HONG KONG: Hong Kong is set to cut 10,000 civil service jobs and freeze public sector salaries as part of a cost-cutting initiative to reduce its growing fiscal deficit.

The government also plans to invest heavily in artificial intelligence (AI) to drive economic growth and strengthen its position as a technology hub.

Financial Secretary Paul Chan outlined these measures in the city's annual budget, describing them as necessary steps toward long-term financial stability.

"It gives us a clear pathway towards the goal of restoring fiscal balance in the operating account, in a planned and progressive manner," Chan said.

The job cuts will be implemented by April 2027, reducing the civil service workforce by two percent each year for the next two years. Additionally, public spending will be trimmed by seven percent by the fiscal year ending March 31, 2028, to counter the sharp decline in revenue from land sales.

Hong Kong's deficit has nearly doubled to HK$87.2 billion, far exceeding the earlier forecast of HK$48.1 billion.

Alongside spending cuts, Hong Kong is ramping up investments in AI and high-tech industries, aligning with China's push for technological self-reliance. The government has allocated HK$1 billion to establish an AI research and development institute.

The announcement boosted market confidence, with the Hang Seng Index rising three percent, while property and technology stocks surged by over three percent and four percent, respectively.

However, some analysts argue that deeper structural reforms are needed.

"While the city's fiscal reserves provide a buffer, the escalating deficit demands immediate and strategic actions," said William Chan of Grant Thornton Hong Kong. "To safeguard Hong Kong's future prosperity, we urge the government to immediately launch a comprehensive tax base expansion study."

Hong Kong's economy remains vulnerable to external factors, including China's economic slowdown and rising U.S.-China tensions under President Donald Trump.

The city's GDP is projected to grow between two percent and three percent this year, compared to 2.5 percent in 2024 and 3.2 percent in 2023.

Ongoing trade restrictions and tariffs have added pressure, with the U.S. recently imposing a 10 percent tariff on goods from China and Hong Kong. Additionally, Washington has increased scrutiny on Hong Kong-based companies, including CK Hutchison, which faces U.S. pressure over its Panama Canal port operations.

"Hong Kong is facing a rather complicated international environment amid changes unseen in a century," Chan said. "The rise of protectionism and unilateralism has resulted in a fragmented global political and economic landscape."

Hong Kong's property market downturn has significantly impacted government revenues. Land sales, which once contributed over 20 percent of government income, now account for just five percent.

Home prices have fallen nearly 30 percent over the past three years, leading to reduced revenue from land premiums. High office vacancy rates have also prompted the government to pause commercial land sales and consider rezoning commercial properties for residential use.

Hong Kong's fiscal reserves have dropped to HK$647.3 billion, down from HK$734.6 billion in March 2024.