Hong Kong faces hard choices on spending to fix its budget deficit

The recently published Hong Kong government accounts show that, after eight months of the current financial year, the Treasury’s expenditure was HK$471.6 billion (US$60.6 billion), with HK$248.2 billion in revenue. That means our public finances incurred a deficit of HK$223.4 billion. After taking into account net cash of HK$80.2 billion received from new bond sales, less partial redemption of existing ones, the adjusted cash flow was minus HK$143.2 billion.

In his speech introducing the 2024 budget, Financial Secretary Paul Chan Mo-po forecast a deficit of about HK$48.1 billion. However, Chan’s figures included cash from bond sales, which muddies the issue. Bonds are not revenue but debts the government must repay. The true deficit – that is, revenue less expenditure – would actually exceed HK$168 billion, so when Chan indicated the deficit would more than double to about HK$100 billion, that suggests a real deficit of more than HK$200 billion.

There is nothing secret about these numbers. They are available simply by searching for “government monthly accounts” on the internet and reading the press releases and accompanying tables.

I spent six years inside the government dealing with public finances and have been writing about the subject here for more than 10 years. Simply put, for the past few years, the Hong Kong government has been spending public money like drunken sailors on shore leave. We cannot keep “balancing the books” by borrowing increasing amounts, even if we give them the cosy name of “bond issues”. They are debts.

Hong Kong is not alone in borrowing, of course, as other governments go down this route, too. Borrowing is generally easy for governments because they are considered reliable debtors, which generally they are – until one day suddenly they aren’t.

As recently as September 2022, we had an example of what happens when financial markets abruptly lose confidence in a sovereign borrower. Then-British prime minister Liz Truss’ government unveiled a mini-budget which included tax cuts and increased spending, all to be funded by debt. She was forced to resign less than a month later. Memories of such events tend to linger: the UK Treasury recently had to offer more than 5 per cent interest on its 30-year bonds.