News that there was insufficient demand from the public for government bonds in a recent sales exercise will have surprised many people. After all, government borrowings are just about the safest investment in an advanced economy like Hong Kong, and the amount being sought was modest.
This came soon after the admission by Financial Secretary Paul Chan Mo-po that the deficit this financial year was likely to exceed HK$100 billion (US$12.8 billion), double his estimate in the budget. That meant raised eyebrows were definitely in order – Hong Kong’s reputation for fiscal prudence is clearly at risk.
The infrastructure bond sale was just HK$20 billion, but the public signed up for only HK$17.85 billion. The underwriters had to make up the balance. There might be pressure on the government to offer a higher interest rate on future bond sales.
In February’s budget, Chan had estimated a deficit of HK$48.1 billion for 2024-25 after taking into account anticipated bond sales of HK$120 billion. It is important to remember that bond sales are not revenue but debts that have to be repaid, so the total difference between revenue and expenditure was being estimated at more than HK$150 billion.
At a meeting of the Legislative Council’s financial affairs panel earlier this month, Chan admitted that government revenue for the year would be substantially less than forecast and, as a result, the deficit would exceed HK$100 billion after allowing for bond sales. A crude calculation therefore puts the unadjusted deficit at more than HK$200 billion.
These numbers are sobering. They will have been noted in general terms by the public but in particular by financial market professionals. The top levels of the administration also need to focus on the implications. Chan has already expressed a disinclination to raise taxes, which means the burden of bringing the accounts back into balance must be borne by cutting spending.