INTRODUCTION
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
|
|
|
|
|
|
|
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) |
|
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
- 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.
- 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 -
(c) General Revenue Account - Expenditure
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
The breakdown of revenue to the various Funds is -—
|
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 -
|
1998-1999 |
1999-2000 |
|
$m |
$m |
General Revenue Account |
(6,290) |
(11,030) |
Capital Works Reserve Fund |
(8,750) |
0 |
Loan Fund |
6,000 |
2,000 |
Capital Investment Fund |
9,000 |
9,000 |
Disaster Relief Fund |
40 |
30 |
Civil Service Pension Reserve Fund |
0 |
0 |
(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 -
1998-1999 |
1999-2000 |
2000-2001 |
2001-2002 |
2002-2003 |
$m |
$m |
$m |
$m |
$m |
10,040 |
10,890 |
14,130 |
14,360 |
14,300 |
(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—
1998-1999 |
1999-2000 |
2000-2001 |
2001-2002 |
2002-2003 |
$m |
$m |
$m |
$m |
$m |
20,600 |
8,750 |
7,020 |
7,960 |
8,180 |
(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).


Public Expenditure in the Context of the Economy
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 |
|
|
|
|
|
|
-4.1% |
6.6% |
6.6% |
6.6% |
6.6% |
|
-5.1% |
3.5% |
3.5% |
3.5% |
3.5% |
Growth in public expenditure |
|
|
|
|
|
|
17.2% |
5.5% |
4.7% |
4.9% |
4.8% |
|
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.

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: |
|
|
|
|
|
|
179,740 |
179,740 |
- |
179,740 |
179,740 |
|
|
|
|
|
|
Plant, equipment and works
|
1,550 |
- |
1,550 |
1,550 |
1,550 |
|
6,360 |
6,360 |
- |
6,360 |
3,025(1) |
|
1,225 |
- |
1,225 |
1,225 |
1,225 |
|
188,875 |
186,100 |
2,775 |
188,875 |
185,540 |
|
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: |
|
|
|
|
|
|
|
107,730 |
1,130 |
108,860 |
|
|
|
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).
|