Today : Mar 18, 2025
Economy
21 February 2025

Hong Kong Faces Budget Dilemma Ahead Of 2025-26 Financial Speech

With rising public expenses, Financial Secretary must navigate cuts and public discontent as fiscal challenges mount.

Hong Kong is bracing for significant fiscal challenges as Financial Secretary Paul Chan prepares to deliver the government's budget speech for 2025-26 on February 26. With public expenses outpacing income, Chan faces mounting pressure to balance the books amid rising operational costs and public demands for social welfare support.

According to recent assessments, Hong Kong's fiscal health has been wobbling, with the expenditure growth rate vastly surpassing income inflows. A prudent approach to fiscal policy would suggest keeping government spending under 20 percent of the GDP. Historically, many of Chan's predecessors adhered to this guideline to draw up their annual fiscal plans. Yet, under the leadership of former Chief Executive Carrie Lam, who implemented policies promoting generosity and spending, this guideline has all but been forgotten, leading to troubling financial repercussions.

Reports indicate Chan's budget forecast has already projected total government expenditure at 24.6 percent of GDP for 2024-25, which marks a pivotal shift from the financial discipline maintained by previous administrations. For perspective, the last notable spike was back in 2001-02 when expenditure reached 22 percent of GDP, compelling financial secretary Antony Leung to initiate cuts to civil servant wages.

Chan's ambition to reduce spending to 20.6 percent of GDP by 2028-29 has been framed as necessary, but it asks for actionable solutions rather than mere aspirations. He indicated potential discrepancies, estimating the current year's budget deficit to be around HK$100 billion. Still, if bond sales are omitted, the deficit could soar to HK$200 billion, or even HK$300 billion if specific fund allocations are excluded. This uncertainty presents challenges for policymaking.

Budget cuts appear inevitable as Chan seeks to navigate political terrains fraught with complications. Social services such as the HK$2 transport subsidy, public healthcare, and civil servant salaries are significant areas where expenditure reductions are projected, creating dilemmas over public satisfaction and political backlash. "Can Paul Chan make needed cuts without angering the public?" ponders the South China Morning Post, highlighting the tensions between fiscal responsibility and public expectation.

To effectively reinvigorate the financial stability of Hong Kong, Chan must closely assess areas to cut costs. Implementing reductions to realize savings of HK$100 billion may sound ambitious, but it could be achieved through strategic spending cuts. For example, trimming 2 percentage points of expenditure may provide the necessary budgetary relief to help realign the city's fiscal plans.

Several fiscal analysts suggest focusing on long-term solutions rather than band-aids. While there are ideas of issuing green and sustainable bonds as immediate relief, these provide only short-term fixes to long-standing issues. With the total amount of bonds issued exceeding HK$320 billion over the past six years, long-term dependency on bonds for funding raises concerns about credit ratings and associated borrowing costs.

The predictions for economic growth sit at around 3.2 percent as per Chan's medium-range forecast, but this growth is far from guaranteed. Achieving sustainable fiscal health hinges upon aligning public expenditure with the targeted 20 percent GDP threshold, coupled with pursuing structural reforms to shore up Hong Kong’s dependencies on debt.

Historically, Hongkongers have witnessed different budgeting approaches from financial leaders. Notable figures include Donald Tsang, who proposed adherence to the 20 percent spending guidance; Leung, who made difficult decisions on civil service wage cuts; and John Tsang, who initiated handout schemes when government spending fell below the threshold.

With the upcoming budget speech, there’s both uncertainty and caution as Hong Kong prepares to tackle its financial discipline. The effectiveness of Chan's planned measures, if any, will spark discussions not just on numbers but on what they mean for the day-to-day lives of residents. Financial Secretary Chan's challenge lies not just in crafting figures but also managing the expectations of citizens. The struggle to craft the 2025-26 budget looms large, and many will be watching as the government's financial strategy for the year takes shape.