THE 2000-01 BUDGET


Speech by the Financial Secretary,

Concluding the Debate on the Second

Reading of the Appropriation Bill 2000


5 April 2000



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Upholding the Linked Exchange Rate System
Maintaining our Long-term Fiscal Health
Making Better Use of Public Money
Enhancing the Competitiveness of our Securities and Futures Markets

Madam President,




     I would like to begin by thanking Members for their support for the Budget and their understanding of my reasons for taking certain actions while refraining from others.


2      Members of the public and this Council have given a warm welcome to the decision not to increase any tax rates or introduce any new taxes this year. But it was the Hong Kong community, not I, who made this decision possible. Were it not for our people's resilience and hard work, we would not have seen GDP growth of 8.7 per cent in the last quarter of 1999. Nor would the stock market have rallied so strongly in the second half of the year unless our economic prospects had given investors reasons for optimism. As a result of the surge in stock values, we gained a huge windfall from the investment earnings on our fiscal reserves. This shrunk our deficit to a fraction of the figure originally estimated and vastly relieved the immediate pressure to increase existing tax rates or introduce new taxes. The people and businesses of Hong Kong should be applauded for this very satisfactory outcome.


3       And there is more for us to feel encouraged about. According to the latest figures, for the first two months of this year, the total export of goods grew by nearly 17 per cent in real terms compared to the same period last year. In addition, total retail sales in January 2000 recorded a year-on-year increase of 12 per cent. This reflects a robust pick-up in local consumer sentiment and spending power. There is no doubt that our economy is bouncing back fast and strong.


4      Other Asian economies have also been recovering from the financial turmoil since 1999. What distinguish Hong Kong are our sound financial and banking systems and strong fiscal position. Our remarkably adaptive and enterprising business sector has also sped up the process of our economic transformation and resharpened our competitive edge. This gives us every reason to believe that we are on the way to attaining sustainable economic growth rather than seeing merely a quick but transient turn-round.


5      But we need to remain alert to the consequences of any adjustments in U.S. interest rates and stock markets. How the Japanese economy fares will also have a direct impact on our own economic performance this year. We also have to watch closely how the cross-straits situation evolves.


Upholding the Linked Exchange Rate System


6     Maintaining the linked exchange rate system is essential if we want to move on despite all the changes around us. I have already explained the merits of the system in my Budget Speech, but perhaps this important subject warrants further elaboration, if only to remove any lingering doubts in certain Members'  minds.


7     First of all, it is not true that the link has made Hong Kong suffer more than other economies during the Asian financial crisis. Indeed it was precisely because we maintained a stable currency that the community was safe from even greater harm. We need to remember that Hong Kong has no natural resources and must rely almost entirely on imports for fuel, food and most other daily necessities. Had we followed the practice of some neighbouring economies and allowed our currency to depreciate as steeply as it could, the first thing to happen would have been a sharp rise in inflation. This would have led to price hikes, making life even more difficult for the business sector and the entire community.


8     Nor should we forget that our currency was actually a freely floating one before 1983. But at the slightest hint of an economic crisis, people started to sell the Hong Kong dollar in large quantities because they were afraid that there would be a free fall in its value under this system. This inevitably led to a nosedive of the currency, which not only exerted tremendous pressure on our banking system, but also wrecked what little confidence was left and resulted in further sales of the Hong Kong dollar. A vicious circle was thus created. This then was the reason for introducing a linked exchange system: to restore the value of our dollar, and more importantly, to salvage the confidence of the community. The Asian financial turmoil was worse than any crisis that Hong Kong has suffered in the last fifty years. But even when conditions were the toughest, the community still had confidence in the link and there was no panic selling of our currency. Of course we could have chosen to find our way out by abandoning the link, by letting the Hong Kong dollar depreciate as it came under attack, to wait and see what would happen. But this would have been blinding ourselves to the lessons of past setbacks and the wishes of the community. It would also have meant gambling with our economic prospects and the wealth of the people of Hong Kong. Ask me a thousand times and I will say the same: that would be reckless and totally irresponsible behaviour.


9      Another option, if we wanted to delink and maintain a fairly stable currency environment at the same time, would be to exercise exchange control. But I need not go on. I am sure Members know that this would be going against the stipulation in the Basic Law. Doing so would seriously undermine our uniqueness as a Special Administrative Region within China. It would also be the surest way to turn our investors off.


10      I remain firm in my belief that the price we need to pay for maintaining the link is still the smallest compared to that for any other currency arrangements. Nor am I alone in this. The International Monetary Fund has commented on more than one occasion that it is wise of us to maintain the linked exchange rate. This time-tested system has also proved to be a strong confidence-stabilizer among the people of Hong Kong as well as investors both within and outside our country alike. I do not think we should consider changing the linked exchange system before the international financial community reaches any agreement to enhance the transparency of capital flows. For any such change would only create room for speculative attacks and increase market risks. Indeed, there are many other more urgent subjects that have a rightful claim on our attention and require discussion, such as the one I am now coming to: our public finances.


Maintaining our Long-term Fiscal Health


11     To ensure that Hong Kong will be able to enjoy long-term fiscal health, we will soon begin the studies of our public finances.


12      Many Members have expressed views on the Task Force to review our public finances and the Independent Committee to advise on new forms of broad-based taxes. Let me assure Members that I shall make one thing very clear to the Secretary for the Treasury who will lead the Task Force and the non-official who will be appointed to chair the Independent Committee: they must solicit views from this Council, from the community at large and from other interested parties in the course of their deliberations. I shall also require them to submit progress reports to me by November this year to assist my consideration of next year's Budget.


13     The Task Force on public finances will determine whether the projected successive operating deficits up to 2002-03 are cyclical in nature or structural. I expect the Task Force to pay due regard to many factors. These include, but are not limited to the developments in our economy, the increasing trends towards globalisation and electronic commerce, the continued stability of the local property market, and the growing importance of volatile investment proceeds from our fiscal reserves to our recurrent revenue. In the light of its findings, the Task Force will consider whether the existing tax base, tax net, tax rates and types of taxes should be changed, and if so, what changes should be made under the overriding principle of maintaining a low and simple taxation regime and preserving Hong Kong's competitiveness.


14      Within the same parameters, the Independent Committee will consider the types of broad-based taxes that might be suitable for Hong Kong should there be a need to generate additional revenue in this way. I expect the Committee, in carrying out this task, to ensure that any proposed broad-based tax is revenue-productive on a recurrent basis and is largely immune to economic cycles and the impact of electronic commerce. I also expect the Committee to have regard to the ease of introduction and cost of compliance of any proposed tax and the administrative costs involved, alongside considerations of equity.


Making Better Use of Public Money


15     During last week's debate, a majority of Members spoke on government's efforts to reduce public spending. Some said that we should raise our targets further, while many expressed concern over the impact of the Enhanced Productivity Programme (EPP) on staff and the quality of service. On the whole, Members and the community expressed support for our efforts and progress in controlling public spending. I can assure you that we will continue to do our best.


16      Several Members expressed worry over the adverse impact of such spending controls on welfare services. Some even alleged that we had made welfare spending the main target for funding cuts. Let me make it clear that it remains our guiding principle in public resource allocation to provide financial and service support to those who are most in need. Indeed, the growth rate of welfare spending this financial year continues to be higher than that of total government expenditure and is more than double the average growth rate of all other policy areas. It can only increase further as our population continues to age. But I think the public and Members would agree that the principles of fiscal prudence and cost-effectiveness should apply to all policy areas, including social welfare. The fact that those who are served are among the most disadvantaged in the community is no excuse for refusing to improve and make better use of public resources. Many government departments and public agencies have done an excellent job in meeting their Enhanced Productivity Programme targets. I am confident that the welfare sector is capable of achieving no less. And I am sure that, like us, the community would want to see welfare agencies provide better and more cost-effective services for the needy under the proposed new funding arrangements. The Government will take positive steps to improve communication with the concerned organisations to help them do so.


17      We also share Members' concern for the prospects of those in the lower-income bracket. We are determined to help the unemployed to acquire the skills they need to get jobs, and to provide the best education possible for the next generation of our community. For we believe that knowledge, not handouts, is what people need to escape poverty in a community that is free, upholds the rule of law, and provides a level playing field. We have already spent huge amounts of public money on education and training. It is now more important than ever to make sure that such resources are put to the best use and can bring real benefits to their recipients. I see this as the best guarantee of raising the earning power of all in the community.


Enhancing the Competitiveness of our Securities and Futures Markets


18      As regards my revenue proposals for this year, I am grateful to Members for their laudable efficiency in dealing with the proposed reduction in the rate of stamp duty on stock transactions so soon after the Budget. Thanks to your efforts, we will be able to resume the second reading and to proceed with the third reading of the Revenue Bill 2000 later in today's session. Subject to its passage, the reduction will take effect this coming Friday. That will bring the stamp duty rate on stock transactions down to 0.225 per cent, making our financial markets even more attractive to investors.


19      One additional task that requires urgent attention is the passing of the new Securities and Futures Bill. This will provide an improved regulatory framework corresponding to market needs in the 21st Century. It will be a move towards the best international standards and will further enhance our competitiveness as an international financial centre. We published this as a White Bill on April 2 for a three-month consultation exercise with Members and the market. This will allow adequate time for scrutiny of the provisions and exchange of views with the Administration. In view of the intense global competition Hong Kong faces, we really need to race against time to stay ahead. We will work closely with Members and all interested parties with a view to enacting the Bill by the end of April 2001.


20     Now that Hong Kong Exchanges and Clearing Limited (HKEx) has come into being, I want to stress that it has a public function to serve the entire community and not just the interests of any selected group. I hope that it will be able to achieve three things for Hong Kong. First and foremost, it needs to give due regard to the systemic stability of the financial market and the interests of investors, and make sure that all risks inherent in the trading, clearing and settlement of stocks and futures are managed properly. Second, it needs to make the best use of technology in upgrading the financial infrastructure. Third, it needs to work closely together with the industry to raise the competitiveness of our markets. I am glad to learn that the HKEx Board has proposed to its participants that the minimum brokerage commission should be removed from 1 April 2002. As I mentioned in the Budget Speech, any positive move from the industry towards this target will assist my consideration of a further reduction of the stock transaction stamp duty rate in future.




21     Finally, I would like to say a few words about the budgetary process. Since becoming Financial Secretary, I have made consultation an essential part of the annual budgetary exercise. The scope of consultation has grown larger in the past five years, with the number of individuals and professions consulted reaching a record high for the 2000-01 Budget. This has led to two results, one positive and one negative.


22      Since we had the opportunity to listen and talk to more people from varying backgrounds and had the benefit of their views very much in our minds as we put the Budget together, the final product has enjoyed a higher level of support from the community and Members alike. This was the positive outcome of our consultation exercise.


23      As for the negative result, there are two aspects. First, as I believed that consultation should be an occasion for two-way communication rather than monologues from either side, I did not hesitate to make known the worrying signs that we were detecting in our fiscal position. This has understandably led to all kinds of speculation and even the conclusion that we would introduce new taxes or increase tax rates immediately. When this turned out not to be the case, we were alleged to have made 'intentional misleading comments' in the first place.


24      Second, there were criticisms that we had played tricks with figures when our short-term economic and revenue position turned out to be so much better than previously thought, mainly because of rapid changes in global and local economic and financial conditions. I am grateful to those both within and outside this Council who have kindly acknowledged the difficulties of making economic projections. Let me supplement their point with three examples.


25     When I forecast a 0.5 per cent GDP growth for 1999 in the Budget last year, it was met with overwhelming expressions of doubt and disbelief from Members, who were quick to conclude that I was over-optimistic. As it turned out, our GDP grew by an impressive 2.9 per cent in real terms. This was far higher than I had expected. No doubt it surprised Members even more.


26     In contrast, our fiscal deficit has turned out to be much smaller than estimated thanks to the astonishing leap in the value of Hong Kong stocks that started in the last quarter of 1999. This was unimaginable in the early months of that year. Even during the Autumn of 1999, when I had started the consultation exercise, no one was able to see this surge coming our way. To my regret, those Members who criticized us for missing the mark in our deficit forecast did not appear to see the need to consider this crucial factor.


27      Privatisation of the MTRC is another case in point. As you all know, the proceeds from this exercise will have a direct bearing on the size of our deficit. We have assumed revenues of $15 billion from the privatisation of the MTRC in the 2000-01 Estimates. However, the actual amount of proceeds and the extent to which our estimated deficit for the year could be reduced will depend to a great extent on market sentiment on the day. If, for whatever reason, the income was half of the assumed amount, then our estimated deficit of $6.2 billion for 2000-01 would shoot up to around $14 billion. But if the proceeds were 50 per cent more than assumed, the deficit would disappear immediately, turning our books from red to black. Indeed the MTRC and I would be deeply grateful if any Member could shed some light on the final figure.


28      But I am encouraged by the fact that most Members agree with us that there are potential problems with our recurrent revenue which need urgent tackling. This shows that they too believe that it is important for the Government to remain alert to problems that may arise and to act promptly to forestall them.


29     On balance, I still believe that widening the consultation net and engaging in two-way communication is a worthy course to take despite the risks involved. After all, the public have the right to know about their government's principles in managing public finances and its current thinking, and the Government has a duty to respond to the community's views and aspirations. Criticisms arising from imaginary wolves and wolf-criers, fair or unfair, are not going to dampen our determination to continue to listen and to explain our thoughts. Returning from the land of Aesop to the real world, you will find us ready to step up communication and exchange of views further. And we intend to do this in the same pragmatic and open manner.


30      Finally, may I thank you all again for sharing your thoughts with us so generously both before and after the Budget was announced. With the whole community - government and public - working more closely together, I am sure the budgetary process can only improve further in the years ahead, and the contents of future Budgets will accord even more fully with the long-term interests of Hong Kong.



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