News Update

The 1996-97 Budget

Speech by the Financial Secretary, Mr Donald Tsang,
concluding the debate on the second reading of
the Appropriation Bill 1996

Wednesday, April 3, 1996

Mr. President,

Introduction

I would like to start by thanking the community, and Members of this Council in particular, for their generous remarks and the very positive way they have received my first Budget.

2. My Budget Speech bore the title of "Building Our Prosperous Future" for three reasons. First, I wanted to lift the community's sights above the immediate horizon of 30 June 1997. Second, I wanted to focus the community's attention on Hong Kong's bright prospects over the next five years and beyond into the next millennium. Third, I wanted to offer the community a vision of Hong Kong's prosperous future. To identify the opportunities, as well as the challenges, which lie ahead.

3. In describing my vision of the future, and developing a strategy to get us there, I emphasised that we must work together and have confidence in ourselves as a community. I said that the Government would strive to make itself more accountable and more business-friendly. My colleagues and I are grateful for the solid support Members have given us in developing our plans. Our proposals for a science park, a fourth industrial estate and the package for the promotion of the service sector have all received the full support of the Council. I have listened carefully to Members' contributions to the debate, and I am greatly encouraged by the recognition that our plans for the service sector are only the start of our work. They are the basis for a renewed consensus on Hong Kong's economic development. A consensus involving the whole of our business community, the Government and this Council. Following this debate, I think we can go forward with confidence to build Hong Kong's prosperous future together.

4. While sharing my optimism for the future, some Members of this Council have expressed concerns about our immediate economic prospects and about the particular revenue and expenditure proposals I have laid before this Council. This is as it should be - before one can dream, one has to be able to sleep soundly. My colleagues covered many detailed issues at the Special Finance Committee meetings held earlier, and this afternoon they have again addressed all the key points raised. My task now is to respond to four general points of overriding importance.

The Revenue Base and The Tax Net

5. Many Members have expressed their concern about what they feel are the potential dangers of the narrowing of the tax base. We must be clear about what are the real issues here. We must make a sharp distinction between two separate concepts: the revenue base and the tax net. They are not the same thing. The revenue base is made up of the profits and salaries tax, the revenue from land sales and the full range of other taxes, duties and charges levied by the Government. We aim to keep this revenue base stable and productive. But the tax net is quite a different concept. It is, in essence, a description of the number of taxpayers. At a time of economic growth and rising real wages, we can maintain revenue while providing salaries tax concessions which may allow some taxpayers to drop out of the tax net. This means that we can reduce the tax net, that is reduce the number of taxpayers, without affecting the revenue base.

6. Growing prosperity has the effect of expanding the tax net over time. As incomes rise, more individuals find themselves drawn into the tax net. So despite the major concessions made in the past few years, salaries tax contributed 14% of total Government revenue in 1995-96, second only to profits tax. Even after the further concessions proposed in this year's Budget, we still expect the contribution of salaries tax to total revenue to remain at about the same level in 1996-97. Salaries tax has remained a stable source in the revenue base even though the tax net has continued to vary in recent years. Our essential policy goals in this area are to ensure that Hong Kong has a stable and productive revenue base while at the same time adjusting the tax net to take account of economic growth and community aspirations.

7. I share Members' views about the advantages of broadening the revenue base. Unfortunately, I have not yet found a way to do so without bringing in a large number of new taxpayers. My colleagues and I believe that it would be highly objectionable to Members, never mind the community at large, if we proposed any major revenue-broadening measures at present and expanded the number of taxpayers. Our unpleasant experience in protecting the revenue base of our fees and charges regime has illustrated this point clearly.

8. I am well aware of the technical or theoretical criticisms which can be made of our tax regime. But we must not let technicalities or theory obscure the basic facts. Our very simple, low-tax regime has been a key element in our economic success. It has enabled us to fund the dramatic improvements in our social services and our infrastructure over the past 30 years. It is the envy of many developing and developed countries. No competing economy can rival it. I will take a lot of convincing that our successful tax system needs systematic review or radical change.

Fiscal Reserves

9. My second general point concerns our fiscal reserves. Some members have urged us to use our reserves to boost spending. The Secretary for the Treasury has explained how the increase in government expenditure has matched economic growth over the last six years since we started the current planning cycle. Any use of our reserves to boost spending further would inevitably mean that government expenditure would be growing at a rate faster than the economy, thus breaching our long-established budgetary guideline. It would also mean another deficit budget for 1996-97, following a small one in 1995-96.

10. Since becoming Financial Secretary, I have clearly stated on several occasions my firm commitment to maintaining tight control of government spending. I want to repeat that commitment again today. We must not allow government spending to grow disproportionately and, as a result, deprive the private sector of the resources required to fuel our economic growth. To do so would put at risk our future growth prospects. It would also risk reversing the welcome and continuing reduction in inflation which we anticipate. I hope Members agree that these are, quite simply, unacceptable risks.

11. I said in my Budget Speech that the appropriate level of reserves, over the long term, could be a matter of debate. But, I repeat, this is not the time to reduce the cushion provided by these reserves. Maintaining confidence, both locally and internationally, in the soundness of our financial system is of paramount importance in the remaining months before the birth of the SARG. Let me emphasise this point. I believe that our strong fiscal reserves and our prudent approach to the management of Hong Kong's public finances have been fundamental to the stability of our financial system. I am not prepared to try any new approaches or take any risks which might undermine our financial system or our economic competitiveness. I may be labouring the point, but I feel very strongly that Hong Kong's future success depends above all on sticking to the economic and financial principles which have brought us our past success.

12. Our prudent approach to the management of our public finances carries over into the management of the fiscal reserves. It is true, as one member stated, that our management is conservative, and that the Exchange Fund normally achieves a higher rate of return. However the risk profile of our fiscal reserves is significantly different. The fiscal reserves are immune to exchange rate and other risks as far as possible, and the yields obtained are primarily determined by the prevailing interest rates. My priority is to ensure that the reserves are safe and invested in a way that strengthens the Hong Kong dollar. The return we have achieved is quite satisfactory given the constraints under which we choose to operate.

Supporting Business

13. Next, I wish to respond to the point that the Government should not forget the interests of the non-business sectors of the community. To this, let me say that I agree entirely that the Budget must address all sections of the community. I hope that the details of the Budget demonstrate that we have done exactly that. Yes, we want to become more business-friendly, and we will devote resources to this aim. But the objective in doing so is to benefit everyone in the long run. The whole community benefits through higher incomes, better public services, more investments in our infrastructure, if our business community is more successful.

14. We recognise that business drives our economy, that the private sector is the engine for generating wealth in Hong Kong. And, by and large, we let the wealth so generated find its own home. However, the Government has a responsibility to ensure that everyone has the opportunity to share in the prosperity created by our economy. We have done this by constructing a safety net below which nobody will be allowed to fall. We have managed to raise this safety net steadily and deliberately over the past few years, precisely because the private sector has generated the wealth, and provided the government revenue, to allow us to do so. This process must continue. Investing resources to create a more business-friendly government will in future produce dividends in which we can all share. This was a message I stressed in concluding my Budget Speech, and I will repeat it here. Wealth generated by the private sector provides the resources for the social improvements we wish to make.

15. This point is fundamental to what I have called the Hong Kong model of development and progress. We must first make sure that the engine of growth and prosperity is in good running order before we look to our social and infrastructure programmes. But the community wants fairness as well as economic efficiency. It demands that we help the disadvantaged. Let me say a few words here about our proposals for CSSA payments and services for the elderly, a subject of concern to many Members as well as to the public at large. My colleague, the Secretary for Health and Welfare, has spoken about this in some detail today. Let me emphasise what I think is the essential point of the Government's approach to this issue. We have an open mind on the possibility of improving further the welfare system for the elderly. Our objective is to have a system that is effective, fair, affordable and acceptable to the community. We have been, and we will remain, open minded. We will not be complacent. We expect to commission soon a consultancy study on services for the elderly, and I can assure Members that we will consider the findings and recommendations from this consultancy carefully and seriously.

16. The Governor once said that while Hong Kong is not and never will be a welfare state, we do care about the state of our welfare safety net. But we care equally about rewarding enterprise, hard work and initiative. That is why I am doubtful about arguments for a more progressive tax system. The Hong Kong Government, like the Hong Kong people, believes in giving the most capable among us every incentive to succeed at a level comparable with the best in the world. Inevitably, this leads to some people being richer than the rest. As a capitalist society, we will always have a disparity of wealth between the richest and the poorest sections of our community. It is true also that the more highly-educated and better-skilled members of the community are enjoying faster income growth than the average. This is a healthy phenomenon in any dynamic economy where opportunities for advancement abound. That is why we have laid so much stress on better education, better skills training and equal opportunities for all our people, particularly the less well-off. Hong Kong is probably the most upwardly mobile economy in the world today, and the very essence of the Hong Kong way is that everyone should have their chance to succeed.

17. The simple fact is that we must first create the wealth before we can distribute it. Any move towards a more progressive system of taxation would risk undermining the incentive for wealth creation and, thus, weaken the driving force of the economy. Success must have its rewards. Other advanced communities have discovered that if a community obscures or frustrates this simple truth, it will pay a price in terms of lower economic growth and poorer standards of public service. We must set no ceiling on success.

Preparation of the 1997-98 Budget

18. Finally, I have taken careful note of Members' views on how we should proceed with the preparation of the 1997-98 Budget. You have expressed wide differences of opinion on the degree of Chinese participation in this process. I appreciate Members' deep concerns. I hope Members also appreciate the Administration's clear position on this matter and how we propose to undertake the transitional Budget.

19. Members understand that we have been fully responsible for our own annual Budgets for many years. The United Kingdom Government has played no role in this. Senior Chinese officials have assured us that, on the establishment of the SAR Government, the preparation of Hong Kong's annual Budgets will immediately fall within the scope of the SAR Government's financial autonomy. The JLG or the Central People's Government have no role to play in their preparation. Indeed, the Basic Law guarantees this autonomy. But in the unique case of the 1997-98 Budget which straddles 1 July 1997, clearly we need to co-operate with the Chinese side in order to achieve a full 12-month Budget which will cover the normal budgetary cycle from 1 April 1997 to 31 March 1998. The continuity of the entire range of public services through the transition will depend on this. And only with such a 12-month Budget will we have certainty over Hong Kong's fiscal system and policies before and after the handover.

20. We shall soon embark on the preparation of the 1997-98 Budget in full co-operation with the Chinese side. The Chinese side have agreed with us that this budget should cover the normal 12-month period with effect from

1 April 1997. Both sides have the same objective of producing a Budget which will be conducive to a smooth transition and Hong Kong's long-term prosperity. There is already a great deal of common ground on the basis and mechanisms for our co-operation. For example -

· the detailed compilation of the 1997-98 Budget will remain the responsibility of the relevant Hong Kong Government departments;

· the prudent financial principles and the system of financial management which the Hong Kong Government has followed in the past have proved effective and are consistent with the spirit of Articles 107 and 108 of the Basic Law. They should continue to be the guiding principles for preparing the 1997-98 Budget;

· the two sides will strengthen co-operation in order to ensure that the preparation of the 1997-98 Budget will proceed in an orderly manner. We view the two sides of the JLG expert group as equal partners in this joint endeavour;

· so far as possible we will aim to keep to the budget timetable by reaching an early consensus on each major issue as it arises;

· given the tight time-frame, the expert group will meet frequently, normally once a month (but more often if necessary); and

· the JLG confidentiality rule will continue to apply strictly to protect the market-sensitive budget deliberations.

21. Some have said that constructive co-operation in preparing the next Budget is not achievable. They fear that however good the intentions may be, we will have to sacrifice something vital to secure Chinese support and that Hong Kong's interests will consequently suffer. In short, that a satisfactory 1997-98 Budget is impossible. I do not share those gloomy predictions. Hong Kong people have a record of achieving what others regard as impossible. Indeed I sometimes wonder if the word "impossible" exists in our mind-set. With good will and hard work we, the Hong Kong people, will succeed.

22. I believe that in 12 months time, most of these doubts will have been long forgotten.

· We will have consulted the community, and in particular the Legislative Council, on our expenditure and revenue proposals.

· We will have held fast to our budgetary guidelines, which are fully consistent with the Basic Law.

· We will have prepared a Budget which will be prudent, fiscally sound and in line with the community's expectations.

· It will be a Budget which we will have discussed with the Chinese side at every step of the way, with a consensus on all the key issues.

· And it will be a 12-month Budget, acceptable to all, which -God willing - I will have the honour to present to this Council in March 1997 in accordance with the laws of Hong Kong.

Whatever uncertainties may lie ahead of us in the weeks and months to come, let this at least be clear and certain : we will get the money right.

Conclusion

23. The 1996-97 Budget before Members today is a Budget for the people of Hong Kong. We have already reached consensus on it. I urge the elected representatives of the people of Hong Kong - all the elected representatives of all the people of Hong Kong - to give it their support. Both in their votes today, and by their deliberations in the weeks ahead. Thank you.

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