The sustainability of public finance is an important foundation for the stable and prosperous development of Hong Kong’s society and economy. Hong Kong needs the Government to have sufficient financial strength to withstand risks to ensure the stability of its economy and financial system.

The Government will be releasing a new Budget. Given the current worse-than-expected financial situation, the Government must boost economic development as soon as possible to increase its coffers, while controlling spending to achieve the purpose of reducing expenditures.

Future expenditures are inevitable but fiscal deficit cannot be taken lightly

The Government has spent a total of over HKD600 billion on anti-epidemic, epidemic prevention and counter-cyclical measures over the past three years since the outbreak of the COVID-19 epidemic, which is understandable. However, this has also led to a 30% drop in fiscal reserves from the peak of over HKD1.1 trillion. According to the latest figures released by the Government, Hong Kong’s fiscal reserves fell to HKD657.1 billion, marking the first time in a decade that half-yearly fiscal reserves have fallen below HKD700 billion.

Given the adverse external economic environment, the economic recovery in Hong Kong is slower than expected. In addition, proceeds from land sales and revenue from stamp duty for the current financial year is the lower than expected. Therefore, the authorities said that the fiscal deficit for 2023/24 may exceed HKD100 billion, nearly double this year’s forecast. They further expected a chance that the fiscal deficit would continue in 2024/25, which is completely different from the optimistic forecast of a turnaround into surplus in the next financial year expressed by the Government at the beginning of the year.1

Public expenditure will inevitably increase in view of the ageing population problem and the forthcoming launch of major infrastructure projects. How to properly manage Hong Kong’s public finance while adhering to the principle of “keeping the expenditure within the limits of revenues” and strive to “achieve a fiscal balance” as set out in Article 107 of the Basic Law is something that the authorities must consider and review.

Grow economy to boost revenue and use public resources prudently

The essence of fiscal management lies in generating revenue and managing costs. To increase government revenue, first and foremost, it is necessary to grow the economy and enhance Hong Kong’s competitiveness. I believe more revenue will be generated for the Government if the authorities can bring in more high-quality companies in keeping with the direction set out in the Policy Address, realize Hong Kong’s “eight centers” positioning as outlined in the “14th Five-Year” Plan, drive investment and the development of the innovation and technology industry, as well as create more high-quality jobs.

Secondly, given Hong Kong’s narrow tax base, the volatility of fiscal revenue, especially from land sales, and the impact of the changing international tax environment, I believe the Government should conduct a comprehensive review of the tax regime and consider different options to broaden the tax base.

It is equally important to cut down on expenditure. On the one hand, the Government should take the lead in cutting expenditure by suitably deploying manpower and resources while maintaining zero growth in the civil service establishment. On the other hand, given the limited room for spending cuts in such areas as healthcare and education that affect people’s livelihood, the authorities must rigorously investigate any misuse of public funds to ensure that government resources are used appropriately.

Fully mobilize market forces to ease Government’s fiscal burden

Finally, in terms of harnessing market forces, the Government should actively consider bringing in capital through bond issuance and public-private partnership2 to ensure fiscal sustainability. Given the vast development space of the Greater Bay Area, the Government should make good use of the Greater Bay Area Investment Fund scheme. In addition, given Hong Kong’s ageing population, the authorities should provide incentives to encourage private developers to build elderly service facilities, increase the supply of residential care homes for the elderly and the number of caregivers, and reduce the waiting time for the elderly. In the long run, the Government should implement a plan for elderly care in the Greater Bay Area to ease the pressure that it has to bear alone.

This is a free translation. For the exact meaning of the article, please refer to the Chinese version.