Hong Kong Plans Spending Cuts and AI Push Amid Rising Deficit
Hong Kong is set to slash 10,000 civil service jobs in a bid to control its growing deficit while making a significant investment in artificial intelligence (AI). The move comes as the city grapples with global economic uncertainty, geopolitical tensions, and a struggling property market.
Government Cuts and Fiscal Strategy
Financial Secretary Paul Chan announced that 10,000 civil servant positions will be eliminated by April 2027, reducing the civil service workforce by 2% each year for the next two years. Additionally, public sector salaries will remain frozen in 2024.
Chan stated that the government’s fiscal consolidation programme would reduce public expenditure by 7% by the end of the 2027-28 financial year. These measures aim to stabilise the city’s finances after a sharp decline in land sales revenue left Hong Kong with a deficit of HK$87.2 billion—nearly double the previous forecast of HK$48.1 billion.
Despite these efforts, some experts believe more structural reforms are necessary to ensure financial stability. William Chan, a partner at Grant Thornton Hong Kong, urged the government to explore tax reforms, noting that the city’s fiscal reserves, while providing a buffer, are not enough to sustain long-term economic health.
AI Investment and Economic Growth
Alongside cost-cutting measures, Hong Kong is making a strong push to develop its AI sector. The government has allocated HK$1 billion for an AI research and development institute, aligning with China’s broader strategy to strengthen its technology and robotics industries.
Financial markets responded positively to the budget announcement. The Hang Seng Index rose by 3%, while property and tech stocks saw gains of over 3% and 4%, respectively.
Economic Challenges and Global Headwinds
Hong Kong’s economy remains vulnerable to external pressures, including China’s economic slowdown and heightened tensions between China and the US. The city’s GDP is expected to grow between 2% and 3% in 2025, compared to 2.5% in the previous year and 3.2% in 2023.
Recent US tariffs on Chinese and Hong Kong goods have added to the economic strain. The Hong Kong government criticised these measures, arguing that Washington has overlooked the city’s status as a separate customs territory.
Political tensions have also impacted Hong Kong’s global standing. Following China’s implementation of a national security law in 2020, several city officials, including leader John Lee, faced US sanctions. Hong Kong also lost its special trading status.
Property Market Struggles and Land Sales Decline
The city’s real estate sector continues to face significant challenges. Home prices have dropped nearly 30% over the past three years, and revenues from land sales—a key government income source—have plummeted. Traditionally contributing over 20% to government revenue, land sales now account for just 5%.
High financing costs and an oversupply of properties are expected to hinder a strong recovery in the property market. In response, the government will not sell any commercial sites in the coming year due to high office vacancy rates. Instead, some commercial land may be rezoned for residential use.
Hong Kong’s fiscal reserves have declined from HK$734.6 billion in March 2024 to HK$647.3 billion, reflecting the financial strain the city faces. Officials hope that spending cuts, AI investment, and economic reforms will put Hong Kong on a more sustainable path.
With inputs from Reuters