HONG KONG – Hong Kong’s government workers will bear the brunt of the biggest cuts in the finance chief’s bid to balance the books as the city braces itself for a fourth straight year of deficit.
Financial Secretary Paul Chan, in his Budget speech on Feb 26, announced that 10,000 civil service jobs would be axed by 2027.
That represents more than 5 per cent of Hong Kong’s more than 191,000 civil service posts. Civil servants account for some 4.6 per cent of the city’s 3.7 million-strong workforce.
All political appointees, lawmakers, civil servants and the judiciary will have their pay frozen for a year.
“The government will lead by example to demonstrate our commitment to cutting expenditure while ensuring the delivery of high-standard public services,” Mr Chan said.
The move, alongside other cost-cutting measures, is meant to help take Hong Kong out of the red by 2028. But Mr Chan’s Budget plan may not go quite far enough to turn the city’s financial situation around in just the next three years.
Hong Kong is expected to incur a fourth straight year of deficit amounting to HK$67 billion (S$11.5 billion) in the 2025/2026 fiscal year, which starts on April 1, the finance chief said.
The deficit for the current fiscal year will come up to HK$87.2 billion, much higher than his original estimate of HK$48 billion a year ago.
He has drastically underestimated the annual deficits in the past few years.
In the 2023/24 fiscal year, he estimated a HK$54.4 billion deficit, but the final figure came up to HK$101.6 billion. The year before that, he forecast a HK$56.3 billion deficit, less than half the final HK$122 billion.
Hong Kong’s gross domestic product is forecast to grow between 2 per cent and 3 per cent in 2025, buffeted by external headwinds, including worsening ties between the US and China. It was 2.5 per cent in 2024.
Mr Chan said his latest Budget, which prioritises “fiscal consolidation”, will work towards reducing the government’s recurrent spending by 7 per cent in the next three years while trying to raise revenue without eroding the city’s competitiveness.
“Strictly containing public expenditure is a must, but we should proceed in a steady and prudent manner,” he said. “This approach… gives us a clear pathway towards the goal of restoring fiscal balance.”
He stopped short of docking civil servants’ wages as some observers had recommended.
Veteran politician Regina Ip said the pay freeze was “the best option” for now, as “cutbacks will have ripple effects on the private sector, and it will affect the labour sector as well”.
But senior economist Gary Ng at investment bank Natixis begged to differ.
“The pay freeze is not enough as it doesn’t include reform on other benefits such as pension contributions and allowances,” he said. “The government needs to undertake bigger and faster reforms in the civil service regime.”
Civil servants’ wages have risen substantially over the past decade alongside government spending in the three key sectors of education, welfare and public health, which has nearly doubled.
Other public spending cuts include a 2 per cent annual reduction in university funding over the next three years, and changes to transport subsidy thresholds for regular commuters, the elderly and the disabled.
Mr Ng said these cutbacks, too, were insufficient “as public expenditure has still been projected to grow in the new fiscal year”.
The Budget’s new revenue-raising measures may not make enough of a splash, either.
They include a 67 per cent increase in airport departure tax to HK$200 per passenger from October and higher visa application charges, parking fees and traffic fines.
More road tolls and electric-car licensing fees are being reviewed as well, although no timeframe was given for a decision.
The authorities are also considering legalising basketball gambling after illegal betting on the sport raked in as much as HK$90 billion in 2024. But government sources said a public consultation on the matter would be held only by the end of the year.
While Mr Chan sought to rein in spending, he did not neglect to invest in the city’s future.
These investments, however, will make another dent in the public coffers.
Headlining the finance chief’s growth plans for Hong Kong is a move to set up a HK$1 billion artificial intelligence research centre and a HK$10 billion fund to invest in emerging industries of strategic importance.
Additionally, some HK$1.5 billion will go towards helping local firms expand internationally, and HK$1.23 billion to boosting tourism such as developing new waterfront spaces on both sides of the Victoria Harbour.
The government is working on attracting more visitors, firms and funds from markets in South-east Asia and the Middle East.
The authorities will also speed up a Northern Metropolis mega project aimed at further integrating Hong Kong with mainland China, issuing more bonds to fund it.
Mr Ng said the Budget reflected “a stronger alignment with Beijing’s economic policies regarding the Northern Metropolis-related infrastructure and productivity led by technological innovation”.
“It is a balanced budget to reduce fiscal deficit, but the government will still spend more supported by long-term debt issuance,” he said.
In a tacit admission that there is little more he can currently do to spur the struggling property sector, Mr Chan said the government would stop putting up commercial land for sale in the new fiscal year.
It was also mulling rezoning some commercial sites for residential use amid high office vacancy rates, he added.
The Hong Kong government has long relied heavily on land sales for revenue. But the protracted property downturn has rendered the city’s traditional funding model unsustainable.
Where land sales once accounted for as much as a third of government revenue, it is now expected to make up barely 5 per cent of earnings in the current fiscal year.
Property prices have plunged some 28 per cent from a peak in 2021, despite repeated attempts to prop up the market.
In 2023, Mr Chan cut the tax rate for some first-time home buyers. In 2024, he scrapped all of the city’s decade-old property-cooling measures.
Still, the total value of homes in Hong Kong has dropped by over 5 per cent from a year ago due largely to interest-rate uncertainty and greater supply from developers desperate to sell off before prices fall further.
In 2025, the finance chief is cutting stamp duties for buyers of low-cost homes valued at up to HK$4 million, affecting 15 per cent of property transactions.
In a statement after the Budget speech, Chief Executive John Lee said the “series of practical and effective measures… will reinforce the government’s financial strength, and create new momentum and new advantages for Hong Kong’s economic development”.
Mr Chan made a welcome move in resisting calls to broaden Hong Kong’s tax base and impose new taxes to raise revenue, according to consulting firm Deloitte China’s tax partner Polly Wan.
“Maintaining Hong Kong’s simple and low tax regime could ease concerns from investors,” she said.
The government is “hunkering down” because “there is no short-term fix to Hong Kong’s economic issues and its budget deficit”, said portfolio manager Gary Tan at asset management firm Allspring Global Investments.
Hong Kong has traditionally enjoyed budget surpluses, until 2019 when its economy took a turn after a prolonged stretch of social unrest and the Covid-19 pandemic.
It has since suffered deficits in five out of the past six fiscal years.
- Magdalene Fung is The Straits Times’ Hong Kong correspondent. She is a Singaporean who has spent about a decade living and working in Hong Kong.
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