The latest Hong Kong budget was well-received, but there are challenges to implementing it, writes ICE Policy Fellow Alex Katsanos.
On Wednesday 28 February, Hong Kong’s financial secretary Paul Chan delivered his 2024-25 budget.
This follows a poor economic showing for the city, which has struggled to rebound from the Covid-19 pandemic.
Despite a return to GDP growth, Hong Kong is, for the second consecutive year, expecting a budget deficit above HK$100 billion, mainly due to reduced land sales and stamp duty revenue.
This has further shrunk the city’s financial reserves, which now stand at HK$733.2 billion.
External impacts from the US and China
The external environment impacting Hong Kong is also challenging.
US interest rates remain high, directly affecting interest rates in the city, while China’s economic slowdown and geopolitical tensions add to uncertainties.
The budget is loaded with medium to longer-term drives that echo last year’s budget and signal a level of continuity on the city’s key goals, including:
- green finance
- green technology
- support for frontier technology and AI
- increased collaboration with the Greater Bay Area
- incentives for non-local businesses in the city
In addition, new initiatives aim to support tourism, enhance Hong Kong’s global image, and develop regulations for cryptocurrencies and a robust data-trading ecosystem.
Property, connectivity, development: 3 key infrastructure initiatives
The budget also unveiled a series of infrastructure-related initiatives that reflect the role of construction and property in the city.
There are three key takeaways in this year’s budget relating to infrastructure:
1. Reviving the property market
As many expected, the financial secretary announced the scrapping of decade-old property cooling measures.
Scrapped measures included stamp duties for second home and foreign buyers, and special stamp duty for reselling within two years of purchase.
This aims to counter low confidence and high interest rates, and revive the ailing property market – a critical source of government revenue, particularly through land sales.
There are also plans to put eight residential sites up for sale this year, which will provide approximately 15,000 flats.
This is coupled with plans to speed up land sales, which involve making 80,000 private homes available in the next five years – an increase from 75,000 homes in five years in last year’s budget.
2. Enhancing rail connectivity with the Greater Bay Area
Hong Kong will work with authorities in Shenzhen on cross-boundary railway infrastructure to continue efforts for enhanced connectivity in the Guangdong–Hong Kong–Macao Greater Bay Area.
The plan concerns two projects that will develop the concept of ‘GBA on the Rail’.
3. Developing the Northern Metropolis and rethinking Kau Yi Chau
Chan reaffirmed commitments to develop the Northern Metropolis mega-district.
To drive the development of this scheme and other infrastructure projects, the government will issue bonds of between HK$95 billion and HK$135 billion annually over the next five years.
At the same time, the language around the development of the Kau Yi Chau Artificial Islands was softer.
The financial secretary indicated that various factors will be considered regarding the timeline of this scheme, whose original name – now rarely encountered – was ‘Lantau Tomorrow’.
This reprioritisation reflects the government’s effort to limit its infrastructure expenditure.
This isn’t uncommon: we recently saw government agencies in the UK, Australia, and New Zealand axing major infrastructure projects due to inflation.
Although Hong Kong hasn’t faced similar inflation issues, repeated budget deficits have required a review of capital spending.
Other measures
This year, there are again references to the government’s long-standing plan to industrialise the building process through modular integrated construction (MiC).
Specifically, the budget proposes the set-up of a cross-departmental steering committee, while the government will explore investing in the MiC supply chain.
Risks to implementation
Do property measures go far enough?
The budget has been well received by experts, officials, and the property sector.
There are, however, some challenges to implementation.
The plan to increase land sales is a move in the right direction, according to commentators.
But it’s worth noting that this past year, the government received a significantly lower number of bids for sites from developers. And in Q4, land sales were suspended.
Furthermore, while removing property cooling measures may encourage transactions, high interest rates remain a source of uncertainty.
Questions around the Northern Metropolis
The plan to issue infrastructure bonds for schemes such as the Northern Metropolis shows a reluctance to finance infrastructure through the city’s dwindling fiscal reserves.
In addition, there’s a lack of clarity on the model through which the Northern Metropolis will be developed.
It’s possible, for instance, that the government will offer land plots at competitive prices.
But will developers be willing to buy plots in remote areas that still lack transport, utility, and social infrastructure?
Slow adoption of MiC
Regarding the spread of MiC in the city, there are some persistent challenges, such as the slower adoption from the private sector.
Other long-standing issues
Finally, matters such as an ageing population, rising costs, and international geopolitical tensions continue to pose risks to economies – and infrastructure sectors – in Hong Kong and worldwide.
Hong Kong’s strengths will drive its success
The financial secretary closed his speech by pointing to Hong Kong’s strengths: its unique blend of east and west, its global talent pool, its connectivity, and support from mainland China.
These, he said, are the factors that will carry Hong Kong into the future and help it ‘soar like a dragon’, referencing this new year’s Chinese zodiac.
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