Hong Kong budget FY2026/27: Aiming at fiscal consolidation simultaneously with debt issuance for investment

Executive SummaryHong Kong has released its FY 2026/27 budget. Although headline economic growth and market activity have improved, leading to better fiscal position and higher government revenue, Hong Kong is not ready to shift away from fiscal consolidation, especially with the more proactive government-led investment supporting the stronger alignment with China’s national Five-Year Plan. It comes at a time when growth prospects remain constrained by numerous domestic and geopolitical challenges. As fiscal consolidation meets the growth bottleneck, budgetary resource reallocation can have important implications on sector opportunities in the city.Fiscal consolidation remains with longed tenor bond issuanceThe government has a cautious growth projection of 3% in the coming years, lower than the average of 3.8% in the 2009-19 period. It explains why fiscal consolidation to bring the operating account back into surplus remains in place. However, a persisting fiscal deficit will be the new norm for Hong Kong, driven by capital expenditure supported by government bond issuance.The extra bond issuance will bring the government debt-to-GDP ratio from 14.4% in FY 2025/26 to 19.9% in FY 2030/31, which is still at a relatively low level. This is largely a result of shrinking on-balance sheet fiscal reserves of which the government intends to keep it at 10 months of its expenditure.One frequently asked question is whether the transfer of fiscal reserves amounting to HK$ 150 billion from the Exchange Fund managed by the Hong Kong Monetary Authority (HKMA), could negatively affect its credibility. The Hong Kong government has previously placed its budget surplus into the Exchange Fund for investment returns. The proposed amount is only 3.6% of the Exchange Fund and largely derives from investment income generated by fiscal reserves. The trend aligns with the government's move to take more responsibility for investment decisions.We argue that the move will not affect financial stability, as the exchange fund will remain fully backing the monetary base, accounting for 45% of M2 and 230% of M1 after the transfer. But of course, the success of such investment, which shifts from portfolio investments in bonds and equities, will depend on policy implementation.Winners in finance, innovation and infrastructureWith the revaluation of China-related assets and the inflows of mainland Chinese capital, Hong Kong's financial market has seen renewed activity. The government will further optimize equity listing requirements for enterprises with weighted voting rights structures, secondary listings for overseas issuers on more recognized exchanges, and laxer rules for the new tech sectors. There will be a stronger focus on support the “go global” trend of Mainland China, RMB internationalization, gold trading, green financing, family offices and REITs.On innovation, Hong Kong's R&D expenditure reached 0.63% of GDP in 2024, up from 0.47% in 2019. The government's role is increasingly evident, as it contributed 57% of total funding in 2024, up from 47% in 2019. To business, it is guaranteed that there will be more government funding in a range of targeted sectors, including the AI+ strategy, robotics, life science, and third-generation semiconductors, and the list can go on. There will also be cross-border arrangements with Mainland China for the flows of personnel, materials, capital, and data. The list shows a shot in the dark to explore any emerging sectors. Where the bet can pay off will depend on the success of commercialization and the ability to develop the R&D ecosystem rooted in the city.With stronger commitment, the public sector is increasingly critical in driving investment through infrastructure through the plan Northern Metropolis, and transport and public housing. In fact, the public share of construction work has already grown to 44% as of September 2025, rising from 27% in 2019. Still, it is possible the government will need to issue even more bonds if the Northern Metropolis cannot attract enough private investment. Unlike in the past, there will be smaller help from construction led by private investment and real estate, especially with pending supply.Unsolved structural challengesStill, the more proactive government spending does not mean there are no challenges. Despite renewed growth in the number of firms, the number of available jobs (employment plus vacancy) has only reached 95% of the pre-pandemic level. With a jobless recovery, the demand may not look as strong as the surface suggests, leading to very mild wage growth. Unless the wealth effect can be sustained, which is not a guarantee, there can be more pressure on private consumption.The K-shaped recovery with weak consumption sentiment is another challenge. As of September 2025, business receipts for information services and banking are strong at 448% and 152% of the 2018 levels. In the other sectors supported by policies, retail and catering services reached 74% of the 2018 level, and tourism, conversion, and exhibition are even worse at 54%. Despite the supportive talent schemes, the main increase in population comes from mobile residents, who may spend less locally.With enhanced connectivity, Hong Kong is now more integrated with Mainland China than ever. Still, there are always winners and losers during integration, which can lead to convergence across different aspects, such as asset prices and wages. Although there will clearly be opportunities in finance and technology, balancing the give-and-take will become increasingly challenging amid heightened geopolitical currents.Resource allocation important in the new era of fiscal deficitIn conclusion, the Hong Kong government has remained prudent with its economic forecasts and has pushed ahead with fiscal consolidation in the latest budget. It is allocating more resources to long-term investment at the expense of debt issuance. It is too early to say whether such proactive government investment will achieve the policy goals, but the greater spending will support the development of finance, innovation, and infrastructure. However, Hong Kong will still face the challenges of a jobless recovery, a potential drag on private consumption amid the change in demographics, and the give-and-take when the integrating with mainland China.