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Commentary: Deciphering the Structural Challenges in the Hong Kong Government's 2026 Budget



Deconstructing the 2026 Budget

Financial Secretary Paul Chan released the 2026 Budget, revealing that the Hong Kong government successfully turned a loss into a profit in its consolidated account this year, recording a surplus of $2.9 billion. However, economist Simon Lee (Li Siu-po) pointed out that if the amounts for bond issuance and repayment are excluded, the actual deficit reaches $100.4 billion, questioning whether the early surplus is merely an illusion.

  • Issuing $970 Billion in Bonds over 5 YearsOver the next five years, the Hong Kong government plans to issue between $160 billion and $220 billion in bonds annually, totaling $970 billion, to drive infrastructure development. Lee believes that the return on investment for such projects carries uncertainty.

  • Budgeted Revenue and ExpenditureAccording to budget data:

    • For the 2025-26 fiscal year, government revenue is $688.76 billion and expenditure is $789.17 billion, resulting in a formal fiscal deficit of $100.4 billion.

    • By treating the issuance of $155 billion in bonds as "revenue," a final "surplus" of $2.9 billion was recorded.

  • Utilization of Fund TransfersTo cope with expenditures, the government has raised capital by transferring funds from various accounts. The transfer amount for the 2025-26 fiscal year is $111 billion, with the plan for the following year increasing to $147.8 billion.

  • Debt RisksLee emphasized that analyzing financial health solely based on the debt-to-GDP ratio is one-sided. He expressed concern that Hong Kong's fiscal reserves have dwindled to over $600 billion, while the government simultaneously shoulders over $400 billion in debt.


Expert Analysis and Recommendations:



  • Bond issuance should fundamentally be viewed as a liability rather than revenue; steady revenue growth must be achieved through prudent fiscal management.

  • The government should explicitly clarify the long-term feasibility of fund transfers to avoid market misunderstandings regarding future fiscal conditions.


Key Indicators:

Year

Gov Revenue ($ Billion)

Gov Expenditure ($ Billion)

Deficit (Excl. Bonds) ($ Billion)

Bond Issuance Revenue ($ Billion)

Bond Repayment ($ Billion)

Recorded Surplus ($ Billion)

2025-26

6887.62

7891.71

-1004.09

1550

516.86

29.05

2026-27

7652.34

8434.16

-781.82

1600

597.08

221.1

2027-28

7944.56

8666.02

-721.46

2100

1299.23

79.31

2028-29

7657.97

8718.63

-1060.66

2200

1033.07

106.27

2029-30

8197.41

8907.99

-710.58

1900

1015.71

173.71

2030-31

8751.48

9136.06

-384.58

1900

1331.48


Upon the release of the Hong Kong Government's 2026 Budget, Financial Secretary Paul Chan announced positive news of turning a deficit into a surplus. However, careful analysis reveals structural challenges and instability lurking behind these fiscal figures. The contradiction between bond issuance and the actual fiscal state raises particular doubts about Hong Kong's future fiscal sustainability.


The Illusion of Surplus

According to the budget, the Hong Kong government recorded a surplus of $2.9 billion, which appears to be a positive signal. However, economist Simon Lee's commentary undoubtedly exposes the fundamental issue with this surplus: if proceeds from bond issuance and repayments are excluded, the actual deficit stands at $100.4 billion. This implies the government's surplus is largely built on the foundation of aggressive bond issuance. Since bond issuance is essentially a liability and should not be treated as revenue, we must pay attention to whether the government is using short-term financial maneuvers to mask long-term fiscal problems.


Bond Issuance Scale and Risks

Over the next five years, Hong Kong plans to issue $970 billion in bonds to drive infrastructure development. While infrastructure investment is crucial for economic growth, this strategy carries inherent risks. Not only is the return on investment uncertain, but over-reliance on debt financing could increase future fiscal pressure. Lee noted that Hong Kong's fiscal reserves have dropped from a peak net value of HK$1.2 trillion to just over HK$600 billion. Coupled with a debt burden of over HK$400 billion and sharply increasing future expenditure commitments, this inevitably raises concerns about Hong Kong's fiscal sustainability.


Rationality of Fund Transfers

Faced with massive expenditures, the government has chosen to transfer funds from various accounts to raise capital. However, this strategy should be seen as a stopgap measure for fiscal insufficiency. Lee described this approach as an "expedient measure" that fails to solve the root problem. Simple capital transfers will not eliminate structural deficits; the government needs to clarify whether such transfers will become the norm and adjust the budget accordingly to ensure long-term fiscal health.


Recommendations for the Fiscal Future

  1. Strengthen Revenue Structure: The government should consider enhancing tax revenue, particularly targeting high-income groups and corporations, to increase the stability of fiscal income.

  2. Control Expenditure Growth: Optimize public spending by focusing on key areas and avoiding unnecessary resource wastage.

  3. Promote Economic Growth: Enhance local economic vitality by attracting foreign investment and supporting innovation, thereby reducing reliance on debt.

  4. Establish Transparent Fiscal Policy: Provide clear fiscal data to the public and the legislature to enhance responsibility and allow citizens to better understand the long-term impact of government finances.

  5. Broad Social Participation: Encourage public participation in fiscal policy discussions and decision-making to improve transparency and accountability.



Conclusion

Against the backdrop of global economic instability, Hong Kong's fiscal situation is in urgent need of reform. The 2026 Budget presents a glossy facade of short-term gains, but the underlying structural challenges cannot be ignored. Only through comprehensive fiscal planning and policy adjustments can Hong Kong establish a sustainable fiscal health system and safeguard future economic development.




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