According to the government’s estimate, a deficit of HK$48 billion would be recorded in 2024-25, followed by a surplus of HK$6.3 billion in the 2025-26 financial year. In the subsequent year, the surplus was expected to climb fivefold to HK$32.8 billion.

The forecast did not take into account any tax rebates or relief measures that the government may implement over the coming four years.

“The issuance of Government bonds is conducive to the development of the bond market and allows the use of the capital raised from the market to drive green or sustainable and infrastructure projects,” Finance Secretary Paul Chan Mo-po said.

“I emphasise that proceeds from bond issuance will not be used for funding government recurrent expenditure.”

Chan added that the government had not decided on a specific timeline to issue the bonds. “We may not issue bonds once a year any more, but the exact time frame would depend on the market condition,” he said.

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The HK$120 billion worth of bond issuance would comprise HK$70 billion of retail tranche that includes HK$50 billion worth of silver bonds and HK$20 billion worth of green bonds and infrastructure bonds.

The remaining HK$50 billion would be institutional bonds, but no breakdown was provided.

The government also planned to issue bonds of about HK$95 billion to HK$135 billion per annum in the coming five years to drive the development of the Northern Metropolis and other infrastructure projects.

“The Government will continue to adhere strictly to fiscal discipline and keep the government debt at a prudent level. It is expected that the ratio of Government debt to GDP will be in the range of about 9 to 13 per cent from 2024-25 to 2028-29, which is much lower than most of the other advanced economies.”

The city’s debt-to-GDP ratio stood at 4.3 per cent at the start of the 2023-24 financial year. It has grown to 6 per cent as of November. It remained below 3 per cent since 2018.

Government debt to GDP ratio was more than 100 per cent in Britain, the United States and Singapore in 2022.

A government source added that the debt amount would be maintained at a low level as the government would repay part of its debt concurrently.

For example, the government was expected to repay HK$24 billion and HK$44 billion of bonds in 2024-25 and 2025-26 respectively, despite issuing HK$120 billion and HK$135 billion worth of bonds that year.

In the coming five years, the government estimated an increase in revenues by 40 per cent, based on the assumption that the nominal GDP will grow by 5.2 per cent to 6.2 per cent in 2024, and 5.5 per cent per annum from 2025 to 2028, according to the government source.

The expenditure was expected to only grow by 4 per cent over the same period after a series of cost-cutting measures were put in place.

“The financial burden in the coming years mainly comes from capital expenditure, for example, the construction works, and the bond issuance would only cover those expenses, but not the operating ones,” the source said.

The fiscal reserves, meanwhile, are expected to drop to HK$733.2 billion by the end of this financial year, and further dip to HK$685 billion in 2024-25, equivalent to 11 months of government expenditure – the lowest level in more than a decade.

But it would rebound afterwards, reaching as much as HK$832 billion in 2028-29, equivalent to 12 months of government spending.

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The source added that maintaining reserves equivalent to 11 to 12 months of government spending, despite a huge contrast from its peak of over 20 months, was a stable and healthy level, although he added that there was no hard indicator.

The city’s fiscal reserves is made up of operating reserves from the general revenue account, seven funds designated for various purposes and the Future Fund. The fund has now become a major part of the reserves amid a series of deficits.

The Future Fund, set up in 2016, comprises an initial endowment from the Land Fund and periodic top-up from budget surpluses.

Chan revealed that he would make a rare move to transfer the investment return from the Future Fund to the operating account, and would seek approval from lawmakers next month. A source added that a total of HK$59 billion would be transferred to the general revenue account this year.

The government budgeted HK$663 billion of revenue in the 2024-25 financial year, of which 12.8 per cent, or HK$80.9 billion comes from operating revenue, where the investment return would be transferred to.

While profits tax remains the largest income source, the share of investment income, including operating and capital revenue, grew significantly in recent years and was expected to account for 14.2 per cent of the total.

But the source stressed that the move was not meant to resolve the deficit, but a usual practice that applied to other funds before.

“Technically we are not using the future fund, because we are transferring the investment income, the principal would not be touched,” the source said.

The government brought back HK$25 billion and HK$35 billion of investment returns to the Land Fund’s operating account in 2021-22 and 2022-23 respectively.

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Leading economists earlier warned that the fund would be unlocked even when returns are used, calling on officials to handle the Future Fund with care or even set up rules for “unlocking” the fund, which grows slower than expected because of the lack of budget surpluses.

The government last sought approval to withdraw the Land Fund in 2003-04 and 2004-05 to meet cash flow shortfalls in the wake of the Sars outbreak.

Professor Terence Chong Tai-leung, executive director of Chinese University’s Lau Chor Tak Institute of Global Economics and Finance, cautioned against issuing bonds to keep its funds afloat in the long run.

“We cannot print money to repay our debts, that’s why our debt-to-GDP ratio cannot be as high as some countries [reaching over 100%]. I think our maximum tolerance is 50 per cent, where our debt equals two years of government expenditure,” Chong said.

Simon Lee Siu-po, an honorary fellow at the Asia-Pacific Institute of Business at the Chinese University, called for a more cautious approach when dipping into the Future Fund and increasing bond issuances.

“Having a year’s expenditure in the reserves is not bad, it won’t impact our ratings. But if we don’t issue bonds or dip into the Future Fund, our annual reserves would dry up quickly,” Lee said.

The economist warned that these relief measures would not solve the problem of a shaky income base for the government, adding that authorities would need to boost its income as offerings increase to ensure that it had the ability to repay them.

Additional reporting by Jess Ma