. As Xia suggested, Hong Kong must not view present circumstances from the old perspective, nor can it address new issues with the old mindset; rather, it should adopt new mindsets, ways and approaches to tackle the challenges it faces. No doubt the current fiscal deficit should be dealt with this way.

The author is vice-chairman of the Committee on Liaison with Hong Kong, Macao, Taiwan and Overseas Chinese of the National Committee of the Chinese People’s Political Consultative Conference and chairman of the Hong Kong New Era Development Thinktank.

The views do not necessarily reflect those of China Daily.