Hong Kong finance chief announces spending cuts in 2025-26 budget address as city faces HK$87.2 billion deficit

South China Morning Post

27-02-2025

Before you read: The Hong Kong government is navigating a substantial budget deficit by implementing a range of spending cuts. Measures include public sector pay freezes, civil service restructuring, decreased spending on education and transforming the city into an AI hub.
Reflect on this: How might these budget changes affect different parts of Hong Kong? How could they shape the city's future, and what role can young people play in that future?
Hong Kong's finance chief, Paul Chan Mo-po, unveiled a budget on Wednesday that included various measures focused on tapping new sources of revenue and easing the city's HK$87.2 billion deficit.
Chan pledged a 7 per cent cut in recurrent expenditure by 2027-28, aiming to save HK$62.4 billion over four years.
Measures include a public servant pay freeze, civil service downsizing, and reduced education spending. The pay freeze will affect all civil servants, including Chief Executive John Lee Ka-chiu, senior officials, lawmakers, district councillors and members of the judiciary.
Chan said 10,000 civil service posts will be cut within this term, although a source said there would be no lay-offs.
The HK$2 fare scheme for the elderly and disabled will now have a 240-trip monthly cap, with beneficiaries paying 20 per cent of fares over HK$10.
The government will cut funding for the city's eight public universities by HK$2.8 billion – or 4 per cent – in the coming three years. It is asking the institutions to return HK$4 billion from their reserves to the public coffers for the first time.
Meanwhile, a student grant of HK$2,500 for each kindergarten, primary and secondary pupil that began in 2019 will be scrapped in the next school year, saving HK$2 billion annually. Education spending will drop 2.3 per cent overall.
'The operating account will return to a surplus in the financial year of 2026-27. Under all these considerations, we think that freezing the salary of senior government officials is the appropriate thing to do,' Chan said.
Hong Kong's civil servants, including Chief Executive John Lee Ka-chiu, will take a pay freeze over the next year. Photo: Sun Yeung
Focus on AI
Chan outlined plans to make Hong Kong an artificial intelligence (AI) hub, citing the benefits of 'one country, two systems' amid China's tech growth. The government will spend HK$1 billion on the Hong Kong AI Research and Development Institute.
'We have to seize the opportunity to make the most out of this critical window to speed up our development, establishing the new before abolishing the old,' Chan said on AI.
'Transformation and innovation will lead our way into the future, and we are poised to fast track the high-quality development of Hong Kong's economy.'
Delivering his 'most challenging' budget, Chan focused on spending cuts and revenue increases.
'Strictly containing public expenditure is a must, but we should proceed in a steady and prudent manner and be careful to find a balance among the various impacts that may arise in the process,' Chan said, promising to minimise effects on public services.
The deficit, though smaller than last year's HK$101.6 billion, will reduce fiscal reserves to a decade-low of HK$647.3 billion. Chan aims to restore fiscal balance within the government's current term.
Rising costs in Hong Kong means more people are buying second-hand, shopping abroad
Betting on gambling
Chan forecast 'moderate' economic growth of 2 to 3 per cent. 'The pressure brought by geopolitics is big and has impacts on capital flow and investment sentiment. That is why we adopted this conservative estimate,' he said.
Tax deductions and rate concessions will be reduced. Revenue will rise via increased fees, charges and the air passenger departure tax.
Pointing to another new source of revenue, Chan said the government had invited the Hong Kong Jockey Club to submit a proposal to expand its sports gambling options to cover basketball and 'combat illegal betting activities'. If approved, legalisation would bring in HK$2 billion in additional betting duties yearly.
Lawmakers generally welcomed the budget, seeing it as the government's best effort to improve the fiscal balance.
Heiwai Tang, an economics professor, said the government's tax choices aimed to raise revenue without harming the economy. 'But it's still a good sign to see the government making cuts in major areas, including education ... I believe market confidence will improve as fiscal reserves start to grow again.'