Opinion | Recognizing reasons for fiscal deficit: How to address HK's financial situation?

As we enter 2025, the most pressing concern for society is undoubtedly the economic outlook for Hong Kong. Financial Secretary Paul Chan stated during a public consultation on the budget over the weekend that the deficit for the current fiscal year (2024/25) is expected to be below HK$100 billion. As various sectors provide suggestions on how the SAR government should increase revenue and reduce expenditure, it is essential to understand the reasons behind the deficit, avoid blame on the government or officials, and not to be misled by claims of a so-called "collapse" of Hong Kong's public finances, which could shift the focus of the discussion.

Before the pandemic, the government's fiscal reserves reached HK$1,160.3 billion in the 2019/20 fiscal year. However, following the outbreak of COVID-19, the government spent over HK$600 billion on public health expenditures from 2020 to 2022 alone. In addition, to safeguard employment and alleviate public hardship during the pandemic, the government launched multiple rounds of large-scale counter-cyclical measures to support businesses and residents.

Correct Understanding of the Reasons for Fiscal Deficit

The substantial expenditures related to epidemic prevention have significantly reduced the government's fiscal reserves. At the same time, as a small and outward-oriented economy, Hong Kong faces a high-interest environment and geopolitical impacts, leading to a sharp decline in land sales and related revenue. Coupled with an economic recovery that fell short of expectations after the pandemic, the real estate market and business conditions have been unsatisfactory, resulting in decreased tax revenue under economic pressure, which greatly affects government income. The income cannot keep pace with the increase in public expenditure due to the economic cycle, resulting in significant deficits for three consecutive years.

Financial Situation Remains Robust

It is normal for Hong Kong citizens to feel concerned about the government's current financial situation. However, Hong Kong's public finances are far from "collapsing." Making such assertions at this stage may be alarmist.

According to data from the International Monetary Fund (IMF), the debt-to-GDP ratio of the Hong Kong SAR government is projected to be 9% in 2024, significantly lower than that of other advanced economies. For example, the U.S. government debt is about 120% of GDP, France exceeds 110%, the UK is over 100%, and Japan is over 250%. It should be noted that these examples are not meant to suggest Hong Kong should emulate the borrowing practices of other advanced economies but rather to highlight that fiscal deficits are quite common in many developed economies, and the scale of Hong Kong's deficit is relatively low.

In fact, Hong Kong's fiscal situation remains very sound, with government reserves expected to be HK$720 billion by the end of March this year. International credit rating agencies have indicated that there is no pressure to downgrade Hong Kong's "AA-" credit rating in the short term, partly due to the strong external financing situation, which is a major credit advantage for Hong Kong. Professor Terence Chong, Executive Director of the Lau Chor Tak Institute of Global Economics and Finance of CUHK, also agrees that Hong Kong's economic situation remains healthy; he explained that the local GDP is showing positive growth, and both the unemployment and inflation rates are low, demonstrating that the economy is operating normally and healthily across these three indicators.

Increasing Cost-Saving Measures While Seizing Development Opportunities

As Chan mentioned, the key to improving public finances lies in increasing revenue and reducing expenditure. In terms of cost-saving, the three major expenditure categories—education, healthcare, and social welfare—each exceeding HK$100 billion annually, undoubtedly need to be reviewed to identify areas for potential savings. The government has indicated that while maintaining and improving public services, it will consider intensifying fiscal consolidation, reviewing resource allocation and prioritizing tasks, and further controlling the growth of expenditures.

In terms of public works, the government will adjust development plans based on the urgency of basic projects and make good use of debt issuance and public-private partnerships to leverage market funding for infrastructure development. I believe that when reviewing the urgency of projects, the government will adhere to the principle of "using what should be used," ensuring that fiscal deficits do not hinder projects that promote social development and benefit the public, which would be detrimental to Hong Kong's long-term development.

Chan also mentioned that the expenditure increase associated with certain subsidy programs poses significant long-term pressure on government finances, indicating that it is inevitable to review the operating models of relevant programs. Although Chan did not specify which programs he was referring to, I believe the recent public discussion surrounding the HK$2 elderly transport fare concession is one subsidy program that the government needs to scrutinize seriously, ensuring that it meets social needs while improving the financial sustainability of the program.

The government must take decisive action to reduce the fiscal deficit while also utilizing resources to drive economic growth and create wealth for Hong Kong society. For me, despite uncertainties in the external environment, Hong Kong has laid a solid foundation for further development, providing a stronger basis for addressing the current fiscal situation. In fact, since taking office, the current government has consistently upheld a spirit of reform and innovation, actively attracting businesses and talent, while vigorously exploring new markets in ASEAN and the Middle East, as well as further developing industries such as finance, innovation and technology, tourism, and shipping. All these efforts contribute to greater diversification of Hong Kong's industries, enabling it to seize development opportunities amid unprecedented changes, leading to sustainable economic growth. Additionally, after the economic cycle, revenues that have cyclically decreased, such as profits tax, stamp duty related to land, and land sale income, are expected to gradually recover, increasing the SAR government's overall revenue. I believe that with a commitment to integrity and innovation, pragmatism, and determination, the SAR government will soon restore a balanced budget.

(Source: Wen Wei Po)

Related News:

2024-2025 deficit expected to be less than HK$100 bn: Paul Chan

HK has made progress in tourism and attracting foreign investment, financial chief says