Asian Angle | How Hong Kong’s budget deficits can be a catalyst to restructure the economy
Authorities can look to tax restructuring among other reforms to restore Hong Kong’s fiscal health and put the economy on a sounder footing
Hong Kong’s budget for financial year 2025-26, unveiled earlier this week by Financial Secretary Paul Chan, was notable for the paucity of measures that might address the structural challenges facing the city’s economy. It was mainly focused on cost-cutting and belt-tightening to narrow the budget deficit, which the government has run in all but one of the last six financial years.
Chan pledged to return the operating account to surplus in financial year 2026-27. This is unlikely: the economy shrank in three of the last six years, and its recovery since Covid-19 has been lacklustre at best. Growth last year was just 2.5 per cent, even as regional competitor Singapore saw its GDP surge by 4.4 per cent.
With growing trade tensions, elevated inflation in the United States, and mainland China facing a prolonged property slump and stubborn deflationary pressures, it would be unwise for Hong Kong’s government to expect a quick turnaround of the city’s fortunes – one that would allow it to balance its books in the next year or two.
Hong Kong’s spending needs are also increasing. Whatever savings that may be achieved by short-term cost-cutting measures are likely to be overwhelmed by higher health and social expenditure demands in the next few years. Clearly, Hong Kong needs to relook its revenue system, not just focus on cutting expenditures.
The government should also accept that the deficits are a consequence of structural, rather than cyclical, factors. It should then undertake the necessary reforms – not just to restore Hong Kong’s fiscal health, but also to put the economy on a sounder footing.
