In his budget speech early this year, Chan said that taking into account the proceeds from the issuance of government bonds of about HK$65 billion, he was forecasting a deficit of HK$54.4 billion for 2023-24. This means the shortfall before the bond issuance was estimated at around HK$119 billion.

At the halfway point in this financial year, the government reported cumulative revenue of HK$131.3 billion and expenditure of HK$355.6 billion, leaving a deficit of HK$224.3 billion. Bond sales of HK$46.6 billion reduced the shortfall to HK$177.7 billion. It would be too simplistic to just double those numbers to derive a full-year forecast as much revenue from profits and salaries taxes comes in the second half.

Bond sales are useful to bolster cash flow and reassure the public that the government still has money in the bank. But the downside of presenting the deficit figures on a net basis is that it can create a false impression among ordinary Hongkongers – and perhaps some ministers – that there is plenty of money to fund new and improved services without raising more revenue.

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Some may think that by putting a negative spin on the numbers, I am suddenly talking Hong Kong down after a lifetime of talking it up. The truth is, we are an international financial centre with thousands of top financial analysts looking at the same numbers and drawing their own conclusions.

We would be fooling ourselves if we thought these experts would not be able to see what was really happening. It is surely more effective to tell ourselves the truth, so that sound decisions can be made about revenue and expenditure.

Hong Kong has an excellent reputation for fiscal prudence, built up over decades of careful budgeting. That is how we have been able to amass extensive reserves, unlike many other economies which have outstanding debts equal to or even greater than GDP.

When the pandemic struck, our administration was able to help residents ride out the storm by drawing on those reserves without having to go into debt. Now that normal times have returned, it’s also time for normal budget practices to resume. A good reputation takes a long time to build up but can disappear quickly.

We need to be particularly wary of the rising cost of borrowing. Our recent bond sales have been pitched at an interest rate of about 5 per cent. That is probably as much as we really want to pay. After all, government debt should be regarded in the market as virtually risk-free. Coincidentally that is the same rate as on 10-year US Treasury paper.

Traditionally, Hong Kong has divided both revenue and expenditure into two separate streams: recurrent for money the government expects to receive and pay out every year, such as income from taxes on salaries and profits, and spending on welfare payments and civil service salaries; and capital, where revenue and spending tend to be lumpy, such as land premiums and expenditure on major works projects.

When revenue on capital account is weak, as it is at the moment, then alternatives have to be considered. One simple option would be for the government to cover any shortfall by running a surplus on the recurrent side, but that would impose a severe squeeze on spending.

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Many governments fund capital works by issuing bonds, which is reasonable, as the assets thus secured have a lifespan of many years so it is fair to spread the cost in this way. But then the cost of annual interest payments and bond redemptions has to be recouped somehow, usually (elsewhere) by user charges.

Whichever way you look at it, Chan has a real challenge ahead in preparing his next budget.

Mike Rowse is the CEO of Treloar Enterprises