Hong Kong's economy is expected to expand at its fastest pace in three years in 2014, the government said Wednesday, while slashing public welfare spending as it cautioned over global economic headwinds and projected a narrowing budget surplus.

Financial Secretary John Tsang forecast growth of between three and four percent, up from 2.9 percent in 2013, as he announced a 40 percent cut in welfare spending even as the government struggles to quell popular discontent over the city's high living costs and widening wealth gap.

He warned the global economic outlook remained uncertain as the winding back of US monetary stimulus added to the risk of capital outflows and the sluggish eurozone recovery remained a cause for concern.

"The US economy may see some improvement in 2014. Nevertheless, there is still uncertainty over the Federal Reserve Board's... strategy and interest rate policy. Possible market fluctuations and the risk of reversal of capital flows will cast shadows... this year," Tsang said as he unveiled the annual budget.

Tsang earmarked HK$20 billion ($2.58 billion) for one-off assistance for citizens such as tax cuts and welfare payments, down from HK$33 billion last year.

He projected a budget surplus of HK$12 billion, compared to HK$64.9 billion last year owing partly to reduced tax revenue from foreign companies based in Hong Kong which have witnessed a slowdown in global business.

"The dilemma facing the government is to strike the right balance and to ensure that the different classes within the society will benefit from the economic success of Hong Kong," So Kwok-kay from PricewaterhouseCoopers Hong Kong told AFP.

Hong Kong's leader Leung Chun-ying last month announced plans to tackle rising poverty in a policy speech, unveiling a raft of welfare policies for the working poor.

Under one HK$3 billion scheme, some low-income families will receive extra subsidies such as a HK$1,000 allowance a month.

"We were expecting a decrease in (such) relief measures because of the lower surplus compared to prior years," Wilson Cheng from the Taxation Institute of Hong Kong told AFP.