Hong Kong should address its government deficit by issuing additional bonds to finance infrastructure projects and using some of its reserves to increase spending, according to a proposal from one of the city’s top business schools.

The paper emphasised that the deficit cannot be resolved solely through economic growth.

In a report released on Thursday, the University of Hong Kong’s Business School highlighted that a significant portion of the near HK$100 billion (US$12.85 billion) deficit was structural, suggesting that more proactive measures are required to help balance the budget, South China Morning Post reports.

Associate Professor Liu Yang, who wrote part of the report, pointed out the city's susceptibility to financial shocks due to the prolonged downturn in the property market, stating that the budget challenges couldn't be solved solely through economic recovery.

Hong Kong's reserves, which totalled HK$734.59 billion as of March 2024, represented 25% of the city’s GDP, one of the highest ratios among developed economies. 

Liu cautioned that maintaining such high reserves could ultimately be “counterproductive.”

“If the economy has not experienced a downturn in five years and reserves continue to reach new highs, the government could consider moderately reducing reserve levels by increasing spending, providing subsidies and offering tax relief,” the economist said.

He also recommended fully utilising the government’s bond program to raise funds for infrastructure projects, which would promote the development of capital markets and support the internationalisation of the Renminbi.

As of April last year, the value of government bonds accounted for around 14.7% of GDP, still “significantly below” the borrowing levels of most developed economies, according to the paper.

Liu stated that issuing bonds could help relieve short-term budget pressures without jeopardising long-term fiscal sustainability.

“It is essential to be bold yet cautious, conducting prudent risk assessments and management throughout the process to ensure debt risks are controllable,” he wrote.

Earlier this month, Finance Chief Paul Chan Mo-po estimated that the deficit for the financial year would be just under HK$100 billion, cautioning that cost-cutting measures would be necessary.