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Hong Kong economy
This Week in AsiaOpinion
Donald Low
Donald Low

Opinion | How infrastructure borrowing can benefit Hong Kong for decades to come

  • Debt financing is more efficient and equitable, with cutting spending and raising taxes unpalatable given the city’s current sluggish growth
  • The government should also put in place a framework to ensure debt sustainability and boost financial transparency for the projects involved

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Central district in Hong Kong. The city’s government has proposed issuing bonds to finance large-scale infrastructure projects. Photo: Getty Images
Donald Low
Faced with a deficit of more than HK$100 billion (US$12.8 billion) this financial year, the Hong Kong government has proposed issuing bonds to finance large-scale infrastructure projects that could include the Northern Metropolis and land reclamation on Lantau Island.
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This proposal makes sense. Hong Kong’s public debt to gross domestic product ratio is extremely low by international standards; the government therefore has the space and creditworthiness to borrow more – even though interest rates today are higher. There is also a strong economic case to rely on debt financing for infrastructure projects which incur costs today but generate benefits for the next few decades.

Nonetheless, there are concerns among some that such borrowing only deepens the government’s financial hole, burdens future generations, and masks the precarity of government finances. Rather than dismiss these concerns as invalid or ignorant, the government should engage seriously with them and, in so doing, build society’s trust in its ability to manage Hong Kong’s finances well. This is also an opportunity to educate the public on why borrowing for infrastructure is not only necessary, but may even be desirable in the current macroeconomic context.

A construction site for public housing on Hong Kong’s Lantau Island in 2020. Photo: Sam Tsang
A construction site for public housing on Hong Kong’s Lantau Island in 2020. Photo: Sam Tsang

Necessary and desirable

The first principle of public financial management that the Treasury should convey is that all deficits have to be financed eventually. In this, the government has to choose between three unpalatable options: raising taxes, cutting spending, or borrowing. Raising taxes – particularly the introduction of a Goods and Services Tax (GST) – is probably something that Hong Kong must do eventually.

But mainland China’s slow recovery, higher interest rates and a strong Hong Kong dollar (the result of the Hong Kong dollar’s peg to the US dollar) have contributed to the city’s current sluggish economic growth and in such an environment, authorities can ill afford to raise taxes that would reduce disposable incomes or consumer spending.
Cutting public spending in other areas is even less realistic than raising taxes. As long as growth remains weak (as is likely the case for 2024), the demand for publicly financed or subsidised services will increase. In the longer term, an ageing population will increase social spending as a share of GDP. While there is merit in reducing some health and welfare subsidies, the fact is that public provision of these services in Hong Kong is already very lean by the standards of developed economies. This also means the savings that can be squeezed in these areas are likely to be very small compared to the expenditure demands of an ageing society. Unless Hongkongers are willing to accept a significantly lower standard of health and welfare provision, there is little chance of public spending decreasing in the coming years.
An elderly man in a park at Cheung Sha Wan. In the longer term, an ageing population will increase social spending as a share of GDP, says academic Donald Low. Photo: Jelly Tse
An elderly man in a park at Cheung Sha Wan. In the longer term, an ageing population will increase social spending as a share of GDP, says academic Donald Low. Photo: Jelly Tse

That leaves increased public sector borrowing as the least bad option to finance Hong Kong’s infrastructure plans.

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