“In view of the substantial increase in government expenditure in the past few years and the pressure on public finances in the future, we will inevitably need to consolidate our expenditure and exercise more prudent control,” he said as he began the public consultation on the 2024-25 budget.

“Looking forward to next year, the geopolitical situation will remain complex and volatile, which will curb Hong Kong’s economic growth. Income related to the asset market will be difficult to recover quickly, and the chance of having a deficit again next year cannot be ruled out.”

Chan, in a separate statement, said the February 28 budget would pursue development to promote stability and “suitably” allocate resources to drive economic growth and bring “tangible benefits” to residents.

He said in the blog that the government would continue its freeze on the civil service headcount this year and require all bureaus and departments to cut expenditure by 1 per cent in 2024-25 and again in the next financial year.

Chan added authorities would work to boost government revenue and that some of the main initiatives included deepening economic ties with the Middle East and Asean countries, while also attracting innovation and technology enterprises to the city.

“We need to make forward planning for Hong Kong’s long-term and sustainable development, to grow the economic pie together and make it better, ” he said.

‘High uncertainty’ ahead for Hong Kong in coming year, finance chief warns

Hong Kong has logged a deficit every financial year since 2019 except for 2021-22. Government expenditure increased by 40 per cent from 2017-18 to 2022-23, excluding the money spent to stabilise the economy and deal with the pandemic. Fiscal reserves dropped from HK$1.1 trillion to HK$834 billion over the same period.

Government revenue, especially stamp duty from property purchases, stock transactions and land premiums, also dropped compared to estimates made earlier this year, a result blamed on a weak asset market.

Yue said he expected the United States economy would be cushioned by careful economic management next year and that mainland China had shown signs of recovery.

He predicted the US economy would have a “soft landing” – where interest rates were raised by the Federal Reserve just enough to cut inflation without sparking recession – next year.

“In the case of a soft landing, it might provide room for the Fed to consider leaving the rates unchanged or even a rate cut,” he said on a radio programme on Sunday.

Yue added that he expected the rate cut to be made no earlier than mid-2024.

He said the mainland economy had reached a bottoming-out phase, with a slight rebound recorded in industrial production, retail and consumer sentiment over the past two months, and that loose monetary policies had shown gradual results.

Hong Kong ‘pushing for deeper ties with Middle East, China’ to bring in new capital

Yue also hit back at claims circulated on mainland social media that Hong Kong had become the “ruins of an international financial centre”.

“Our banking system is still the largest among the international banking centres in Asia and our stock market, despite some cyclical impacts, is also huge in terms of market capitalisation and transaction amount,” Yue said.

Although proceeds from initial public offerings (IPOs) have fallen to a 20-year low, Yue said that was a result of the interest rate hike, which affected the world economy and hit global IPOs and the issuing of bonds.

He added there was no evidence of increased capital outflows because the exchange rate remained stable and the amount of customer deposits had increased, despite a drop in loans. Neither were there signs of increased outflows of foreign currency reserves at banks, he added.

Yue also promised to set up a tough regulatory mechanism for virtual assets, which would follow a framework laid down by the Financial Stability Forum. Earlier this year, hundreds of people allegedly lost more than HK$1.6 billion to cryptocurrency exchange platforms Hounax and JPEX.

But he emphasised that jurisdictions would need to standardise the framework and work together to close loopholes.

Yue added next year’s priorities for the HKMA would include promotion of the internationalisation of the renminbi and mBridge, a multi-central bank digital currency project.