Officials are under pressure to balance the books as Hong Kong faces its toughest fiscal test in three decades, with annual deficits exceeding US$20 billion in three of the past four years.

The city is also being weighed by China's economic malaise and a looming US-China trade war, following an opening salvo of tariffs from President Donald Trump.

Financial Secretary Paul Chan on Wednesday said the government will contain spending in a way that minimises the impact on public services and livelihoods.

A "cumulative reduction" of government recurrent expenditure by seven percent through to 2027-28 would take place, he said in his annual budget speech.

"It gives us a clear pathway towards the goal of restoring fiscal balance in the operating account... within the current term of the government," which ends in June 2027, he added.

Chan's speech saw no public opposition, as authorities continued to crack down on dissent in the city.

Activists from the League of Social Democrats, one of the last remaining pro-democracy groups, cancelled their annual pre-budget petition citing "strong pressure".

The group planned to call for pay cuts for top officials, greater government accountability and halting costly infrastructure projects.

Chan also said the government would set aside HK$1 billion ($129 million) to set up a Hong Kong AI Research and Development Institute, in a bid to make the city "an international exchange and co-operation hub for the AI industry".

The economy is expected to grow between two and three percent this year, on par with last year's 2.5 percent.

The International Monetary Fund said last month that Hong Kong was "recovering gradually after a protracted period of shock".

The city's benchmark Hang Seng Index reached a three-year high on Wednesday morning, helped by a recent rally in mainland tech companies.