Hong Kong has announced plans to reduce its civil service workforce by 10,000 positions by April 2027 as part of an effort to curb public expenditure and address a growing budget deficit.

The decision was outlined in the city's annual budget presentation by Financial Secretary Paul Chan, who stated that the reduction would amount to a 2% decrease in the civil service workforce annually over the next two years.

Public sector salaries will also be frozen in 2025.

The fiscal consolidation program aims to cut public expenditure by 7% by the end of the 2027-28 financial year.

This follows a sharp decline in revenue from land sales, which has contributed to a deficit of 87.2 billion Hong Kong dollars, nearly double the previously forecasted figure of 48.1 billion Hong Kong dollars.

In addition to spending cuts, the government is allocating 1 billion Hong Kong dollars for the establishment of an AI Research and Development institute, aligning with China's broader push for self-reliance in advanced technology sectors such as artificial intelligence and robotics.

Officials highlighted Hong Kong’s role as an international hub for AI development and technological innovation.

Market reactions to the budget announcement were positive, with the Hang Seng Index rising by 3%, while property and technology sub-indices gained over 3% and 4%, respectively.

Economic Challenges and Global Pressures

Hong Kong's economy remains vulnerable to external pressures, including China’s economic slowdown and heightened tensions between China and the United States.

The city’s GDP is projected to grow between 2% and 3% in 2025, compared to 2.5% in 2024 and 3.2% in 2023.

In early 2025, the United States imposed an additional 10% tariff on goods from China and Hong Kong.

The Hong Kong government criticized the measure, arguing that Washington has disregarded the city's status as a separate customs territory.

Since the imposition of China’s national security law in 2020, Hong Kong has faced increased U.S. sanctions, including restrictions on city officials such as Chief Executive John Lee.

The loss of Hong Kong’s special trading status has further complicated the economic landscape.

Additionally, one of Hong Kong’s largest conglomerates, CK Hutchison, owned by billionaire Li Ka-shing, is facing scrutiny from the U.S. over its port operations in the Panama Canal.

Former U.S. President Donald Trump has falsely claimed that China controls the canal, adding to geopolitical tensions.

Declining Land Revenue and Property Market Struggles

Hong Kong’s fiscal position has been significantly impacted by falling revenues from land premiums, which have historically contributed more than 20% of government income.

That share has now fallen to approximately 5% as property prices have dropped nearly 30% in the past three years.

Marcos Chan, head of research for real estate consultancy CBRE Hong Kong, stated that high financing costs and an oversupply of properties continue to be major obstacles to property investment recovery.

In response to weak demand, the government has decided not to put any commercial sites up for sale in the coming year and is considering rezoning some commercial land for residential development.

Hong Kong’s fiscal reserves currently stand at approximately 647.3 billion Hong Kong dollars, down from 734.6 billion Hong Kong dollars at the end of March 2024. As the city navigates economic headwinds, officials are expected to explore further measures to stabilize finances while maintaining growth initiatives in key industries such as AI and technology.