Hong Kongs budget surplus masks mounting structural deficit

The Hong Kong government has squezed out an estimated surplus for the fiscal year ending March 31, 2026, supported by stronger-than-expected revenue from stock-trading stamp duties along with expanded bond issuance and the reallocation of some special funds.

Financial Secretary Paul Chan Mo-po announced on Wednesday in his budget report that the government’s consolidated account in 2025/26 is projected to record a surplus of HK$2.9 billion (US$372 million), reversing an earlier forecast deficit of about HK$67 billion. Fiscal reserves are expected to reach HK$657.2 billion by March 31, 2026, up slightly from HK$647.3 billion a year earlier.

The government said the figures show stabilization in Hong Kong’s economy and public finances despite continued weakness in the property market.

Chan attributed the surplus to “a buoyant equity market and accelerated economic growth,” which lifted stamp-duty revenue to HK$99.5 billion, about HK$31.9 billion higher than initially projected.

Some foreign media have also pointed to a stronger pipeline of mainland Chinese IPO candidates as a factor helping the government avoid a deficit, while overseas commentators have argued the improved balance sheet reflects only increased borrowing through bond issuance.

Each explanation carries its own logic, yet none fully clarifies how the government could have rapidly reversed course over the past year.

Property crisis

To understand the latest fiscal turnaround, it is necessary to examine developments in Hong Kong’s public finances over the past decade and the government’s limitations in cutting expenses and generating new revenue.

Over the five fiscal years ending March 31, 2021, the Hong Kong government generated an average of HK$128 billion annually from land sales, according to its budget reports. Even when the city was hit by social unrest in 2019 and the Covid-19 pandemic in 2020, this revenue stream remained stable.

In 2020/21, the government recorded a deficit of HK$257.6 billion due to a sharp increase in medical expenses and emergency relief. Observers said that it was a one-off incident and that similar situations had also occurred in many other economies.

However, the bursting of China’s property bubble in the second half of 2021 fundamentally altered the picture.

The crisis, highlighted by Evergrande Group’s inability to repay debts and deliver pre-sold homes, quickly spilled over into Hong Kong’s land market, which had long been a cornerstone of the city’s fiscal model.

Over the three fiscal years ending March 31, 2026, revenue from land premiums averaged only HK$16.8 billion annually. This represented a shortfall of roughly HK$110 billion per year compared with the pre-2021 norm.

Such a gap widened as Beijing urged Hong Kong to step up investment in infrastructure and technology applications, projects widely expected to benefit mainland construction companies and technology startups.

The Hong Kong government’s capital expenditure rose 27% year-on-year to HK$155 billion in 2024/25 and by another 21% to HK$187 billion in 2025/26. Compared with the level before 2021, this implied an additional HK$60-70 billion in annual spending.

At the same time, operating expenditure remained elevated at about HK$600 billion, as the government struggled to rein in civil service pay and recurrent outlays. As a result, the city recorded an operating deficit of HK$73 billion in 2024/25.

Taken together, the loss of roughly HK$110 billion in land revenue and an increase of about HK$70 billion in capital spending and anotherHK$70 billion in operating expensesmeant Hong Kong was effectively confronting a structural fiscal gap of around HK$250 billion per year.

Bond issuances vs credit ratings

To bridge the shortfall, the government began issuing bonds in 2019/20 with an initial amount of HK$7.8 billion. In 2025/26, it issued HK$155 billion in government bonds and used HK$52 billion to repay maturing debt.

During a meeting with Chinese President Xi Jinping in December 2024, Chief Executive John Lee said the Hong Kong government aimed to eliminate fiscal deficits within three to five years. Beijing, however, was reportedly dissatisfied with the pace of adjustment and urged Lee to resolve the issue as early as possible.

Meanwhile, credit rating agencies began flagging concerns.

Fitch Ratings said last May that Hong Kong’s government debt-to-GDP ratio stood at 15% in 2024/25. It projected that debt issuance would average HK$177 billion per year between 2025/26 and 2029/30 to finance infrastructure investment, implying a gradual but significant build-up of fiscal liabilities.

“Hong Kong’s fiscal balance sheet is continuing to erode but remains very strong,” it said. “The deterioration does not cause imminent pressure on the credit profile, but fiscal risks are tilted to the downside over the medium term.”

Fitch also said it was closely monitoring Hong Kong’s fiscal reserves, noting that they remain a key credit strength but are projected to decline to about 14% of GDP by 2029/30, compared with the pre-pandemic peak of about 41%.

Chan defended the borrowing strategy, arguing that debt levels would remain conservative by international standards.

“In the coming five years, the government debt-to-GDP ratio will rise from 14.4% to 19.9%, which is a highly prudent level and well below that of most advanced economies,” he said on Wednesday. “I would like to reiterate that proceeds from bond issuance will be used to invest in infrastructure only, but not for government recurrent expenditure.”

Bring back special funds

In the current fiscal year, the government enjoyed an additional HK$31.9 billion in revenue from stock‑trading stamp duties and a HK$16.8 billion increase in profits tax receipts. Both revenue streams are highly cyclical and depend heavily on global market sentiment.

Even with these windfall gains, the government still needed to find roughly HK$60 billion to break even in 2025/26.

In his February 2025 budget proposal, Chan suggested that the administration would “bring back about HK$62 billion from six endowment funds established outside the government accounts.”

Public information shows that these funds include the Education Development Fund, Language Fund, HKSAR Government Scholarship Fund and Self‑financing Post‑Secondary Education Fund.

Some commentators have likened the situation to a household that has maxed out its credit cards and is now drawing on its children’s education funds.

Chan said Wednesday that in the 2026/27 fiscal year, the government will bring back about HK$15.8 billion from these special funds, HK$37 billion from the surplus of the Bond Fund and HK$75 billion from the investment income of the Exchange Fund to the government’s accounts. Together with continued bond issuance, these measures are expected to help the administration achieve a consolidated surplus of HK$22.1 billion in2026/27.

The total assets of the Exchange Fund, managed by the Hong Kong Monetary Authority (HKMA) to stabilize Hong Kong dollars, increased by HK$70.4 billion, from HK$4.08 trillion at the end of 2024 to HK$4.15 trillion at the end of 2025.

HKMA Chief Executive Eddie Yue said on January 28 that the Exchange Fund’s investment income in 2025 reached a record high, supported by strong US and Hong Kong equity markets amid US rate cuts and a weaker dollar.

He warned, however, that the favorable conditions seen in 2025 may not persist. Looking ahead to 2026, he said global economic conditions, major central bank policies, developments in artificial intelligence and geopolitical tensions could all affect financial market performance.

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