The Medium Range Forecast (MRF) is a projection of expenditure and revenue for the forecast period based on the forecasting assumptions and budgetary criteria outlined in Section I of this Appendix.

2    The MRF is presented in three sections:

      (I)  Forecasting assumptions and budgetary criteria.

     (II)  The MRF for 1998-1999 to 2002-2003.

    (III)  Commentary on the MRF in relation to budgetary criteria.

SECTION I - FORECASTING ASSUMPTIONS AND BUDGETARY CRITERIA

3    A number of computer based models are used to derive the MRF. These models reflect a wide range of assumptions about the factors determining each of the components of Government's revenue and expenditure. Some are economic in nature (the general economic assumptions) while others deal with specific areas of Government's activity (the detailed assumptions). These are supported by studies of historical and anticipated trends.

General Economic Assumptions

Growth in Gross Domestic Product (GDP)

4    There is a clear link between many of Government's major revenue sources and economic growth. For planning purposes the medium range assumption as to annual GDP growth for the current MRF has been set at 3.5% in real terms.

Inflation

5    Over the forecast period the average year on year inflation is assumed to be 3%. It is emphasised that this is a trend assumption related to the GDP deflator.

Methodology

6    In arriving at the yearly forecasts, account is taken of short-term fluctuations from the trend forecasts of GDP and inflation.

Detailed Assumptions

7    A wide range of detailed assumptions relating to developing expenditure and revenue patterns over the forecast period are taken into account. These include:

• estimated cash flow of capital projects.
• forecast completion dates of these capital projects and their related recurrent consequences in terms of staffing and running costs.
• estimated cash flow arising from new commitments resulting from policy initiatives.
• the expected pattern of demand for individual services.
• the trend in yield from individual revenue sources.
• new revenue measures in the 1999 Budget.

Budgetary Criteria

8    In addition to the above forecasting assumptions there are a number of criteria against which the results of forecasts are tested for overall acceptability in terms of budgetary policy. Any significant breach of these parameters results in a review of the underlying programmes and adjustments where necessary and appropriate.

9    The following are the more important budgetary criteria:

• Total cash flow surplus/deficit

  The Government aims to maintain adequate reserves in the long term.

• Total expenditure growth

  It is intended that, over time, expenditure growth should not exceed the growth of the economy.

• Capital expenditure growth

  By its nature some fluctuations in the level of capital expenditure are to be expected. However, over a period the aim is to contain capital expenditure growth within overall expenditure guidelines, i.e. in line with economic growth but allowance is made for unavoidable expenditure on exceptional projects. Allowance is also made for a number of major projects due to start in the forecast period. In planning the size of the capital programme regard is had to the recurrent consequences of capital works (staffing, maintenance, etc.).

• Revenue policy

  The projections reflect the revenue measures introduced in this year's budget. Account is taken of the need to maintain over time the real yield from fees and charges, fixed duties etc. and to review periodically the various tax thresholds in the light of inflation.

SECTION II - THE MRF FOR 1998-1999 TO 2002-2003

10    The current MRF is summarised in the following three tables which indicate the forecast operating position, capital cash flow and consolidated reserves(Note a).

Operating Statement (General Revenue Account)

Table 1

	Revised Estimate	Forecast
	1998-1999	1999-2000	2000-2001	2001-2002	2002-2003
	$m	$m	$m	$m	$m
Revenue (Note b)	178,410	156,970	179,000	205,750	239,090
Less: Expenditure (Note c)	184,270	188,870	193,330	204,890	218,810
Operating surplus/(deficit) for the year	(5,860)	(31,900)	(14,330)	860	20,280

Capital Financing Statement (The Funds)

Table 2

		Revised Estimate	Forecast
		1998-1999	1999-2000	2000-2001	2001-2002	2002-2003
		$m	$m	$m	$m	$m
Opening balances of the Funds		64,350	44,240	50,670	55,380	58,810
Add    :	Revenue (Note d)	34,420	48,150	65,940	68,530	58,560
:	Transfers from/(to) General Revenue Account(Note e)	6,290	11,030	(4,000)	(4,000)	6,000
Less :	Expenditure on capital projects (Note f)	30,140	33,110	36,080	38,780	41,910
:	Loans and investments (Notes g and h)	30,640	19,640	21,150	22,320	22,480
:	Aid for disaster relief (Note i)	40	-	-	-	-
Closing balances of the Funds		44,240	50,670	55,380	58,810	58,980

Consolidated Reserves

Table 3

	Revised Estimate	Forecast
	1998-1999	1999-2000	2000-2001	2001-2002	2002-2003
	$m	$m	$m	$m	$m
General Revenue Account
Opening balance	393,190	381,040	338,110	327,780	332,640
Operating surplus/(deficit) (per Table 1)	(5,860)	(31,900)	(14,330)	860	20,280
Transfers from/(to) the Funds (per Table 2) (Note e)	(6,290)	(11,030)	4,000	4,000	(6,000)
Closing balance	381,040	338,110	327,780	332,640	346,920
The Funds-closing balances (per Table 2)	44,240	50,670	55,380	58,810	58,980
Fiscal Reserves at 31 March(Note j)	425,280	388,780	383,160	391,450	405,900

Notes on the Medium Range Forecast

(a) Accounting policies

1. The Medium Range Forecast, like Government's Accounts, is prepared on a cash basis and reflects forecast receipts and payments, whether or not they relate to recurrent or capital transactions.
   
2. The Medium Range Forecast includes the General Revenue Account and the Funds (the Capital Works Reserve Fund, the Loan Fund, the Capital Investment Fund, the Disaster Relief Fund and the Civil Service Pension Reserve Fund). For the purpose of the Medium Range Forecast, the Land Fund is merged with the General Revenue Account.
   

(b) General Revenue Account - Revenue

        This comprises all receipts to be credited to any of the following revenue heads, namely -

Duties
General Rates
Internal Revenue
Motor Vehicle Taxes
Fines, Forfeitures and Penalties
Royalties and Concessions
Properties and Investments
Loans, Reimbursements, Contributions and Other Receipts (excluding transfers from Funds)
Utilities
Fees and Charges

For the purpose of the Medium Range Forecast the investment earnings of the Land Fund (including change in net worth of investments up to 31 October 1998) are also included under the revenue of the General Revenue Account.

        This comprises all expenditure to be charged to the General Revenue Account in accordance with the Appropriation Ordinance, with the exception of the transfers to funds. It includes the day to day operational expenses of government departments together with minor capital purchases of a routine nature.

(d) Funds - Revenue

          This comprises all revenue receivable by the Funds except the transfers from General Revenue Account. It includes -

Land Premia
Loan repayments received
Recovery from Mass Transit Railway Corporation
Recoveries from Trading Funds
Interest and dividends
Donations towards capital projects

	1998-1999	1999-2000	2000-2001	2001-2002	2002-2003
	$m	$m	$m	$m	$m
Capital Works Reserve Fund	24,400	32,700	41,050	44,520	48,750
Capital Investment Fund	6,460	2,830	18,060#	18,280#	3,300
Civil Service Pension Reserve Fund	1,040	550	570	590	620
Loan Fund	2,520 _______	12,070 _______	6,260   _______	5,140   _______	5,890 _______
Total	34,420 _______	48,150 _______	65,940   _______	68,530   _______	58,560 _______

(#Assumes, for the purpose of the Medium Range Forecast, that privatisation receipts of $15 billion in 2000-01 and 2001-02 arising from a partial floating of the Mass Transit Railway Corporation will be credited to the Capital Investment Fund.)

(e) Transfers between General Revenue Account and the Funds

          The transfers between General Revenue Account and the Funds are assessed with regard to the commitments of the Funds and their forecast cash flow requirements. The breakdown of the transfers for 1998-1999 and 1999-2000 is -

(f) Expenditure on capital projects

           This comprises expenditure chargeable to the Capital Works Reserve Fund in respect of the Public Works Programme (including land acquisition), capital subventions, major systems and equipment and computerisation.

(g) Loans

           These comprise loans made from the Loan Fund, including loans to schools, teachers, students, housing loans for the Home Starter scheme and to civil servants, and loans under the special finance scheme for small and medium enterprises.

The forecast of payments from the Loan Fund is -

(h) Investments

          These comprise, in the main, advances and equity investments made from the Capital Investment Fund to trading funds and statutory bodies.

The forecast of payments from the Capital Investment Fund is?P>

(i) Aid for disaster relief

          This is actual expenditure made from the Disaster Relief Fund for providing relief to disasters that occur outside Hong Kong. Because of the unpredictable nature of disasters, no estimate of future expenditure is made for the forecast period.

(j) Fiscal reserves

          The fiscal reserves represent the accumulated balances of the General Revenue Account (including the Land Fund) and the Funds. The movement in the fiscal reserves from one year to the next year represents the estimated surplus/deficit for the year.

SECTION III - COMMENTARY ON THE MRF

Expenditure Growth

11    To demonstrate that expenditure growth, over time, does not exceed the trend growth rate in the economy, Government's spending plans should be compared with the budgetary guidelines (Diagrams 1 and 2).

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12    For monitoring purposes, the Government's own expenditure is consolidated with the expenditure of some other public bodies such as the municipal councils in order to compare total public expenditure with the size of the economy.

13    The results of this comparison are set out in Table 4 and the historical and forecast relationship between GDP and public expenditure is illustrated in Diagram 3. A comparison of cumulative growth in public expenditure with cumulative growth in GDP since the introduction of the MRF in 1986-87 is shown in Diagram 4. GDP figures quoted in Table 4 and used to derive Diagrams 3 and 4 are based on trend forecasts for 1999-2000 onwards.

Public Expenditure in the Context of the Economy (Note 1)

Table 4

	Revised Estimate	Forecast
	1998-1999	1999-2000	2000-2001	2001-2002	2002-2003
	$m	$m	$m	$m	$m
Operating expenditure	178,720	182,770	190,490	201,890	215,610
Capital expenditure(Note 2)	43,160	46,770	53,050	56,140	59,410
Total government expenditure(Note 2)	221,880	229,540	243,540	258,030	275,020
Add: Other public sector bodies	53,250	60,590	60,330	60,780	59,120
Total public expenditure	275,130	290,130	303,870	318,810	334,140
Gross Domestic Product (calendar year) (Note 3)	1,289,130	1,374,280	1,465,050	1,561,810	1,664,970
Growth in GDP
Money terms	-4.1%	6.6%	6.6%	6.6%	6.6%
Real terms	-5.1%	3.5%	3.5%	3.5%	3.5%
Growth in public expenditure
Money terms	17.2%	5.5%	4.7%	4.9%	4.8%
Real terms	11.5%	4.3%	2.7%	1.1%	0.4%
Public expenditure as a percentage of GDP (at current prices)(Note 4)	21.3%	21.1%	20.7%	20.4%	20.1%

Note 1

Public expenditure comprises expenditure by the trading funds, the Hong Kong Housing Authority, the Provisional Urban Council and the Provisional Regional Council, expenditure financed by the Government's statutory funds and all expenditure charged to the General Revenue Account. Expenditure by institutions in the private or quasi-private sector is included to the extent of their subventions. The payments of government departments which are wholly or partly financed by charges raised on a commercial basis are also included (e.g. airport, waterworks). But not included is expenditure by those organisations, including statutory organisations, in which the Government has only an equity position, such as the Airport Authority, the Mass Transit Railway Corporation and the Kowloon-Canton Railway Corporation. Similarly, advances and equity investments from the Capital Investment Fund are excluded as they do not reflect the actual consumption of resources by the Government.

Note 2

To avoid the double-counting of expenditure these figures exclude government's payments to the two municipal councils.

Note 3

For years beyond the current year, the GDP figures are based on trend assumptions

Note 4

Caution should be exercised in interpreting these percentages as the public expenditure is estimated on a fiscal year basis while the GDP is estimated on a calendar year basis.

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14    Table 5 shows the sum to be appropriated in the 1999-2000 Budget analysed between operating and capital expenditure and, after including expenditure from the various funds and other public sector bodies, shows the derivation of public expenditure for 1999-2000 given in Table 4.

15    The table also illustrates the effect of the budget revenue measures on the overall surplus/deficit position for 1999-2000.

16    The table can be read with Tables 1-4.

Relationship Between Government Expenditure and Public Expenditure in 1999-2000

Table 5

Components of expenditure and revenue	Appropriation	Government expenditure and revenue			Public Expenditure
		Operating	Capital	Total
	$m	$m	$m	$m	$m
Expenditure General Revenue Account:
Recurrent account	179,740	179,740	-	179,740	179,740
Capital account
Plant, equipment and works	1,550	-	1,550	1,550	1,550
Other non-recurrent	6,360	6,360	-	6,360	3,025(1)
Subventions	1,225	-	1,225	1,225	1,225
	188,875	186,100	2,775	188,875	185,540
Transfers to Funds	11,030	-	-	-	-
Capital Works Reserve Fund	-	-	33,110	33,110	33,110
Load Fund	-	-	10,890	10,890	10,890
Lotteries Fund	-	-	-	-	1,270
Housing Authority	-	-	-	-	41,730
Provisional Urban Council	-	-	-	-	8,620
Provisional Regional Council	-	-	-	-	5,170
Trading funds	-	-	-	-	3,800
	199,905	186,100	46,775	232,875	290,130
Revenue
General Revenue Account:
Taxation		107,730	1,130	108,860
Other revenue		37,220	1,890	39,110
		144,950	3,020	147,970
Capital Works Reserve Fund		-	32,705	32,705
Capital Investment Fund		-	2,825	2,825
Civil Service Pension Reserve Fund		-	555	555
Disaster Relief Fund		-	-	-
Load Fund		-	12,070	12,070
Land Fund		11,660	-	11,660
		156,610	51,175	207,785
Cash surplus/(deficit) before budget revenue measures		(29,490)	4,400	(25,090)
Less: Effect of budget revenue measures (2)		(2,655)	(5)	(2,660)
Cash surplus/(deficit) after budget revenue measures		(32,145)	4,395	(27,750)
Less: Advances and equity investments from the Capital Investment Fund (3)		-	(8,750)	(8,750)
Consolidated Deficit		(32,145)	(4,355)	(36,500)

(1)      To avoid the double-counting of expenditure, the government's payments to the two municipal councils are excluded in arriving at public expenditure.

(2)      In addition to reduced revenue totalling $2,660m, the rates revenues of the two municipal councils are expected to reduce by $1,110m as a result of the 50% rebate on the rates to be collected in the July to September quarter. This amount has been included in GRA expenditure as potential compensation to the two councils.

(3)      Advances and equity investments from the Capital Investment Fund are excluded from government expenditure (see also Note 1 to Table 4).