7. The economic history of Hong Kong can be summed up very simply. Manufacturing formed the backbone of our economy for three decades from the 1950s. During those years, the made in Hong Kong" label came to mean high-class fashions instead of cheap textiles. This transformation became a symbol the world over of our determination to lay the foundations of the economic and social success we now enjoy. But, over the past 15 years, we have undergone a second revolution in the way we earn our living. By last year, 72 per cent of our total workforce was employed in the services sector, and 83 per cent of our GDP came from services. Even if we exclude the public sector, services still account for an astonishing 73 per cent of GDP. So swift has this change been that it has taken us policy-makers time to catch up with the new economic reality. Perhaps in a free-market economy, this was inevitable. Entrepreneurs and markets, and not Financial Secretaries, must lead economic change. I believe that the time has come to give the services sector the place it deserves in our economic policies.
8. Let us be clear about what we mean by a service economy. Quite simply, it means that we now earn our living by selling our skills, our creativity, our enterprise, our professionalism and our reputation for integrity. To put it another way, we have moved up market as an economy and as a community.
9. And we have put our prosperity to good use by investing in our social as well as our physical infrastructure. As a result, we have increased our recurrent spending on health, welfare and housing programmes by 117per cent in real terms in the past ten years.
10. The results of these improvements are self-evident. For example,
Later in my speech, I shall have more to say on our future prospects and how we must build on past achievements. We cannot rest on our laurels. Past success is no guarantee of future prosperity.
12. Over the last forty years, Hong Kong has developed its own way of managing its economic and social affairs. We have our own blend of enterprise and regulation, our own balance between the public and the private sectors, our own formula for individual liberty and social responsibility. I do not think it is going too far to say that there is a distinct Hong Kong model of economic and social development. We might describe this model most simply as a commitment to markets and enterprise but with a recognition that, for these to work fairly and effectively, the Government cannot be passive. The community wants vigour and inspiration from its government, not lethargy.
13. The Government's contribution has been:
14. There is no better testimony to the success of the Hong Kong model than the simple fact that we have enjoyed unbroken economic growth since we began to compile GDP figures in 1961. Of course, growth in some years has been faster than in others. We achieved a real GDP growth of 4.6 per cent last year. This outcome, though lower than we had originally hoped, was still robust. Growth was dampened by a sharp slowdown in domestic consumption and reduced private sector building activity as the property market consolidated. We experienced, as in the past, a cyclical adjustment following a period of particular buoyancy in these two areas.
15. Nevertheless, total exports of goods grew by 12 per cent in real terms. Imports of goods, however, grew more rapidly, by 14 per cent in real terms. The visible trade deficit thus widened to ten per cent of the value of imports, somewhat above the average for the past decade. This increased deficit reflected in part a 15 per cent increase in retained imports of raw materials for production and infrastructure construction, and in part an impressive 20 per cent growth of investment in machinery and equipment. We should draw considerable encouragement from this fact. Our balance of trade has deteriorated principally because we have been investing in the expansion of our productive capacity. In due course, this will show itself in increased output, a growth in exports and higher GDP. We should also draw encouragement from an 11 per cent growth in real terms in our exports of services, and from the fact that the substantial invisible trade surplus largely offset our visible trade deficit.
Inflation
16. The average rate for inflation during 1995, as measured by the CPI(A), was 8.7 per cent. Underlying this was a sharp fall, from 10.1? per cent in January to 6.6 per cent at the end of the year. The easing of inflation owed a great deal to the way in which the US dollar gained strength in the latter part of the year. Also contributing were more stable world commodity prices, as well as a significant moderation in China's inflation. In addition, locally-generated inflationary pressures eased. Specifically, rents and labour costs moderated, while the prices of consumer goods softened.
The Labour Market
17. Last year, we experienced an uncomfortable rise in the rate of unemployment. The increase in the number of people looking for jobs was caused not so much by the lower than expected rate of GDP growth, but was largely a consequence of changes in the labour supply situation.
18. We cannot be complacent about the employment situation, low though our rate is by international standards. In the latter part of the year, the private sector was still reporting 50,000 vacancies. Thus, the problem seems to be less a lack of jobs than a mismatch between the skills on offer by the unemployed and the skills required by potential employers. I shall have more to say on this mismatch and how we can overcome it later in my speech.
The Residential Property Market
19. The residential property market continued to consolidate during 1995. I now believe that, following the successful implementation of the measures devised by the 1994 Task Force, the property market has stabilised. By the end of the year, average prices for residential flats were 24 per cent lower than the peak levels reached in the early part of 1994. Although prices were some 20 per cent above the levels seen at the end of 1992, they were still lower in real terms than three years earlier. Thus, flats have become generally more affordable to home-buyers, and speculation has subsided. The ground has been laid for the healthy development of the market in the future.
Financial Markets
20. Our financial markets performed well in 1995.
The Exchange Fund
22. As Members know, the Administration is committed to openness and transparency in the operations of the Exchange Fund. Last year, for example, we increased the frequency with which we publish information about the Fund. We are now doing so quarterly. I am happy to take this opportunity to inform Members that the underlying foreign exchange assets in the Exchange Fund rose again in the last quarter of 1995. They now stand at US$57.2 illion. This is 12 per cent higher than the corresponding total for the year before. These are impressive figures indeed.
23. I will complete my review by providing Members with details of our public finances for the financial year 1995-96. We are now forecasting a deficit for the current year of $2.5 billion. This is virtually the same as the deficit we originally estimated. In overall terms, this outcome has arisen because a reduction in revenue of $8.2 billion has been offset by an underspending of $8.3 billion. However, the original estimates for both revenue and expenditure included the Post Office and the Office of the Telecommunications Authority. During the year, these became trading funds. As a result, we have to account for their revenues and expenditures in the books of the new Trading Funds rather than, as previously, in the General Revenue Account. After eliminating the effect of this accounting change, revenue for the year is $6.4 billion less than originally estimated, while underspending amounts to $6.6 billion.
24. On the expenditure side, there are two main reasons for the underspending.
26. On the revenue side, we have seen a shortfall in both capital and recurrent revenues as a result of two main factors:
[1996-97 Budget Speech]