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:

1. Forecasting assumptions and budgetary criteria.

2. The MRF for 1997-1998 to 2001-2002.

3. Commentary on the MRF in relation to 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 5% in real terms.

Inflation

5    Over the forecast period the average year on year inflation is assumed to be 7.5%. It is emphasised that this is a trend assumption related to the GDP deflator.

Detailed Assumptions

6    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 1998-1999.

Budgetary Criteria

7    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.

8    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 assumption as to the trend growth in GDP.

• 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. within the assumption as to the trend GDP 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 1997-1998 TO 2001-2002

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

10    It is emphasised that the forecasts are based on trends and, therefore, the actual results of any individual year may vary from the trend assumption.

Operating Statement (General Revenue Account)

Table 1

	Revised Estimate	Forecast
	1997-1998	1998-1999	1999-2000	2000-2001	2001-2002
	$m	$m	$m	$m	$m
Revenue (Note b and j)	200,350	192,680	211,390	242,900	271,330
Less: Expenditure (Note c)	161,770	182,480	200,740	227,830	258,570
Operating surplus for the year	38,580	10,200	10,650	15,070	12,760

Capital Financing Statement (The Funds)

Table 2

	Revised Estimate	Forecast
	1997-1998	1998-1999	1999-2000	2000-2001	2001-2002
	$m	$m	$m	$m	$m
Opening balances of the Funds	46,990	61,660	50,210	55,030	63,390
Add : Revenue (Note d)	56,410	66,310	72,790	85,520	101,250
Add : Transfers from/(to) General Revenue Account (Note e)	(5,840)	(11,990)	1,000	(2,000)	(12,000)
Less : Expenditure on capital projects (Note f)	31,570	34,110	39,610	46,130	53,740
Less : Loans and investments (Notes g and h)	4,320	31,660	29,360	29,030	29,350
Less : Aid for disaster relief (Note i)	10	-	-	-	-
Closing balance of the Funds	61,660	50,210	55,030	63,390	69,550

Consolidated Reserves

Table 3

	Revised Estimate	Forecast
	1997-1998	1998-1999	1999-2000	2000-2001	2001-2002
	$m	$m	$m	$m	$m
General Revenue Account
Opening balance	126,620	383,910	406,100	415,750	432,820
Operating surplus (per Table 1)	38,580	10,200	10,650	15,070	12,760
Land Revenue (Note j)	17,870	-	-	-	-
Transfers from/(to) the Funds (per Table 2) (Note e)	5,840	11,990	(1,000)	2,000	12,000
Closing balance	188,910	406,100	415,750	432,820	457,580
The Funds - closing balances (per Table 2)	61,660	50,210	55,030	63,390	69,550
Fiscal Reserves at 31 March (Note k)	250,570	456,310	470,780	496,210	527,130
Land Fund - opening balance (Note l)        - change in net worth	197,070 (2,070)
Total	527,130

Notes on the Medium Range Forecast

(a) Accounting policies

1. The Medium Range Forecast, like Government's Accounts, is prepared on a cash basis and reflects forecast receipts and payments, whether or not they relate to recurrent or capital transactions.
   
2. The Medium Range Forecast includes the General Revenue Account and the Funds (the Capital Works Reserve Fund, the Loan Fund, the Capital Investment Fund, the Disaster Relief Fund and the Civil Service Pension Reserve Fund).
   
3. The Suspense Account of the Capital Works Reserve Fund is excluded from the Medium Range Forecast the net revenue of which, to 30 June 1997, was subject to sharing between the Government's account and the then Hong Kong Special Administrative Region Land Fund.

(b) General Revenue Account - Revenue

     This comprises all receipts to be credited to any of the following revenue heads (except Transfers from Funds and revenue from Land Transactions), namely -

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

(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 -

Hong Kong Government's share of land premia received up to 30 June 1997 distributed in accordance with Annex III of the Joint Declaration and all income from land transactions from 1 January 1998
Loan repayments received
Recovery from Mass Transit Railway Corporation
Recoveries from Trading Funds
Interest and dividends
Donations towards capital projects

	1997-1998	1998-1999	1999-2000	2000-2001	2001-2002
	$m	$m	$m	$m	$m
Capital Works Reserve Fund	48,500 (Note 1)	52,960	61,620	73,040	86,850
Capital Investment Fund	4,030	6,130	4,050	4,270	4,380
Civil Service Pension Reserve Fund	650	560	570	610	640
Loan Fund	3,230 ______	6,660 ______	6,550 ______	7,600 ______	9,380 ______
Total	56,410 ______	66,310 ______	72,790 ______	85,520 ______	101,250 ______

Note 1 : In 1997-98 revenue from land transactions of $17,870 million was credited to the General Revenue Account before the enactment of the revised Capital Works Reserve Fund resolution effective from 1 January 1998.

(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 1997-1998 and 1998-1999 is -

(f) Expenditure on capital projects

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

(g) Loans

     These comprise loans made from the Loan Fund, including loans to the Hong Kong Housing Society, schools, teachers, students as well as housing loans for the Home Starter scheme and to civil servants.

The forecast of payments from the Loan Fund is -

(h) Investments

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

The forecast of payments from the Capital Investment Fund is-

(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) Land revenue

     In 1997-98 revenue from land transactions of $17,870 million was credited to the General Revenue Account before the enactment of a revised Capital Works Reserve Fund resolution effective from 1 January 1998. The revenue of $17,870 million credited to the General Revenue Account in 1997-98 is shown in Table 3.

(k) Fiscal reserves

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

(l) Land Fund

     For the purpose of the MRF the balance of the Land Fund has been merged with the General Revenue Account from 1 April 1998 and its investment earnings are included under the revenue of the General Revenue Account with effect from that date.

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 bugetary guidelines (Diagrams 1 and 2).

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.

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

Table 4

	Revised Estimate	Forecast
	1997-1998	1998-1999	1999-2000	2000-2001	2001-2002
	$m	$m	$m	$m	$m
Operating expenditure	159,620	180,130	198,090	224,840	255,190
Capital expenditure	37,890	52,900	55,260	62,720	71,320
Total government expenditure	197,510	233,030	253,350	287,560	326,510
Add: Other public sector bodies	46,400	55,860	62,480	66,500	67,470
Total public expenditure	243,910	288,890	315,830	354,060	393,980
Gross Domestic Product (calendar year) (Note 2)	1,327,030	1,497,880	1,690,740	1,908,420	2,154,130
Growth in GDP
Money terms	11.3	12.9	12.9	12.9	12.9
Real terms	5.2	5.0	5.0	5.0	5.0
Growth in public expenditure
Money terms	15.5	18.4	9.3	12.1	11.3
Real terms	8.2	11.2	1.2	3.6	3.0
Public expenditure as a percentage of GDP (Note 3)	18.4	19.3	18.7	18.6	18.3

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 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.

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