Hong Kong Unveils Budget with Civil Service Cuts and AI Push
HONG KONG, Feb 26 (Reuters) – Hong Kong is planning to cut 10,000 civil service jobs and significantly boost its investment in artificial intelligence (AI) as part of its latest budget, Financial Secretary Paul Chan announced on Monday. The measures are designed to address a rising deficit amid global economic uncertainty, rising 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,” Chan stated while presenting the financial hub’s annual budget.
Chan detailed that 10,000 civil servant positions would be eliminated by April 2027, representing a 2% reduction of the civil service each year for the coming two years. In addition, public sector salaries will be frozen this year.
Fiscal Consolidation and Spending Cuts
According to Chan, the “reinforced” fiscal consolidation program will result in a 7% cumulative reduction in public expenditure from the present time until the fiscal year ending March 31, 2028. He added that this expenditure cut will establish a “sustainable fiscal foundation for future development” after a sharp drop in revenue from land sales drove the deficit to HK$87.2 billion, which is nearly double the earlier projection of HK$48.1 billion.
AI Development and Investment
In a move aligned with China’s growing drive for self-reliance in AI and other high-technology sectors, including robotics, Hong Kong aims to “leverage its strength as an international platform for stepping up the development of the AI industry,” Chan said. To this end, the city has earmarked HK$1 billion for an AI Research and Development institute initiative.
Expert Reactions
However, some observers have expressed concerns that the budget doesn’t go far enough and have called for more structural actions to address the city’s strained finances. William Chan, a partner at Grant Thornton Hong Kong, stated, “While the city’s fiscal reserves provide a buffer, the escalating deficit demands immediate and strategic actions.” He further urged the government to “immediately launch a comprehensive tax base expansion study.”
Market Response
The AI initiative and spending cut plans were positively received by markets. The Hong Kong’s Hang Seng Index (.HSI) rose 3%, while the property (.HSNP) and tech (.HSTECH) sub-indices increased by over 3% and 4%, respectively.
Economic Headwinds
Hong Kong, with its small, open economy, is susceptible to external headwinds such as China’s economic slowdown and tensions between China and the U.S. This has created a complex international environment, according to Chan.
The city’s GDP is projected to expand between 2% and 3% this year, compared to 2.5% last year and 3.2% in 2023.
Property Market Challenges
Land sales, traditionally a primary source of income for the government, have been impacted by a decline in home prices. Marcos Chan, the head of research for real estate consultancy CBRE Hong Kong, noted that high financing costs and oversupply will continue to pose “significant obstacles” to a demand rebound in property investments. The government will not offer commercial sites for sale in the coming year due to a high office vacancy rate and adequate future supply, and it is considering rezoning some commercial sites for residential use.
Hong Kong’s fiscal reserves are now approximately HK$647.3 billion, down from HK$734.6 billion at the end of March 2024.
