Can Paul Chan make the necessary adjustments to the Hong Kong budget without upsetting the public?

Hong Kong’s finance chief is expected to deliver his budget speech on February 26 and is under mounting pressure to balance the books. The Post looks at the dilemmas involved and the political will required to address funding challenges in a two-part series.

For six days a week, 64-year-old Wen Runlan spends half an hour commuting on the MTR to get to work, spending just HK$2 (26 US cents) per trip thanks to the government’s transport subsidy.

For Wen, a security guard who earns HK$12,000 a month and lives alone, the subsidy is significant, allowing her to save about HK$400 monthly, or HK$15.6 each day, travelling between her home in Shek Mun and her workplace in Lai Chi Kok.

“Without the HK$2 fare, I would need to further tighten my belt, such as by going out less on my days off … because it’s not possible for me to cut back on my rent and medical expenses,” she said.

Wen spends a third of her wage on rent and traditional Chinese medicine for her stomach and nerve problems. The rest goes to daily living expenses and retirement savings, although she says she has little hope of stopping work any time soon.

“I hope the government can consider the financial hardships of the low-income group if they are to adjust the HK$2 transport subsidy [for those aged 60 to 65],” she said, adding she hoped the fare would not be raised beyond HK$3.

Wen’s concerns reflect the widespread apprehension among residents ahead of Financial Secretary Paul Chan Mo-po’s delivery of his annual budget speech on February 26.
Unlike in previous years when coffers were overflowing, residents no longer chatter about what sweeteners they might enjoy and instead are worried about potential cuts to their benefits.

The government is in a bind, as the city grapples with a deficit for the current financial year estimated at HK$100 billion.

Spending cuts are likely to be unpopular, especially among those already facing hardships during the economic slowdown. But deep cuts seem necessary as increasing revenue appears difficult amid geopolitical tensions between China and the United States.

Equally alarming to observers is the possibility that Hong Kong is entering an era of structural deficit. This has raised questions about whether the situation will reach a tipping point that affects the financial hub’s credit rating and hinders its efforts to find new drivers for growth.

The Post examined some of the dilemmas the government faces should it cut expenditure in major spending areas, such as the HK$2 transport subsidy, public healthcare and civil servant salaries.

Observers said addressing funding challenges would require that Chan demonstrate strong political will and embrace bold reforms, performing a delicate balancing act that avoided frustrating those already in financial hardships while also instilling faith in the city’s long-term development.

Alarming deficit and reserve levels
Hong Kong’s estimated deficit of about HK$100 billion for the 2024-25 financial year, as well as a reserve expected to plummet to HK$685.1 billion from a peak of HK$1.17 trillion in 2018-19, has raised alarms over the government’s fiscal management.

The financial hub had previously enjoyed budget surpluses for over a decade. But the deficit levels of the past four financial years have surpassed that of previous economic downturns since the city’s return to Chinese rule in 1997. The deficit was HK$122.3 billion in 2022-23 and HK$100.2 billion in 2023-24.

Chan has sought to reassure the public that there is no need to worry about a structural deficit. The government was aiming to balance the books within two to three years, “primarily through reducing expenditures, complemented by generating revenue”, he said earlier this month.

But economists at the University of Hong Kong’s Business School warned in a recent paper that the city’s structural deficit was at a “moderately high level”, which could not be passively alleviated by economic growth alone but required proactive fiscal policy adjustments.

There were growing concerns over a significant decline in government income due to a slowdown in property transactions, which has in turn led to a sharp reduction in land sales and stamp duty revenue.

PwC Hong Kong estimated that land sale revenues would reach only HK$8 billion, a drastic 76 per cent drop from the government’s original forecast of HK$33 billion. Stamp duty was expected to generate only HK$58 billion, 18 per cent lower than the projected HK$71 billion.

Revenue from profits and income tax was expected to stand at HK$247.6 billion, a 10 per cent drop from the original projection of HK$275.6 billion.

Transport subsidy: cut costs or promote active lifestyle?
Politicians and professional groups seeking to identify areas to cut expenditure have naturally focused on those with the highest government spending.

At HK$120 billion, social welfare ranked first, making up about a fifth of the estimated total recurrent government expenditure for 2024-25, followed by healthcare and education.

The subsidy scheme that allows elderly residents and people with disabilities to spend just HK$2 on commutes has emerged as a contentious issue. There have been calls to cancel or reduce the benefits for the roughly 643,000 residents aged 60 to 65 who are entitled to the subsidy.

But those who oppose the cuts, including the city’s largest political party, the Democratic Alliance for the Betterment and Progress of Hong Kong, have warned the government that the intangible benefits of encouraging active lifestyles and social connections among elderly must be considered.

Launched in 2012 with wide support from politicians, the scheme was initially available only to residents aged 65 and older but was expanded in 2022 under Carrie Lam Cheng Yuet-ngor’s leadership to include those aged 60 to 64.

After the expansion, reimbursements to public transport operators doubled in a year, going from HK$1.4 billion in 2021-22 to HK$3.1 billion in 2022-23.

They reached HK$4 billion in 2023-24, accounting for 0.7 per cent of the government’s total operating expenditure and were projected to reach HK$6 billion for 2024-25.

The finance minister recently described the scheme as “fiscally unfeasible” in the long run.

But opinions on how to modify the subsidy vary. Some have suggested raising the age of eligibility back to 65, while others have proposed introducing a monthly cap on usage, integrating the scheme with other transport subsidies or reducing subsidies for longer trips.

Shen Jianfa, a professor at the department of geography and resource management at the Chinese University of Hong Kong (CUHK), estimated that cancelling the subsidies for those aged 60 to 65 would save HK$2 billion to HK$4 billion a year.

By comparison, setting a monthly usage limit and discount limit would reduce expenditures by about HK$500 million to HK$1.5 billion per year, he said.

Shen suggested the most practical way would be adjusting the HK$2 subsidised fare to HK$2.5 or HK$3 per trip, which could reduce expenditure under the scheme by about 20 per cent.

“It is practical to adjust the fare according to the inflation rate so that the increased cost will be shared between the elderly and the government. Otherwise, the government share will increase for each trip,” he said.

In 2023, the elderly and people with disabilities took 2.4 million subsidised trips per day on average, a 93 per cent increase from 2021. A third of the journeys were made by those aged between 60 and 64. On average, the government subsidised HK$4.23 per trip for the elderly.

Shen said the increased number of trips benefited transport operators financially and reduced the pressure on the MTR Corporation and bus companies to increase fares.

KMB recently warned that any policy changes that increased the burden on bus operators could create pressure to raise fares.

A former senior government official in charge of the policy supported an inflation-linked increase in the subsidised fare, which he said was the most viable option. It would be easily accepted by users, while keeping prices at a level that incentivised them to stay active.

“Setting caps will greatly affect the working elderly who need to travel frequently” he said.

“Also, limiting the subsidies would be unfair to the elderly living in remote areas who face higher travel costs to get to urban areas.”

He noted the urgent need to gradually raise the retirement level amid the city’s ageing trends, following the lead of Germany and Spain, which have increased it to 67 years old.

In mainland China, over a period of 15 years starting in 2025, the retirement age for men will be raised from 60 to 63, and from 55 to 58 for women in white-collar jobs. For women in blue-collar jobs, the retirement age will increase from 50 to 55.

“A gradual increase will have minimal impact on individual elderly people, but significant financial implications on the entire pension and welfare system,” the former official said.

A&E fees: raise charges or seek new revenue sources?
Chan has identified healthcare, the government’s second-largest expenditure, as one of the targets for cuts.

But the government is grappling with the dilemma of raising medical fees while also keeping public healthcare affordable for the underprivileged.

Health minister Lo Chung-mau floated the idea of raising fees for non-urgent accident and emergency (A&E) room visits at public hospitals, to a level that matched private clinic rates, which he said could also discourage abuse.

Data from the Hospital Authority showed that of the 1.7 million visits to public hospital A&E departments last year, fewer than half were classified as critical, emergency or urgent.

Since 2007, residents have paid HK$180 for each visit to a public A&E room, but Lo had said this rate was highly subsidised as the average cost for a patient was about HK$2,400.

Medical sector lawmaker David Lam Tzit-yuen suggested raising the fee to between HK$300 and HK$400.

Tim Pang Hung-cheong, an advocate for patients’ rights from the Society for Community Organisation, suggested keeping fee increases to within 10 per cent and improving the exemption policy for vulnerable groups. He said further increases would prompt the private sector to raise its fees, making healthcare less accessible.

“Low-income patients with chronic diseases who need frequent medical treatment would be affected most by the huge fee hikes,” Pang said.

“They may hesitate, leading to delayed treatment. This could eventually drive up medical costs and worsen their health.”

The Hospital Authority, which operates the city’s public hospitals and clinics, relies heavily on government funding. Its HK$84.8 billion in government subsidies made up 86 per cent of its annual revenue, according to the authority’s report for 2023-24.

Medical fees amounted to HK$5.9 billion, making up just 6 per cent of its revenue.

Staff costs came up to HK$62.4 billion and took up a sizeable portion of the HK$97.4 billion in expenditure in the last financial year. The authority spent HK$13 billion on drugs and HK$5 billion on medical supplies and equipment.

Pang said while there was little room for cuts to the 7,350 full-time medical staff, excluding nurses, there were ways to generate more revenue.

The authority could learn from overseas counterparts and sell patient data to support research initiatives, as long as personally identifiable information was removed to protect individuals’ privacy, he said.

The US, United Kingdom and Singapore have programmes to share de-identified data with researchers and private companies for studies and analysis, often under strict regulations.

Civil servant pay: freeze wages or reform to boost efficiency?
Another dilemma the government faces is how to manage the 173,000-strong civil service amid growing calls to freeze or reduce their wages. This sentiment was supported by 77 per cent of 1,000 residents in a recent survey.

Former transport minister Anthony Cheung Bing-leung is among several prominent figures suggesting the salary adjustments should also apply to the chief executive, his top advisers in the Executive Council and the city’s 90 lawmakers.

Civil servant salaries constitute a significant portion of government spending. For 2023-24, staff-related costs soared to HK$156.2 billion, accounting for 25.98 per cent of the government’s operating expenditure.

While salary cuts could save a substantial amount and demonstrate solidarity with a public experiencing economic hardships, drastic reductions could affect the morale of civil servants at a time when demands on the government were greater than ever.

The efficiency of the civil service has been a long-standing problem. Exco convenor Regina Ip Lau Suk-yee questioned the effectiveness of Hong Kong’s 173,000 civil servants serving a population of 7.5 million, noting Singapore’s 80,000 workforce served 5.9 million.

Civil servants underwent pay cuts in 2003 due to the Sars epidemic, followed by a pay freeze and two subsequent cuts in 2004 and 2005. Senior civil servants faced a 5 per cent salary cut in 2009 amid the financial crisis, while junior and mid-level staff had their salaries frozen. The economic turmoil following the pandemic also led to a pay freeze in 2020.

Recently, several civil servant unions publicly said they would accept a pay freeze. Lawmaker Michael Tien Puk-sun from Roundtable estimated a freeze could save the government up to HK$9 billion a year.

Others warned that a pay cut would trigger a “domino effect” that harmed the economy, as a reduction could drag down private sector wages and affect staff morale and retention.

Wilson Wong Wai-ho, associate professor at CUHK’s department of government and public administration, said the government should move beyond proposed salary reduction or recurrent expenditure cuts of up to 5 per cent across departments.

He urged deeper reforms to address the strain on public finances, amid other growing calls to improve government efficiency through solutions driven by artificial intelligence (AI).

The Shenzhen government recently announced that 70 “AI civil servants” powered by DeepSeek, a mainland AI start-up, were being used to help with administrative governance in Futian district. It was also reported that Shenzhen, Guangzhou and Dongguan had integrated DeepSeek’s models into online government services.

Citing the US’ new Department of Government Efficiency (Doge) led by tech billionaire Elon Musk, Wong said Hong Kong could establish an independent task force consisting of members from within and outside the government, including civil servants, scholars, consultants, accountants and economists, to review the efficiency of the civil service.

“The last exercise was more than 20 years ago. The government structure has swollen tremendously and become unavoidably outdated,” said Wong, who has written extensively about civil service reforms. “Starting the review late is better than not doing it at all.”

The last major overhaul took place in 1999 spearheaded by Tung Chee-hwa’s administration. Wong said that round of reforms and a previous one proposed by the British colonial government reduced the size of the government under a “big market, small government” principle.

“Hong Kong has been deviating from this principle. The government should help the market and residents to build wealth, instead of just providing for them,” he said.

For example, the government could study the feasibility of transferring public utilities, such as the water supply and postal service, to the private market, thereby reducing the size of the government and making services more efficient to meet public demands, he said.

Bold reforms to drive new growth are key to restore faith
Last Sunday, Chan highlighted the importance of large infrastructure projects as a key, new driver for Hong Kong’s economic development.

He also hinted that the city had the capability to issue more bonds to match the issuance levels of some advanced economies, citing proposals by scholars and experts.

His assurance came after a survey conducted last month showed that the public was sceptical that the government could balance its books within three years as pledged.

About 72.4 per cent of 740 respondents lacked confidence in the authorities’ ability to meet the turnaround target, while around 20 per cent expected it would take a decade to return to a surplus, according to the poll by New Youth Forum and Hong Kong Thinkers.

“The lack of confidence reflects that people are not sure whether the government could successfully find new sources of revenue to remedy the losses incurred by economic transformation amid the geopolitical tensions,” Wong said.

He added that this year’s budget was critical in assessing the government’s ability to deliver bold reforms with strong political will.

“Instilling confidence in Hong Kong’s economy is way more important than looking for quick cuts for this financial year,” he said.