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Hong Kong aims to cut spending by slashing 10,000 civil service jobs in an effort to rein in a rising deficit, and plans a big AI push as it navigates headwinds from global economic uncertainty, geopolitical tensions and a weak property market.
“It gives us a clear pathway towards the goal of restoring fiscal balance in the operating account, in a planned and progressive manner,” said the city’s Financial Secretary Paul Chan in announcing the financial hub’s annual budget.
Chan said 10,000 civil servant jobs would be cut by April 2027, representing a reduction of 2% of the civil service in each of the coming two years. Public sector salaries will also be frozen this year.
Chan said the “reinforced” fiscal consolidation program would see a cumulative reduction in public expenditure by 7% from now till fiscal year ending on March 31, 2028.
The spending cut would lay a “sustainable fiscal foundation for future development,” he said, after a sharp fall in revenue from land sales left the deficit at HK$87.2 billion, nearly double the previous forecast of HK$48.1 billion.
Separately, in line with China’s growing push to develop self-reliance in AI and other high technology sectors including robotics, Chan said Hong Kong would “leverage its strength as an international platform for stepping up the development of the AI industry.” The city has earmarked HK$1 billion for an AI Research and development institute.
Yet, some observers said the budget didn’t go far enough, and called for more structural changes to address the city’s strained finances.
“While the city’s fiscal reserves provide a buffer, the escalating deficit demands immediate and strategic actions,” said William Chan, a partner at Grant Thornton Hong Kong.
“To safeguard Hong Kong’s future prosperity, we urge the government to immediately launch a comprehensive tax base expansion study.”
The AI push and spending cut plans though cheered markets. The Hong Kong’s Hang Seng Index was up 3% while the property and tech sub-indices rose over 3% and 4%, respectively.
Global Uncertainty
Hong Kong’s small and open economy has also been vulnerable to external headwinds including China’s economic slowdown, and the tensions between China and the U.S. as President Donald Trump ramps up pressure on Beijing around trade, tech and geopolitics.
The city’s GDP is expected to grow between 2%-3% this year, versus 2.5% last year and 3.2% in 2023.
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Earlier this year, the U.S. imposed additional tariffs of 10% on goods from China and also Hong Kong, which the financial hub’s government has criticised, saying Washington has ignored the city’s status as a separate customs territory.
Following China’s imposition of a powerful national security law on Hong Kong in 2020, a number of officials including current leader John Lee were sanctioned, and the city was stripped of its special status as a separate trading entity.
One of Hong Kong’s major conglomerates, CK Hutchison, owned by billionaire Li Ka-shing, is also facing pressure from the U.S. over its ports in the Panama Canal, after Trump falsely claimed China is operating the canal.
“Hong Kong is facing a rather complicated international environment amid changes unseen in a century around the world. The rise of protectionism and unilateralism has resulted in a fragmented global political and economic landscape,” Chan said.
Hong Kong’s finances have been hurt in the last three years by plunging revenues from land premiums — which developers pay for land use — as home prices tumbled nearly 30%.
Marcos Chan, the head of research for real estate consultancy CBRE Hong Kong, said high financing costs and an oversupply of properties would remain “significant obstacles” to a meaningful rebound in demand in property investments.
The government will not put any commercial sites on sale in the coming year, due to high office vacancy rates and ample future supply, and will consider rezoning some commercial sites to residential sites.
Land sales have traditionally been a main source of income for the government, contributing more than 20% to coffers, a figure that has now slipped to around 5%. Hong Kong’s fiscal reserves are now around HK$647.3 billion, down from HK$734.6 billion at the end of March 2024.
($1 = 7.7712 Hong Kong dollars)
(Reporting by Jessie Pang, Clare Jim, Donny Kwok, Anne Marie Roantree; Writing by James Pomfret; Editing by Christian Schmollinger and Shri Navaratnam)
