Hong Kong budget 2024-25
Get more with myNEWS
A personalised news feed of stories that matter to you
Learn more
Hong Kong’s debt-to-GDP ratio could be raised to help pay for massive projects such as the creation of artificial islands off Lantau, an economist says. Photo: Martin Chan

Hong Kong can raise debt-to-GDP ratio to fund major projects, despite risk of structural deficit, top economist says

  • Liu Pak-wai, an economics professor and former government adviser, says city’s 6 per cent debt-to-GDP ratio could easily go up to 10 per cent without problems
  • But he warns cash would need to go to bricks-and-mortar projects, not to fund operating expenses such as salaries and healthcare
Hong Kong should take a bolder approach and issue more bonds to finance major construction projects, as well as build up a land bank, despite the possibility of a structural deficit, experts have proposed as the government prepares to announce the budget at the end of the month.

One highlighted the government had “plenty of room to borrow” for mega projects because of the city’s low debt-to-gross domestic product (GDP) ratio compared with places such as Singapore.

Liu Pak-wai, emeritus professor of economics at the Chinese University of Hong Kong, said raising the proportion to 10 per cent from the present 6 per cent would still be acceptable.

Another expert warned against “repeating the same mistake” made in the early 2000s, when development slowed amid mounting deficits after the Asian financial crisis and Sars outbreak, and appealed to the city government to continue investment in the city’s future.

Liu Pak-Wai, a top economist and former government adviser, says Hong Kong’s good debt-to-GDP ratio means the level could be raised to help fund major projects. Photo: Dickson Lee

“As long as the deficit is caused by investment in the future or the infrastructure, it’s fine to cover it with bond issuance … but we should never use the money on operating expenditures, such as civil servants’ salaries and healthcare,” the veteran economist said. “That would contravene the fiscal principle in the Basic Law.”

Liu, a director of the Hong Kong Institute for Monetary and Financial Research, which is led by the head of the Monetary Authority, highlighted that the investment return would be huge and should not just be measured in money.

“As you create more land, facilitate integration with the mainland, promote economic development and build houses, the rate of return would be high, not only economic return, but also social benefits,” he said.

Liu added, that apart from the general public, financial institutions such as banks and life insurance companies would have a strong demand for long-term bonds to match their future liabilities.

Hong Kong finance chief rules out capital gains tax for ‘foreseeable future’

The city’s debt-to-GDP ratio stood at 4.3 per cent at the start of the 2023-24 financial year. It has remained below 3 per cent since 2018.

The ratio climbed to 6.2 per cent last November, with total debt hitting HK$188.2 billion (US$24 billion), after the second round issuance of the government’s green bonds two months earlier.

But the ratio is low compared to other advanced economies.

The International Monetary Fund (IMF) said central government debt accounted for more than 260 per cent of Japan’s GDP.

Government debt to GDP ratio was more than 100 per cent in Britain, the United States and Singapore in 2022.

The suggestions came as public pressure mounted on the government to slow down work on massive projects such as the Kau Yi Chau artificial islands because of an estimated budget deficit of more than HK$100 billion (US$12.8 billion) and poor land sales performance over the last year.

The Hong Kong government has said it would issue infrastructure bonds to better manage the cash flow needs of major projects. But it promised to maintain the debt ratio below 10 per cent to the end of the medium-range forecast period in 2027-28.

Financial Secretary Paul Chan Mo-po has highlighted the need to “keep expenditure within the limits of revenue”, as laid down in the Basic Law, the city’s mini-constitution.
Chan, who will unveil the new budget on February 28, emphasised that proceeds from the bond issuance would not be used to fund recurrent expenditure.

Hong Kong’s Paul Chan aims for ‘balanced’ budget measures to boost public confidence

But Liu insisted the government could be more progressive and increase its debt-to-GDP ratio. He also dismissed concerns over its impact on Hong Kong’s financial stability.

“It’s fine even if the [debt-to-GDP] ratio goes up to 10 per cent,” he said, adding there was no international benchmark to follow.

European Union financial rules peg public debt to 60 per cent of GDP, but many of the group’s governments far exceed the limit.

Liu added that an increase in the ratio should not affect Hong Kong’s credit rating and the cost of debt financing should be relatively low, as long as the borrowing was used for capital projects.

Hong Kong has relied heavily on land premiums to finance its construction projects.

Hong Kong should review A&E fees to prevent abuse of healthcare system: John Lee

The last budget estimated the government would take in HK$85 billion from land premiums in 2023-24. The amount accounted for more than 50 per cent of the total budgeted income of the capital works reserve fund. The rest was made up from the issuance of green bonds, investment income and donations.

But Hong Kong has secured less than 20 per cent of the targeted land sales income so far, with six failed land tenders amid a sluggish economy, high interest rates and complex development requirements.

Weak market confidence and high office vacancy rates also led authorities to halt residential and commercial plot sales in the fourth quarter of the present financial year – the first time that has happened in 13 years.

The government has already predicted a HK$100 billion deficit for 2023-24.

The city 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.

Financial reserves dropped from HK$1.1 trillion to HK$834 billion over the same period.

Liu did not rule out the possibility of a structural deficit because of the huge expenditure on healthcare and welfare, exacerbated by a rapidly ageing population.

“We have to invest in the future – otherwise, with the increasing financial burden in healthcare, and the unstable external environment, our fiscal reserves would continue to be eroded by the deficit situations,” he warned.

“The economy might remain difficult for a few years, but, with the help of the mainland, our path of transformation will be easier. We should continue our integration with the mainland, enhance our innovation and technology industry and expand our markets.”

Other economists backed Liu and appealed to authorities to reduce reliance on land premium revenue through bond issuance and investment.

Heiwai Tang, an economics professor at the University of Hong Kong, said the present “cash-based model” of managing the public finances was not sustainable and should be changed.

“The government needs to learn to borrow money from the future, instead of always taking money from the coffers,” he added.

He said the authorities could set up a company for the Northern Metropolis development, where most shares would be held by the government, and let people from all walks of life buy the bonds to support the work.

He said there was no firm indicator of how much debt would damage economic growth, but Hong Kong should not worry about the potential consequences while the ratio remained at a single-figure level.

Billy Mak Sui-choi, an associate professor at Baptist University’s accountancy, economics and finance department, said bond issuance was one of many financing options that the government could consider, but the specific purposes had to be indicated to maintain financial discipline.

“The two mega projects are necessary for the long-term development of Hong Kong. We should never repeat the mistake made in the early 2000s to stop land creation, which ultimately impacted economic growth,” he said.

“But we would need to wait till the cash flows were consolidated to know which financing models would fit the best.”

Belts may have to be tightened, Hong Kong’s finance chief warns

Mak said some of the parameters included how much and when the finance would be needed, how large the scale was and when a return could be yielded.

He added the government would need to diversify its sources of income in the long term, with a focus on investment in the innovation and technology hub in the Northern Metropolis, which could help boost revenue without increasing tax rates.

But Andy Kwan Cheuk-chiu, director of the ACE Centre for Business and Economic Research, suggested prioritising the new islands project and the Northern Metropolis, putting one before the other.

“Issuing debts could increase the short-term financial burden and affect the impression on Hong Kong’s fiscal discipline, especially when the reserve is also dropping,” he said while agreeing that the city might be facing a structural deficit. “The government may consider issuing short-term bonds of smaller amounts.”

Hong Kong may take ‘year or two’ extra to achieve budget surplus, Paul Chan says

He added that the government may need to offer a higher interest rate when people had lower confidence in the government’s fiscal health, “and that will defeat the purpose”.

Kwan estimated that the midterm land demand was dropping because of a shrinking population and changes in work methods and consumer behaviour in post-pandemic times.

He suggested the government should boost its efforts to bring in talent and major enterprises from elsewhere to create demand and stimulate the property market, which would boost government revenue before splashing cash on another big project.

But Kwan agreed the government might have to explore broadening the tax base to reduce reliance on land sales income in the long run.