THE 1997-98 BUDGET


Speech by the Financial Secretary
The Hon Donald Tsang OBE JP

moving the second Reading of the Appropriation Bill 1997

Wednesday, 12 March 1997




662K Zip file - Click here to download the complete set of


Speech by the Financial Secretary The Hon Donald Tsang OBE JP

Mr President,


An Historic Occasion

        I move that the Appropriation Bill 1997 be read a second time.

2.     With this short conventional phrase, we begin deliberation of what, by any measure, is a rather extraordinary Budget. After all, 1997 is a very special year for Hong Kong. The eyes of the world will be upon us as we set out on our historic journey.

3.     As we gather here today, we are a dependent territory which has been under British Administration for 150 years. In a little over three months' time, and indeed for most of the period covered by this Budget, we will be a Special Administrative Region of the People's Republic of China. This is a defining moment in our history.

4.     My underlying theme this afternoon will be the need for Hong Kong to find a balance between continuity and change during this exceptional year. We need continuity for our existing policies and programmes which support our economic and social progress. But with our dynamic society and fast-moving economy, we cannot afford to stand still. We must improve, we must grow. We must move forward. Fortunately, our healthy public finances and robust economic prospects have made the task of finding the right balance somewhat easier.

5.     The Budget I am presenting this afternoon is unique because it is a transitional one, a Budget specially designed to meet the circumstances of 1997. It must respond to the far-reaching consequences of the resumption of the exercise of sovereignty and the creation of the Special Administrative Region. This Budget seeks to fulfil that historic mission. At its most basic level, it provides continuity both in terms of our fiscal framework and in terms of our public services. At the same time, because of the unique circumstances of its preparation, the Budget operates on a higher plane to show how we can work together with China and fulfil the promises of the Joint Declaration and the Basic Law. To achieve this goal, we have drawn up a Budget which not only follows strictly our traditional principles of prudent financial management, but also complies with the provisions of the Basic Law which will come into effect on 1 July.

Speech Structure

6.     This afternoon, I will start by reporting on the consultation process which has produced this Budget. I will then discuss the role of the Basic Law in underpinning the Budget and in promoting our future prosperity before turning to the Government's major spending programmes. I have already presented a detailed review of how the economy performed in 1996 and what we can look forward to this year in two speeches I made, the first in December and the second last month. So, unlike last year, I will only briefly outline our economic performance and prospects.

7.     I will also describe the major improvements we propose to make to our services. This review will be followed by a report on the public finances, including the forecast outturn for 1996-97, the estimates for 1997-98, and the Medium Range Forecast up to the early part of the next century. This will set the scene for my revenue proposals.

8.     As I did last year, to conclude my Speech, I will outline my main points and proposals in Cantonese.


9.     Because this is a transitional Budget, the British and the Chinese Sides needed to go through a process of consultation in order to achieve a unified Budget for the whole financial year.

The Joint Liaison Group

10.     As Members will recall, a Budget Expert Group was established in 1995 under the Sino-British Joint Liaison Group to deal with the transitional Budget and related matters. When we started these consultations, the sceptics predicted nothing but bad news. The reality has proved to be very different. The Budget Expert Group has worked throughout in a co-operative spirit. Its discussions have been pragmatic and constructive. And it has reached rapid consensus at every stage. Members will have noted the repeated public declarations by the Chinese Side over the last year that their involvement in the budget process was unique. They have made clear that after 30 June 1997, preparation of the annual Budget will be a matter entirely for the Special Administrative Region and its Government in accordance with Article 106 of the Basic Law. These declarations have been very helpful in reassuring both the local and the international community.

11.     In this year of transition, it would have been all too easy to send the wrong signals about the future of our economic and social policies, budgetary principles and business practices on which Hong Kong has built its past success. Thus, throughout the budget consultations, we had four objectives.

12.     I am able to present before Members today a Budget which both sides have agreed in the Budget Expert Group. I believe that the two sides were able to reach agreement for two reasons. First, we had a shared commitment to a smooth and successful transition. Second, we had a shared understanding that the Basic Law’s provisions should guide the drawing up of this year’s Budget. I hope that by the time I have finished speaking, Members will agree that we have met the objectives which we set ourselves in these consultations.


13.     I should now like to explain the important part played by the Basic Law. Its 160 Articles define our constitutional framework, our political institutions and the shape of our future from 1 July. In particular, they will guide our economic policies. 42 Articles refer directly to economic issues and another 28 are related to economic development. By my count, 44 per cent of the Basic Law’s provisions are designed to lay down the economic rules of the Special Administrative Region and to describe how Hong Kong’s separate economic system will continue to flourish. (I should like to mention here that the full text of the Basic Law Articles to which I refer this afternoon is shown in the supplement to the printed version of this Speech.)

14.     The most important of these is Article 5. It states: “The socialist system and policies shall not be practised in the Hong Kong Special Administrative Region, and the previous capitalist system and way of life shall remain unchanged for 50 years.” This is a clear pledge that Hong Kong will continue to enjoy free, open and competitive markets which are not controlled by state planning or state direction.

15.     Plainly, I cannot review the Basic Law in detail this afternoon. Instead, I will concentrate on just three of its economic features:

A Centre for International Business

16.     Hong Kong’s domestic economy is too small by itself to provide the standard of living the community expects. That is why we look to sell our goods and services throughout China, around the Asian region and to the rest of the world. As a result, we now have a GDP per head of US$24,500. We will only be able to sustain our impressive record of economic growth in the years ahead through attracting as large a share as possible of the world’s trade and investment transactions.

17.     In recent years, our performance as an international business centre has won very high marks from independent and prestigious authorities.

18.     The Basic Law, in Articles 109, 112, and 114, offers a commitment to Hong Kong’s continuing role as a centre for international business. They define Hong Kong as serving the needs of international business in three ways:

These three Articles are a clear pledge to the 2,300 foreign firms which, by the middle of 1996, had set up regional headquarters or offices here. They pledge that Hong Kong will continue to provide a favourable trading and investment environment for its overseas partners. Above all, they pledge the continuity which the international business community is seeking from 1 July.

Financial Prudence

19.     The Basic Law is not only committed to providing a business-friendly setting for international trade and finance. It also offers a guarantee of financial prudence in Article 107. This Article promises that Hong Kong will not abandon its tradition of avoiding deficit budgets. And it does not allow government spending to outstrip the overall growth of the economy. This guarantee of financial prudence is reinforced by Article 108 which identifies “the low tax policy previously pursued in Hong Kong” as a benchmark for the future.

20.     Hong Kong should have no difficulty in complying in full with these provisions of the Basic Law.

Article 107 and its guarantee of financial prudence is an important reassurance for entrepreneurs and investors, both here and overseas. It is a guarantee that there will be no change from 1 July in either the philosophy or the policies which have enabled Hong Kong to create Asia’s most attractive business environment.

Economic Autonomy

21.     At the same time, entrepreneurs and investors need to know what a high degree of autonomy will mean in practice for the economy. In particular, how much autonomy the Special Administrative Region will have in its trade and financial relations with the rest of the world.

22.     Three Articles in the Basic Law define Hong Kong’s future economic autonomy. Article 106 states: “The Hong Kong Special Administrative Region shall have independent finances.” Article 110 states: “The monetary and financial systems of the Hong Kong Special Administrative Region shall be prescribed by law.” Article 115 states: “The Hong Kong Special Administrative Region shall pursue the policy of free trade and safeguard the free movement of goods, intangible assets and capital.”

23.     These Articles have a clear message.

These three Articles do not impose new or difficult demands on us. On the contrary, they are a promise that Hong Kong’s best practices will continue into the future. They enshrine in law Hong Kong’s winning formula for economic success in the past. They will prove even more important in ensuring our future prosperity.

24.     These provisions of the Basic Law are of special importance in allowing Hong Kong to protect its standing in world markets. Without the economic autonomy they confer, we would not qualify for membership of such international bodies as the World Trade Organisation, for example, or the Bank for International Settlements, the Asian Development Bank, the World Customs Organisation and APEC. These are the key forums shaping the future of the global economy. As the world’s eighth largest trading economy, the ninth largest exporter of services and the fifth largest foreign exchange market, it is vital for Hong Kong that our voice is heard in their deliberations. That our views influence their decisions. The British and the Chinese Sides have agreed the necessary arrangements to continue Hong Kong’s separate membership of such bodies from 1 July in accordance with Articles 116 and 151 of the Basic Law. And we are already taking full advantage of the opportunities offered by membership of these organisations.

The Four Pillars

25.     I have tried to sum up the spirit of the separate economic system which the Basic Law is pledged to safeguard in what I have often called Hong Kong’s “four pillars of wisdom”. These are the rule of law, a level playing field, corruption-free government and the free flow of information. To ensure the rule of law, the community must live by laws that are public, laws that apply to all and are enforced by courts which are fair, open to all and independent. A level playing field is crucial for competitive markets and efficient business. It means that contracts are awarded fairly and equitably. No favours. No patronage. A corruption-free government is essential to preserve the rule of law and a level playing field. Without a total commitment to integrity, the Civil Service will not command the respect of the community or win its co-operation. Finally, the free flow of information is the lifeblood of a modern service economy. It leads to transparency and accountability in both the public and the private sectors. It is the best protection against corruption and abuse of power, not only by Government but in the business world as well.


26.     At this point, I should like to focus on the resilience of our economy and its ability to adjust to changing political as well as business conditions. A major reason we have almost doubled our GDP in real terms since 1984 is the momentum of economic development in the mainland of China over this period. Hong Kong has been uniquely placed to take the fullest advantage of the business opportunities created by economic modernisation and the "open door" policies.

27.     At the same time, we should not ignore another, peculiarly Hong Kong factor. Hong Kong has long had a clear understanding between the Government and the business community that business decisions are best left to entrepreneurs and investors. The Government's job is to provide the right environment for business to grow. We do not pretend to be better at forecasting the nature and trends of market demand than businessmen risking their own capital. Unlike some others in Asia who were caught by the slump in the electronics industry, Hong Kong emerged in good shape from 1996.

Future Forecasts

28.     I now turn to 1997. We believe that China's economic policies will continue to produce relatively high growth rates combined with good control of inflationary pressures. We also anticipate steady, or in some cases better, performance in a number of OECD and Asian economies which trade with us and China. Locally, we anticipate a further strengthening in consumer demand. Taking these factors together, as I explained last month in some detail, we are forecasting for this year:

29.     Thus, as Members can appreciate, 1997 promises to be another year of sound, sustainable growth. This will ensure solid growth in employment, new business opportunities and good profits across the economy as a whole. But the slight pick-up envisaged in inflation is a reminder that when a mature economy like ours is growing at a rate close to full capacity, there will inevitably be pressures on both our labour and our land resources. Indeed, we have already seen pressures building up faster than we would prefer on the property market in particular. (I will return later in my Speech to how we can tackle property prices.) To contain these pressures, we will have to continue our battle against inflation. This underlines the importance of the Government maintaining the tightest control over public spending and pursuing maximum value for money throughout the public sector. It also means doing everything possible to raise productivity and enhance business efficiency.

Helping Business

30.     At which point I turn naturally to the subject of helping business, one close to my heart. I should now like to explain how this transitional Budget has tried to respond to the needs of the business community. Hong Kong thrives by deliberately leaving as much room as possible for enterprise and innovation. Our low, simple and predictable tax regime is rightly famous. The level of government regulation of trade and investment is the lowest in the world. But there is no room for complacency. I believe that we should adopt an active strategy to maximise our growth prospects. Thus, in last year's Budget, I announced a package of new measures to support business and to make government procedures more user-friendly.

31.     Over the past 12 months, the Secretary for the Treasury, supported by the Efficiency Unit, has led a special task force to make sure that the Hong Kong Government is truly "business friendly". The task force has completed the seven pilot studies which made up the first phase of the Helping Business Programme. We are now implementing the recommendations.

32.     In December, I formed a Business Advisory Group comprising eleven top businessmen plus six senior government officials. The Group will set the agenda for the second phase of the Programme. We will look at ways to cut red tape further and reduce over-regulation. We will examine ways to measure, and then reduce, the cost of complying with government requirements. We will see what more scope exists for services now performed by the Government to be taken up by the private sector. In all of this work, we will listen very closely to the private sector's needs and respond as best as we can.

Services Promotion

33.     Last year, I also drew attention to the changing nature of our economy and the growing importance of the services sector. Since August 1995, I have chaired a Task Force on Services Promotion, taking advice from a group of businessmen.

34.     Attached to the 1996 Budget was an Addendum which set out specific proposals covering the major service industries. As is the way in Hong Kong, things have progressed very rapidly. For example, we have:

Overall, we have achieved over 90 per cent of our original target. The record is impressive. Full details, including our plans for the coming year, are in the Final Report of the Task Force which is published today to mark the end of its work.

35.     Nor have others been idle. For example, a year ago, I asked the Trade Development Council to add the task of promoting Hong Kong’s trade in services to its other responsibilities. The Council has responded to this challenge with gusto. Already it has developed a long-term strategy which emphasises both the breadth and depth of Hong Kong’s quality services. In 1996-97, it spent over $28 million on a promotional campaign. In the coming year, it will spend nearly $30 million. The Export Credit Insurance Corporation and the Hong Kong Productivity Council have also played their part. Again, full details of these initiatives are given in the Final Report.

36.     I have been impressed too by progress made by the Stock Exchange and Futures Exchange in developing and marketing new products. For example, the introduction of pound sterling futures contracts and the preparations for the launching of regional derivative warrants and convertible bonds. I welcome these developments which enhance our position as an international financial centre. I would be willing to consider favourably, on a case-by-case basis, what incentives new products might enjoy including possibly some form of stamp duty concession.

37.     Similarly, with stamp duty on stock transactions. I remain prepared to review the stamp duty rate once the industry has finalised its plans to reduce brokerage charges.

38.     Publication of the Task Force's Final Report does not mean our work is finished. On the contrary, it is just beginning. I intend to form a new high level Services Promotion Strategy Group to give an overall steer on the way forward. To make sure Hong Kong remains the services centre par excellence in the region, and indeed the world. Its members will include senior representatives from the Trade Development Council, the Coalition of Service Industries and Chambers of Commerce. It will hold its first meeting next month.

New Unit

39.     It is vital to maintain the momentum. I am personally committed to seeing that the initiatives we have launched are taken forward with full vigour. So, I propose to create a new unit to take responsibility for both Helping Business and Services Promotion and have identified the necessary resources. This Unit will not be some far flung quango. It will be part of my own office and its head will report directly to me.

Building the Infrastructure

40.     While changes to the institutional arrangements are taking place, we have continued to strengthen our infrastructure. For example, we are pressing ahead with the modernisation of our transport facilities.

41.     We have also made good progress on the initiatives I announced last year to create an advanced technology base.


42.     In finding the right balance between continuity and change, we have to respect our social values, as well as recognise our economic priorities. Rightly, Hong Kong expects its living standards to improve and the Government to upgrade the range and quality of public services each year.

Housing: Improving the Supply

43.     One of the most important of these is housing. It is probably the item which comes highest on a family’s agenda. Over the last five years, in partnership with the Housing Authority, we have increased spending on housing by 34 per cent in real terms. In 1997-98, total public spending on housing will be $32.1 billion. This represents an increase of 16 per cent in real terms over 1996-97.

Building More Homes

44.     Largely as a result of this substantial investment, about 63,000 new flats will become available in 1997-98. Of these 21,500 will be public rental flats, 16,000 will be subsidised flats for sale and 4,000 will be flats for the Sandwich Class Housing Scheme operated by the Housing Society. The rest, that is 21,500, will be produced by the private sector.

Land Supply

45.     However, demand for housing still outstrips supply. The only really effective long-term solution is for the Government to produce more land for residential development. In the last five years, we have made available 257 hectares of land for public rental and subsidised home ownership flats, and another 145 hectares for private development. Over the next five years, we plan to release another 327 hectares for public and 260 hectares for private housing – an increase of 46 per cent over the previous five years. But I recognise that we must try to do even more. So, I have decided to chair a special task force to look at land supply and its impact on infrastructure and housing development. The relevant policy secretaries will join me in this new initiative. We will start our work shortly.

46.     Hong Kong has made remarkable progress in providing adequate shelter for our community. 47 per cent of our households live in public housing. And as standards of living have risen, more and more people aspire to owning their own home. We will step up our efforts to help them achieve this ambition. Over the next two years, as a result of our recent injection of $1.38 billion into the Housing Society's Sandwich Class Housing Loan Scheme, we will be able to provide loans to a further 3,000 families.

The Pressure on Prices

47.     In the meantime, until the additional land is available, there continues to be pressure on property prices. We are constantly reviewing market conditions. We are already taking action against speculators using companies to buy flats and resell them shortly afterwards. The Inland Revenue Department is tackling this problem vigorously by charging Profits Tax on any gains from these trading-type transactions. I welcome the steps which the Real Estate Developers Association is taking to inhibit speculation. And the Hong Kong Monetary Authority will continue to encourage financial institutions to take a prudent and responsible attitude towards mortgage lending.

Improvements in Key Services

48.     In addition to housing, this community quite rightly attaches importance to the education of its children, to the provision of adequate health and welfare services and to the maintenance of law and order. In recent years, we have been able to make major improvements in these services. Unlike most advanced economies, Hong Kong has not had to increase the burden on the taxpayer in responding to the public's rising expectations. On the contrary, we have been able to reduce taxation while at the same time making significant improvements. We have been able to afford these because our economic growth has generated the necessary wealth to do so.

49.     I am happy to tell Members that in 1997-98 we can build on our past achievements. We can, once again, use some of the additional resources produced by our continuing economic growth to make life better for our community. In deciding how best to meet the community's aspirations, I have consulted widely. Members of this Council have been as generous as ever with their comments and suggestions. I have also benefited from the views and advice of a wide range of professional associations and interest groups. This has made a difficult task considerably easier. I hope that, like last year, Members will be able to identify the contributions which they have made in shaping our spending plans.

Education : Investing in Quality

50.     In education, our priority must be to maintain and upgrade the quality. In recent years, Hong Kong has faced the challenge of change socially, economically and technologically. As a result, the community has become increasingly concerned about whether our education system can produce young people with the right professional, technical or vocational qualifications and skills to sustain the development of Hong Kong into the next century. These concerns are shared by parents, educators, employers and the Government alike.

51.     In 1997-98, our total expenditure on Education will exceed $45 billion - an increase of 7.7 per cent in real terms over 1996-97.

Basic Education

52.     We will devote additional resources to improving basic education. We will, for example :

Tertiary Quality

53.     Last October, the University Grants Committee completed a comprehensive review of higher education in Hong Kong. This sets the direction for tertiary education in the future. We agree with the main recommendations in the report.

Students with Special Education Needs

54.     In this quest for quality in our basic and higher education, we must not lose sight of the needs of another group of children who deserve additional support. The Board of Education has made a number of valuable recommendations about what should be done to improve the opportunities for children with special educational needs. We will spend $30 million in 1997-98 on improvements including the provision of additional staff and increased school grants for the upgrading of facilities and activity programmes in special schools.

Language Skills

55.     Last year, I dedicated a special section of the Budget to measures aimed at improving language skills. Such skills are vital to our success as a Special Administrative Region of China, as well as our role as an international centre for business. I believe more needs to be done this year. In 1997-98, we will spend almost $42 million on raising the standard of language training in our schools by:

56.     As for our universities, Members will recall that last year we provided $68 million to raise the language standards of these students. This year we will spend another $78 million. Our universities can also send a clear signal about the need for higher language standards by only accepting, as a general rule, students who meet the language requirements in their Advanced Level Examinations.

A Well-Trained Workforce

57.     In addition to the necessary language skills, we need to intensify our efforts to ensure that we have a workforce well-trained to meet the needs of our changing economy. We have reviewed the role of the Employees Retraining Board and the Vocational Training Council. And we are now mapping out a comprehensive strategy for manpower training and retraining to meet the needs of the 21st century.

58.     In the meantime, we have recently injected $500 million into the Employees Retraining Board to enable it to sustain its retraining programmes to assist local workers to rejoin the labour market and to extend the scheme to cover new immigrants.

A Caring Community

59.     Our society has remained loyal to its traditional values. Families do all they can to look after their elderly members, those with a disability or the relative who is sick. These are important values which we must preserve. At the same time, Members of this Council and the vast majority of the people of Hong Kong want this to be a caring community. They want us to provide all the support necessary for those whose families are unable to care for them or who need help to do so. And we offer them this support through our extensive health and welfare services.

60.     On welfare, our record is impressive. We have increased our expenditure on welfare by 88 per cent in real terms over the past five years. It will increase by a further 9.1 per cent in 1997-98 to $21.2 billion. On health, our spending in 1997-98 will total more than $28 billion - an increase of 5.7 per cent in real terms over 1996-97.

The Elderly

61.     The group for which this Council and the community have expressed the greatest concern is the elderly. We share this concern. That is why, in addition to the financial assistance we provide, we are constantly improving our continuum of care for elderly people. For example, in 1997-98 we will:

62.     We will also relax, from 1 April this year, the residence requirement for elderly people who retire to Guangdong. They will be able to receive their monthly standard Comprehensive Social Security Assistance (CSSA) payments there. This will, in the words of a Chinese proverb, help those who like falling leaves wish to return to their roots.

Others in Need

63.     Other groups also need our support. In 1997-98, we will further expand our services by, for example :


64.     Our health service has made huge strides in recent years. But the community expects us to raise the standards of healthcare still further. I have just mentioned the increase in our health spending of 5.7 per cent in real terms in the coming year. In 1997-98, we will for example:

65.     We are also undertaking a comprehensive review of our healthcare system. We will explore financing options to see how best to balance the costs of care between the individual and the community as a whole. We will also examine the interfaces between primary and hospital care and between public and private healthcare.

New Arrivals

66.     This brief description of our support services would not be complete without mention of one other group. In 1996, around 60,000 new arrivals from the mainland made Hong Kong their new home. I believe that most of them, like generations of immigrants before them, adjust quickly to life here. But as a caring community, we should help them integrate as smoothly as possible.

67.     Programmes to help the new arrivals begin the moment they arrive. For example, they are offered general advice and assistance at Hung Hom Railway Station. They are given information directories, in simplified characters, on the services available to them. We offer special orientation programmes, as well as counselling and referral services. Around 30,000 new arrivals in 1996 benefited. As for the children, we help them fit into our schools with special support services and remedial English programmes. In 1997-98, we will spend a total of around $168 million on these children – an increase of over 150 per cent in real terms over 1996-97.

Law and Order

68.     Hong Kong people need to feel safe as they go about their daily lives. We are fortunate that this is one of the few places in the world where the crime rate has gone down. In 1996, the overall crime rate was 19 per cent lower than that in 1991. And, even more reassuring, the rate of violent crime was 29 per cent lower. This makes us a much safer place to live and work than other major cities like London, New York, Tokyo or Toronto.

69.     We need to ensure that our excellent Police Force can continue to provide a secure environment. In 1997-98, we will be putting around 600 additional police officers on front-line operational duties. For example, these extra officers will staff the new police districts at Chek Lap Kok and North Lantau, patrol roads and highways across the territory and strengthen Crime Wing Headquarters. To help officers do their jobs even more efficiently, we will spend nearly $70 million on computers, enhanced communication systems and new high-speed, anti-smuggling boats.

70.     This afternoon, I am only able to touch on the highlights of what we plan to do in the coming financial year. Plans to improve the well-being of our families by upgrading our housing, social service and security programmes. I know that many will tell us that the Government should do more. More for the least well-off and more for the groups most at risk. But I hope I have said enough to demonstrate that this is an Administration which is very conscious of the community's concerns and which will indeed strive to do more.


71.     I come now to a review of Hong Kong's public finances. As we enter the run-up to the transition, I am able to report that our financial position is very strong. Our economic prospects are somewhat better than last year. Our fiscal reserves are buoyant. We will start life as a Special Administrative Region in an extremely favourable position.

The 1996-97 Outturn

72.     I am now forecasting a surplus for 1996-97 of $15.1 billion. This is a substantial increase over the $1.6 billion I originally estimated in my 1996 Budget. Revenue for the year is $6.6 billion more than originally estimated, while underspending amounts to $6.9 billion.


73.     On the expenditure side, there was an underspending of $5.5 billion from the Capital Works Reserve Fund. This amounted to 15 per cent of the original Capital Works Reserve Fund estimate. We missed our expenditure targets for capital works projects by $2 billion; for purchase of premises by $2 billion; and for land acquisition by $1.5 billion. The last was because of delays in land resumption and clearance. On purchase of premises, I should explain that the original estimate for 1996-97 included a sum of $750 million for the purchase of office accommodation for the Legislative Council Secretariat which we had advanced to 1995-96. In addition, we experienced some slippage in identifying suitable premises for welfare facilities. But we shall do our best to catch up in the coming year. If we just look at the delivery of capital works projects, our spending has been much nearer to our original estimate. Total spending on these projects was only about 6 per cent below the original estimate, a considerable improvement over the much higher levels experienced five years ago.


74.     On the revenue side, we have seen increases in both recurrent and capital revenues for two main reasons.

75.     While additional revenue is always welcome, these increases come from two particularly volatile sources. It would not be wise for me to anticipate that this boost to our finances would be maintained over the medium term.

The 1997-98 Estimates

76.     In drawing up this year’s programme of expenditure we have, as always, followed the budgetary guideline that government expenditure, over time, should grow at a rate no faster than the economy. I have already highlighted some of the major new and improved services which we shall be introducing in 1997-98. When Members examine the detailed draft Estimates of expenditure at the special meetings of Finance Committee, they will see that we are proposing a host of other improvements which are too numerous to mention this afternoon.

77.     When account is taken of all additional spending initiatives to be introduced in 1997-98, I estimate that government expenditure (excluding payments from the Capital Investment Fund) will total $202.2 billion. This is an increase of $24.5 billion over the revised estimate for 1996-97.

78.     After adding forecast payments from the Capital Investment Fund of $0.8 billion, total expenditure will amount to $203 billion.

79.     On the revenue side, after the various tax and duty changes which I will detail shortly, I am forecasting total receipts in 1997-98 to be $234.7 billion – an increase of $32.4 billion over the revised estimate for 1996-97. As I explained in last year’s Budget, we can expect a sharp growth in revenue for two reasons. The first is the additional revenue from the collection of rents in accordance with Annex III of the Joint Declaration and Article 121 of the Basic Law. The second arises from the accounting changes to the treatment of income received from land transactions. From 1 July 1997, all such income will be retained by the SAR Government (rather than shared between the Government and the Land Fund).

80.     I am forecasting an overall budget surplus for 1997-98 of $31.7 billion. This is a huge figure, and one which warrants some explanation. To do this, I must refer to the Medium Range Forecast and the forecast of our financial position for the next few years.

Medium Range Forecast

81.     I have published the Medium Range Forecast in Appendix A to the printed version of this Speech, covering revenue and expenditure for the next four years. Its objective is to assure this Council and the community that the proposals in today's Budget are affordable not only in the context of the next financial year, but also over the medium term. The projected surplus of nearly $32 billion is equivalent to almost 16 per cent of forecast expenditure. So today's proposals are clearly affordable. Indeed, in the context of the coming year, they are extremely conservative. However, if we look beyond the next financial year and review the arithmetic for the period 1998-99 to 2000-01, we can see a strong case for caution.

82.     These three years should show a combined surplus of $58.9 billion. However, there is one major omission from the Medium Range Forecast. It does not take into account the substantial contributions that may be needed for the high priority projects under the Railway Development Strategy. The Medium Range Forecast does not cover this item because the precise amount and the timing of the contributions are not yet clear. However, it would be imprudent of me not to warn this Council of the huge capital investments which may be needed during this period.

83.     Over the past three years, 1994-95 to 1996-97, we have contributed $49 billion to the Airport Authority and to the Mass Transit Railway Corporation to help finance the construction of the airport and the airport railway. The SAR Government may well need to contribute a similar sum between 1998 and 2001 towards the construction of the high priority projects under the Railway Development Strategy.

84.     While the various options are still being examined, it would only be prudent to earmark a sum of this magnitude to meet the potential funding for these projects over the forecast period. A contribution of this size would take up virtually all of the surpluses I am forecasting for the period.

85.     Against this background, the large surplus forecast for 1997-98 should be viewed as a one-off and is, therefore, misleading. We have to look with caution on 1997-98 as a unique year: falling after the completion of our contributions towards the cost of the airport and the airport railway and before our contributions to the Railway Development Strategy.

86.     Earlier this afternoon, I warned of the need to take every precaution in the coming year to keep inflationary pressures under control. With the pick-up in the rate of GDP growth we are forecasting for 1997, it is even more important than usual to stick to our budgetary guidelines and to keep public expenditure under the tightest possible control. From a macroeconomic viewpoint, the exceptional surplus which I am forecasting for the next financial year represents a very fortunate windfall for our efforts to hold back the pressure on prices.


87.     I bring a similar spirit of caution to my revenue proposals. Hong Kong has never had an appetite for dramatic fiscal reforms. A transitional Budget tends to reinforce this sentiment. In addition, our revenue arrangements should conform with the Basic Law. They should support Hong Kong's role as a centre for international business, and they should reflect our commitment to financial prudence and economic autonomy. These considerations set the parameters for examining possible revenue proposals. The end result is a number of significant tax concessions which I am recommending to this Council for adoption. But let me first set out the areas in which I propose to make no changes.

Areas of No Change

88.     In framing my revenue proposals, I have considered carefully all the advice I have received from Members of this Council, as well as the views and suggestions from professional groups, business associations and other bodies. I have been happy to accept some of these proposals. Others I have not been able to endorse, and I should like to explain my thinking on some of the more important ones.

Tax Relief for Housing

89.     Some Members have again called for a tax allowance to cover spending on mortgage interest or even rental payments. Some have suggested that we should at least provide some form of tax concession for first-time home buyers. Let me say here that I have considerable sympathy with the family which is investing a substantial part of its monthly income in buying its own home. It is also a government objective to encourage as many families as possible to become home owners. Nevertheless, it would be wrong in principle to create a general tax concession, regardless of the individual family's needs, to cover investment in housing.

90.     Any help which the Government provides to promote home ownership should be given specifically to those families which need such assistance. For this reason, we have established the Home Ownership Scheme, the Sandwich Class Housing Scheme and the Private Sector Participation Scheme. These have already helped some 220,000 households to buy their own homes. I believe that these programmes are far more effective than tax relief would be. I also urge Members to look at the way in which home ownership has expanded even in the absence of tax concession for mortgage interest. Between 1991 and 1996, the number of households owning their own home rose by 22 per cent. Today, more than 50 per cent of households own their own home.

91.     Although I am not convinced that we should introduce a tax allowance for housing expenditure, I will discuss later one concession which will help to relieve the financial burden on home buyers.

Profits Tax

92.     I do not propose to make any changes this year to the level of corporate Profits Tax. By comparison with our competitors in the region, our level of Profits Tax is already very low. We are still highly competitive even when we look at their effective tax rates (that is, the actual tax paid after all tax concessions and deductions have been applied).

93.     During my consultations with Members of this Council, I found that views on this subject were mixed. Some Members asked for a reduction. Others asked for an increase. Some even suggested a progressive rate.

94.     My personal view is that a case can be made out for a comprehensive review of Profits Tax to examine whether we can make our tax system and business environment even more competitive. This review will proceed next year. We will include in our review the question of depreciation allowances which I referred to in my Budget Speech last year.

Duty Adjustments

95.     I turn now to a small number of areas on the revenue side where I propose modest increases. To maintain the real value of the duty charged on fuel, tobacco and methyl alcohol, I propose to raise the duty rate by 6 per cent, in line with the rate of inflation. This will bring in additional revenue of $430 million in 1997-98 and $1.9 billion up to 2000-01.

A Dividend for the Community

96.     And finally, the part I suspect most people have been waiting for - tax reductions. In drawing up my proposals, I have had to balance two considerations. The first is the need for financial prudence. I am very conscious of our obligation to ensure that the SAR Government is in the strongest possible financial position on 1 July. The second is the case for the people of Hong Kong to enjoy a fiscal dividend from the success they have created.

Salaries Tax

97.     I believe that, given our strong financial position, it is right to reduce Salaries Tax once again. I propose the following wide range of concessions.

98.     In deciding on these Salaries Tax concessions, I have stuck to the principle of targeting the groups that need them most. In a caring community which respects traditional family values, the tax system should recognise the special difficulties faced by single parents or families caring for relatives, particularly those with a disability. The size of the concession for the training expenses is part of our effort to keep Hong Kong a premier centre for business by encouraging the work force to upgrade its professional and technical qualifications.

99.     During my Budget consultations, I received a wide range of proposals on the marginal tax structure from Members and professionals in the accounting and taxation fields. With the healthy revenue position forecast, both for 1997-98 and in the medium term, I agree that there is scope for me to revamp the structure. This will give added relief to middle-income salaries taxpayers, especially the “sandwich class”. In framing my tax concessions, I have been very conscious of the needs of this particular group.

100.     Currently, the marginal tax band widths are set at either $20,000 or $30,000. I will standardise them at the level of $30,000. I also propose to rationalise the marginal tax rate by adopting a uniform interval of 6 per cent. This revamping will simplify the structure and make it easier to understand. Let me explain the changes.

101.     This means a taxpayer with a chargeable income of $100,000 will pay nearly 25 per cent less tax. The number of salaries taxpayers who have to pay the standard rate of 15 per cent will also decrease.

102.     The concessions I propose this afternoon will benefit 96 per cent of our salaries taxpayers. Let me give some concrete examples of how I propose to cut the tax bills for individual employees and their families.

103.     During last year’s Budget debate, some Members expressed concern about the consequences of increasing the basic allowance in real terms, that is, at a higher rate than inflation. They argued that the effect might be to make the tax net too small or the tax base too narrow. I have looked carefully at the statistical evidence on this subject. In each of the last five years, we have raised the basic allowance in real terms. Yet the total number of taxpayers, i.e. the tax net, has remained relatively stable, at around 1.4 million. Similarly, the yield from salaries tax, as a proportion of total revenue, i.e. the tax base, has been reasonably stable over the last five years. The explanation for the stability of our tax net and productivity of our tax base lies in our rapid economic growth. Salaries taxpayers occupy the better-paid jobs and have benefited most from the increasing demand for well-qualified and experienced staff. The result is that while an increase in the basic allowance in real terms removes some taxpayers from the tax net, their disappearance tends to be temporary. As their salaries rise, they return to the tax net. I hope that Members will accept my assurance that today’s tax concessions will not undermine the productivity of Salaries Tax as a source of revenue.

104.     I estimate that these concessions will cost $3.1 billion in 1997-98 and $20 billion up to 2000-01. Full details of the concessions are set out in the Supplement to the printed version of this Speech, together with further examples of their effect on different categories of taxpayer.


105.     I said in my Speech last year that we would be carrying out a routine revaluation of rates during 1996-97, with any changes to take effect on 1 April 1997. The general revaluation has been completed and, based on rental values on 1 July 1996, the overall average increase in rateable values is around 17 per cent. Domestic properties show an average increase of 23 per cent and nondomestic properties an average increase of only 10 per cent for the past three years. The rateable values for approximately 8 per cent of properties will actually decrease or remain unchanged.

106.     In formulating my proposals on rates, I have not lost sight of the government rents which some ratepayers will have to pay from July 1997 in accordance with Annex III to the Joint Declaration and Article 121 of the Basic Law. I have also taken into account the financial position of the Urban Council and the Regional Council, their planned programmes of activities and their rates revenue requirements for the next triennium, since their main source of funding comes from rates.

107.     I propose that the overall rates percentage charge should be reduced from 5.5 per cent to 5 per cent. This is an historic low. In the Urban Council area, the percentage for Urban Council rates will decrease from 2.8 per cent to 2.6 per cent and that for the general rates from 2.7 per cent to 2.4 per cent. In the Regional Council area, the percentage for Regional Council rates will go down from 4.4 per cent to 4.2 per cent and that for the general rates from 1.1 per cent to 0.8 per cent. The details are set out in the Supplement to the printed version of this Speech.

108.     After these adjustments, 28 per cent of ratepayers will pay the same or lower rates. About 59 per cent will face an increase of 20 per cent or less.

109.     But there will still be some who will face a relatively large increase in rates even after lowering the overall rates percentage charge. I propose to give these ratepayers some relief by imposing a 20 per cent cap on increases in rates for 1997-98 and for 1998-99. This relief will apply to about 13 per cent of ratepayers in 1997-98. In 1998-99, about 87 per cent of all properties will have no change in rates.

110.     The average increase in rates in 1997-98 for a small private flat will be only $29 per month - an increase of 8.8 per cent. Members will realise that the largest single group of tenants, those living in public rental housing, will not be affected directly by changes in rates. As in the past, the Housing Authority will absorb the effect of rates increases until the next rent review. In practice, public housing tenants will be little affected because rents are revised only every two years and are fixed on the basis of affordability.

111.     As for the business sector, the average rates payment for non-domestic premises will, in overall terms, fall by 3.4 per cent. Industrial premises will enjoy the largest reduction, with an average 17 per cent cut in their rates bill. For offices, the reduction will be a useful 6 per cent on average. Lower rates for business firms are another contribution to ensuring Hong Kong is as user-friendly as possible to business, thus reinforcing our role as an international business centre.

112.     The effect on each class of property is shown in the Supplement to the printed version of this Speech.

113.     The net effect of my proposals on revenue from general rates is that in 1997-98, it will remain at the 1996-97 level of about $6.3 billion, whereas the two Councils' rates will increase from $9.4 billion to $10.3 billion. The cost of these proposals to general rates is $1.2 billion in 1997-98 and $3.4 billion up to the end of the century.

114.     In the last Budget Speech, I also raised the possibility of conducting the general revaluation on an annual basis. The objective would be to introduce smaller rises in rates each year instead of a larger rise once every three years. This is a complex issue which we are still studying. Let me assure this Council that we will carefully consider the views of Members and the public before we take any final decision.

Stamp Duty on Property Transactions

115.     Last year, I made adjustments to Stamp Duty on property transactions in order to benefit buyers of lower to medium-value flats, in particular those bought under the Home Ownership and Sandwich Class Housing Schemes. Increases in property prices have eroded this concession since the last Budget. Because of the Government's commitment to encouraging home ownership, I would like to restore the effect of last year's concession. I, therefore, propose to adjust the threshold values for the various Stamp Duty bands to benefit those buying flats with a value of $4 million or less.

116.     As a result of the proposed adjustments, the Stamp Duty paid on a $2 million flat will be halved, from $30,000 to $15,000. I estimate that about 50,000 property transactions will benefit from the proposal in 1997-98. The concession will cost $620 million in 1997-98 and $3 billion up to 2000-01. Details of the new schedule of Stamp Duty rates are set out in the Supplement to the printed version of this Speech.

Deduction of Foreign Withholding Tax

117.     In the past, we took the view that the Inland Revenue Ordinance allowed a deduction for foreign withholding tax on income subject to Hong Kong Profits Tax only for companies which were controlled and managed in Hong Kong. The deduction would not be available to overseas companies operating a branch here. However, a judicial decision has indicated that foreign withholding tax charged on income or turnover is a legitimate expense, which should be deductible in determining assessable profits whatever the residency status of the company concerned. The Inland Revenue Department is following the judicial decision in its practice. Nevertheless, during the Budget consultations, the tax, accounting and banking professions asked that we clarify the law so as to provide certainty. I, therefore, propose to amend the Inland Revenue Ordinance to reflect the judicial decision and the Department's current practice. This will, I hope, offer another inducement to encourage overseas companies to set up branch operations in Hong Kong, thereby strengthening our status as an international financial centre.

Driving Licences

118.     We now issue driving licences which are valid for one or three years. Regular renewal is somewhat inconvenient to licence-holders, and those who forget can commit an offence by driving without a valid licence. To make life easier for drivers and, I am happy to say, reduce administrative costs for the Transport Department, I propose to issue driving licences valid for 10 years except for those aged over 60. And since ten years is a long time, the Commissioner for Transport will issue notices to remind people that their licences are due for renewal.

119.     I propose to charge $900 for a 10-year licence. This comprises $520 for the licence fee, and $380 for a 10-year levy to the Traffic Accident Victims Assistance Scheme (which currently charges an annual levy of $38 on driving licence-holders). This is good value for money because a three-year licence currently costs $864 (comprising $750 for the licence fee and $114 for the levy). The cost of this proposal is $20 million in 1997-98 and $610 million up to 2000-01.

Scrapping Scheme

120.     Last year, I introduced a scheme to encourage people to scrap their old cars on environmental grounds. Since the scheme started in June last year, we have received an average of about 150 applications each month. As I promised in the last Budget, I have reviewed the effects of the scheme. It works and there have been no abuses. I propose to extend it for another twelve months and review it again at the end of the period. To increase the number of cars eligible under the scheme, I will cut the period a person is required to own the car before it is scrapped from two years to one year. And I will reduce the requirement for the car to have been licensed immediately before scrapping from two years to one.

Electric Vehicles

121.     In the 1994-95 Budget, we granted First Registration Tax exemption to electric vehicles for a period of three years. Our aim was to make electric vehicles, which do not cause air pollution, more attractive by reducing their initial cost. I propose to extend the concession for another three years with another review at the end of the period.

Estate Duty

122.     Last year, I revised the exemption level for Estate Duty to offset the effects of inflation, and I widened the marginal duty bands from $1 million to $1.5 million. This year, I propose to increase the level below which no duty is payable from $6.5 million to $7 million. Above that level, I propose that Estate Duty be payable at 6 per cent on estates between $7 million and $8.5 million; 12 per cent on estates between $8.5 million and $10 million; and 18 per cent on estates over $10 million. The cost of this proposal will be $12 million in 199798 and $103 million up to 2000-01. Details of the new Schedule of Estate Duty rates are set out in the Supplement to the printed version of this Speech.

Duty on Alcoholic Beverages

123.     In my period as Financial Secretary, one issue has plagued me more than most. It comes up on visits overseas, in this Council, at meetings with bankers and businessmen, at dinner parties. Even one of my predecessors, who shall remain nameless, has lobbied me. I am talking, of course, about alcohol duty, particularly that on wine.

124.     In March 1994, we introduced a simple ad valorem duty system on alcoholic beverages. The system has benefited ordinary consumers by giving them greater choice and cheaper alcohol as importers have had to compete for sales, especially at the lower end of the market. And it is also consistent with our obligations under international trade rules that we should treat local and imported products exactly the same. Thus, there is no valid argument for me to change the system.

125.     As the French proverb says, and as those of you who enjoy a glass of wine from time to time will know, it is only the first bottle which seems expensive. Once that has taken effect, so I understand, drinkers worry less about the price. As Financial Secretary, however, I need to be mindful of Hong Kong's status as a centre for trade, finance and tourism. The case has been put to me that our 90 per cent duty on wine is too high and is affecting our tourist industry and our business generally. For this reason, I propose to reduce wine duty from 90 per cent to 60 per cent. This will cost $110 million in 1997-98 and $490 million up to 2000-01. I am looking to shops, restaurants and hotels to pass on this duty reduction to their consumers. I shall ask the Consumer Council to monitor the price of wine in restaurants, hotels and other retail outlets to see that they do so.


126.     he proposed increases in duties on tobacco, fuel and methyl alcohol and the reduction in duty on wine come into immediate effect under a Public Revenue Protection Order issued today. Under similar authority, my proposals on Rates, Estate Duty, Stamp Duty, and First Registration Tax will come into effect on 1 April this year. My proposals on Salaries Tax and Profits Tax will take effect from the year of assessment starting on 1 April 1997, and those on driving licences and the scrapping incentive scheme will be implemented as soon as we have put in place the necessary legislative and administrative measures.


127.     Mr President, this afternoon I have explained that this Budget had a special task to perform. We needed to show how, in a year of historic change, Hong Kong's economy and public finances could remain strong and healthy. I believe we have done this by :

128.     The Budget has been agreed by the two Sides in the Budget Expert Group and complies with the provisions of the Basic Law. I have pointed out that no fewer than 70 of the 160 Articles in the Basic Law deal with economic issues or are related to economic development. The most important, Article 5, provides that our capitalist system and way of life shall remain unchanged for fifty years. We are committed to our role as an international business centre. We are committed to our policy of financial prudence. We will continue to enjoy full autonomy in economic affairs.

129.     The theme of continuity and change has run through my Speech today. I have explained how we will spend :

In each of these areas, we have funded the continuation of existing services and found new money to pay for improvements.

130.     On Salaries Tax, I have set out to substantially reduce the amount of tax people have to pay, while keeping the number of taxpayers roughly the same. I propose a number of concessions, including :

Truly, this is a package which reinforces our traditional family values.

131.     I also propose changes to the marginal tax structure as follows :

These measures will benefit the sandwich class in particular.

132.     A single-income family of four earning $22,000 a month will pay less than $20 a month in tax. A typical sandwich-class family of four with a monthly income of $26,000 will pay only $237 a month in tax. A married couple with two children will have to earn over $100,000 per month – more than $1.2 million per year – before they pay tax at the standard rate of 15 per cent.

133.     Altogether the Salaries Tax concessions I have proposed will cost over $3 billion in 1997-98 and $20 billion up to 2000-01.

134.     In addition, I propose to :

135.     The only increase I propose is to raise the duty on fuel, tobacco and methyl alcohol by 6 per cent in line with inflation.

136.     I am able to make these substantial expenditure and revenue proposals because our public finances are robust now and look set to remain so in the future. In addition to the $15 billion surplus in 1996-97, we will record a further surplus in 1997-98 of nearly $32 billion. I have explained that this last figure is an exceptional one. The reasons are twofold. First, because of the accounting changes on 1 July 1997 to the treatment of income received from land transactions, there will be additional revenue from this source. Second, the surplus arises in the year in between funding the new airport and airport railway and investing in the Railway Development Strategy.

137.     This is a time of great change for us. But it is also a time for us to hold fast to our values. To have faith and confidence in ourselves. To look to what we Hong Kong people can do. We will begin our new life as a Special Administrative Region of the People's Republic of China with total reserves of around $330 billion (including the Land Fund). We are the premier centre for international business in the region. We are looking forward to faster economic growth in 1997 than in 1996. Our sustained economic growth, our excellent law and order situation and our bright future prospects, mean that we can go on expanding our investment in our infrastructure, our support for business and our housing and social service programmes.

138.     Mr President, many in our community, and among our friends around the world, have a major question in their minds at this time. This Budget provides at least a part of the answer : Yes, the future does work.

139.     I move that the debate on this motion be now adjourned.