“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.

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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.

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

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.

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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.

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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 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.”

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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.”

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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.