Madam President,

Introduction

           I move that the Appropriation Bill 2000 be read a second time.

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2.      A short time ago the world welcomed the birth of a new century. As always, ringing out the old and ringing in the new meant different things to different people. For me it brought a time to reflect. Time to reflect on Hong Kong's amazing journey through the last century - a journey that has transformed this obscure trading port into one of the world's best-known economic miracles; and from a remote colony in the East to a capitalist Special Administrative Region reunited with a fast-growing China. Above all, my thoughts focused on the dramatic events of the last two years. Two years in which our record of uninterrupted economic growth was destroyed as we fell prey to a sharp and sudden economic downturn. All these twists and turns evoked feelings too complicated to put into words. But reminiscences aside, the dawn of a new era also brings a natural sense of hope and renewed vigour, urging us to look ahead and position Hong Kong for the future.

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3.      This afternoon's Budget is the first after Hong Kong comes out of a deep economic recession. But more importantly it is the first budget in the 21st Century for the SAR. This is a time for taking stock and a time for charting a new course for the future. This afternoon I want to consider the reasons for our past success, and look at the lessons we must learn from the recent turmoil. I want to re-emphasise our economic and fiscal policies. And I want to put forward proposals that should position Hong Kong for the 21st Century. These proposals will help us achieve the policy objectives previously described by the Chief Executive and are consistent with the strategic framework recently outlined by his Commission on Strategic Development. 

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Crisis Management : Turning Adversity into Opportunity

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4.      Over the past two years, the contagious impact of the Asian financial crisis brought Hong Kong its worst economic downturn for half a century. Few, if any, families or companies went unscathed. It was an extraordinary period demanding extraordinary measures. Throughout this period the economic, monetary and financial measures which we took were aimed at achieving three targets -
  • to relieve the difficulties of the community;
  • to restore confidence; and
  • to turn the crisis into an opportunity for reform.

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5.       In the 1998 Budget, we introduced a series of tax and other concessions costing nearly $100 billion over four years. But shortly after that Budget the need to act further became painfully apparent. Three months later, we took the extraordinary step of releasing a 'mini-budget' which contained a further package of relief measures. These were aimed at easing the credit crunch, providing further relief through reducing taxes and fees, and stabilizing the property market. In early 1999, when our economy had shown little sign of turning the corner, we accepted the need for a substantial budget deficit. The aim was to provide further relief in the form of tax rebates, the continued freezing of fees and charges, and the commitment to maintain our spending plans despite a sharp fall in our revenues.

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6.      But last year's Budget went further than that. At a time when our economy was badly rocked, we decided that it was important to sustain Hong Kong's positive and enterprising spirit. That was why I took the exceptional step of announcing our plans for the Cyberport and for Disneyland.

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7.      But, of all the measures which we took during this period, the most extraordinary occurred in August 1998 with our unprecedented incursion into the stock and futures markets to safeguard our very economic survival.

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8.       Yet the economic crisis also opened windows of opportunity for domestic reform. The dizzying pace of change in the global financial market and the shocks to our system brought about by the massive flows of funds in and out of our stock and currency markets proved a catalyst for local unity. We have reached consensus in a number of areas at a speed previously unimaginable. With this new-found unity, we have introduced reforms to several areas of our financial systems.

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9.       We also took the opportunity to reform the Civil Service and to privatise the MTRC, so that the public sector could move on with the times and operate with greater efficiency.

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10.       Today, I will be reporting how our economy has started to bounce back and is doing so at a rate even faster than I dared hope a year ago.

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11.       Our currency regime has proven to be much stronger after the technical improvements we introduced. Our banking industry is now one of the most open and best-regulated in the world. The stocks that we purchased in defending our financial system have brought gains for the Exchange Fund and a revenue windfall for the Government. Not only that, we have lived up to our pledge to reduce these stock holdings progressively in a way that would not damage the market. By disposing of some of them through the Tracker Fund, we have enabled the community to share the fruits of our investments, and at the same time brought an innovative product to our stock market.

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12.       But the most exciting outcome of the financial reform must be the formal establishment just two days ago of the Hong Kong Exchange and Clearing Company. This puts Hong Kong at the forefront of the demutualisation game worldwide and has much enhanced our position as an international financial centre.

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13.       Following this Council's approval of the Disneyland project, we are proceeding with the necessary preparatory work. Construction will begin once we have met all the statutory requirements. On opening, the project will give a quantum boost to our tourism industry and create additional job opportunities. Separately, Members have also approved the funding for the Cyberport infrastructural works last year.

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14.       We have made some encouraging progress in the last 12 months on Civil Service reform. We are narrowing the gap between private and public sector pay by launching a new salaries and appointment package for Civil Service recruits. I shall be saying more on this important subject later. Our plans for the privatisation of the MTRC are progressing well. Two weeks ago this Council passed the enabling legislation. Market conditions permitting, I envisage an initial public offering of shares by the autumn.

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Learning from the Crisis

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15.       The pain of the last two years is dissipating. But we must make sure that we have not suffered in vain. We must draw lessons from our setbacks. We will be all the wiser if we keep these hard-learnt lessons in mind. We should not forget that -
  • rapid developments in information technology and globalisation are making the global financial environment increasingly volatile and unpredictable. To respond to the challenges ahead, we must remain vigilant. We must continue to strengthen our defences and make improvements;
  • our best defence against external attack and the biggest boost to confidence come from upholding the rule of law, running a clean, transparent and accountable government, maintaining free speech and a free flow of information, operating strictly in accordance with best international standards, and providing a level playing field for all businesses;
  • the linked exchange rate system is still the best currency system for Hong Kong. It may bar us from adjusting interest rates freely. But therein lies its beauty. The system has the important merit of keeping Government's discretionary power to intervene in the currency market to a minimum. It allows market adjustments to take place autonomously and efficiently, and ensures a high degree of credibility in our monetary policy. The link has withstood the test of time and remains sound to this day. For a small and entirely open economy like ours, this is still the safest and most reliable currency system, and one that our community and investors readily trust. We must preserve the link; and
  • the prudent management of our public finances remains crucial. Only by controlling government spending can we leave the bulk of our economic resources in the hands of our people, while meeting the needs of the community. Only with a healthy level of fiscal reserves will we have the ammunition to defend ourselves, the means to relieve hardship, and the capacity to restore confidence.

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Upholding Our Economic and Fiscal Principles

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16.      Above all else, the events of the last two years have reinforced our commitment to some fundamental principles. In his 1999 Policy Address, the Chief Executive summed up the role of the Government in our economy. I want to take this opportunity to explain in more detail our economic and fiscal beliefs. We believe that -
  • the economy must be market-led;
  • the Government must stick to its rule of "maximum support and minimum intervention"; and
  • the Government must live within its means and manage our public finances prudently.

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Market-led Economy

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17.       Market-led means that Government does not seek to direct or plan the course that our economy or markets should take. Instead, we believe that investors and entrepreneurs understand markets far better than officials and that private initiatives are a surer way to build Hong Kong's prosperity than any bureaucrat's blueprints.

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18.       Our economy has transformed itself several times over the last 50 years. Every time one door closed, a new one opened leading to bigger and better opportunities. Through their own initiatives, our talented and hard-working people have managed to create these new opportunities for growth. The Government has had the good sense not to try to usurp the business sector's role, nor to seek to direct economic developments. Instead, it has confined itself to creating the conditions that allow individuals and businesses to flourish. We started out as a modest trading port, which our people then transformed into a manufacturing centre. They developed global trading links. They ventured into the Mainland. They built Hong Kong into a world-class financial centre. And now, again driven by market forces, they are seizing new opportunities in cyberspace.

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19.       None of these successful transformations was the result of government planning or directing the economy. This lesson from the past must be the guiding principle for anyone entrusted with the management of Hong Kong's economic affairs.

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Maximum Support

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20.       The Governmen's primary role is to provide the most business-friendly conditions possible. It should provide the fundamental 'software': personal liberty, the rule of law, a clean and efficient administration, and a level playing field for all businesses. It must also provide the land and the infrastructural 'hardware' such as schools, roads and airports that Hong Kong needs for its growth.

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21.      In addition, the Government has a special responsibility for removing market restrictions and promoting fair competition. This has also been a focus of our endeavours in recent years. I mentioned earlier how we seized the window of opportunity offered by the crisis to introduce financial reforms. One essential component was the liberalisation of the securities, futures and banking industries. We have also made considerable strides in opening up the telecommunications, information technology and broadcasting markets. Not surprisingly, increased competition has brought in more participants, both local and foreign. It has stimulated our businesses to raise their game both at home and abroad. Most of all, the consumer benefits from better quality of service and lower prices.

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22.       There are other responsibilities which only the Government can shoulder. We have a duty to protect and promote Hong Kong's commercial interests in the national and international arenas. We do this through our representation in, for example, the World Trade Organisation and the Asia-Pacific Economic Cooperation. And we do this by negotiating and entering into bilateral arrangements such as those for air services.

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Minimum Intervention

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23.       Minimum intervention means that the Government will consider intervening in the market only when the market fails to work or to invest in projects or programmes that would clearly yield overwhelming economic benefits for the community.

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24.       We have always prided ourselves on not intervening in the market. But as my widely-respected predecessor, the late Sir Philip Haddon-Cave said some 20 years ago, we cannot let non-interventionism become an excuse for doing nothing. As he explained, "It is normally futile and damaging to the growth rate of an economy, particularly an open economy, for the Government to attempt to plan the allocation of resources available to the private sector and to frustrate the operation of market forces, no matter how uncomfortable may be their short term consequences."

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25.       Then he added an important qualification: "Generally speaking, the Government weighs up carefully the arguments for and against an act of interventionism in any sector of our economy and on the demand or supply side in the light of present and future circumstances. The Government then comes to a positive decision as to where the balance of advantage lies."

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26.       It is in this spirit that the Government has intervened sparingly in the market over the last 50 years. The most notable example was the establishment 16 years ago of the linked exchange rate system which stabilised our currency against the US dollar. Other government initiatives have included the development of the Mass Transit Railway System and the Convention and Exhibition Centre. Over the last two years, when our economy was suffering from a sudden and serious downturn and our financial markets were under severe attack, we also decided to take extraordinary action to defend our financial systems and to save the economy.

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27.        Our past success has clearly demonstrated the vital importance of trusting in the market and creating the conditions that give maximum support to the private sector as our principal engine of growth. No less important is exercising sound judgement on the need and timing of government intervention when necessary.

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28.      I did not invent these principles. Rather, they represent collective wisdom gleaned over the years. They have provided the bedrock of our prosperity. It is my firm belief that these familiar principles remain especially relevant in these times of rapid change.

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Fiscal Prudence

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29.       We also stick to tradition in our fiscal policies. Our basic principle is 'prudence'. There is no magic, no mystery. All this means is that we apply some simple rules. We live within our means. We strive for a balanced budget. We do not allow the growth of government spending to outstrip our GDP growth. We are committed to a low, simple and predictable tax regime.

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30.       These rules have been enshrined in the Basic Law precisely because they have been tested over decades and have proved their worth as pillars of our prosperity. Thanks to these rules, we have been able to -
  • maintain sufficient reserves to underpin our monetary stability and deal with emergencies;
  • ensure that the public sector does not consume too much of the community's resources, allowing the private sector to function as the engine of wealth creation;
  • provide the Government with sufficient resources to enhance our infrastructure and improve public services as our economy grows; and
  • assure investors, both local and foreign, that Hong Kong is worthy of long-term investment.

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31.      We would be foolish to abandon these sound principles even if the Basic Law did not require us to follow them.

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32.       The recession in the last two years forced us to accept budget deficits. I did that without regret, for the deficits were not the result of wasteful overspending or financial mismanagement. Rather, they were the outcome of our conscious decision to relieve the hardship of the community and not to drive the economy into even deeper decline by cutting back expenditure in an economic downturn.

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33.       But I have stated in unequivocal terms, both in my Budget last year and on many other occasions, that we must return to balanced budgets in the medium term. With the recession behind us, the time has come for us to resume our normal fiscal behaviour. Our fiscal discipline is the best guarantee the Government can offer to ensure that we shall have the means to improve our public services and Hong Kong's competitiveness. It also serves to secure investor's confidence.

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34.      I turn now to our economic performance.

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The Hong Kong Economy

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Economic Performance in 1999

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35.      The Hong Kong economy staged a distinct turnaround in 1999. Positive growth returned in the second quarter of the year with a modest increase of 1.1 per cent. The recovery then gathered momentum, bolstered by a distinct pick-up in exports of goods and services and a continued improvement in local consumer spending. GDP growth accelerated rapidly to 4.4 per cent in the third quarter and further to 8.7 per cent in the fourth quarter, giving 2.9 per cent growth in real terms for the year as a whole.

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36.       The turnaround owed much to the remarkably flexible and adaptable attitudes of our workers and entrepreneurs. Amid the difficult business conditions, many companies have acted promptly to cut costs, raise efficiency and enhance productivity. Our workforce has had to cope with rising unemployment and falling pay. Rentals have come down markedly to ease business costs further. Along with virtually zero imported inflation, these cost reductions increased our competitiveness and at the same time resulted in consumer prices falling by an average of 4 per cent in 1999, the first annual decline since the Composite CPI series became available in 1982.

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37.       The economic recovery was largely export-led, driven by the resurgence of demand in Asia after the slump in 1998, as well as stronger import absorption in the United States and the European Union. At the same time, the rebound in currency values across the region has made the prices of our own exports more competitive. For 1999 as a whole, total exports of goods grew by 3.7 per cent in real terms, reversing the decline of 4.3 per cent in 1998.

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38.       Exports of services also accelerated over the course of 1999. Inbound tourism revived and there was a strong rebound in offshore trading activities on the back of the distinct turnaround in the Mainland's exports. Exports of other trade-related, professional and business services also picked up in tandem with the regional recovery. Overall, exports of services grew by 5.5 per cent in real terms for 1999 as a whole, in stark contrast to the 6.6 per cent decline in 1998.

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39.      The marked increase in the invisible trade surplus, together with a much reduced visible trade deficit, gave rise to a substantial surplus of $54 billion in the combined visible and invisible trade account last year.

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40.       Local consumer spending was back on a growth track by the second quarter of 1999. It strengthened further in the third and fourth quarters, as local economic conditions progressively improved and the employment situation stablised. For 1999 as a whole, consumer spending grew by 1.1 per cent in real terms, reversing the 6.7 per cent decline in 1998. But overall investment spending continued to fall, by 17.6 per cent in real terms in 1999, after a 6.4 per cent decline in 1998. Encouragingly, this decline moderated considerably in the latter part of the year.

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Economic Prospects for 2000

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41.      Hong Kong's trade prospects remain promising in 2000. Economic activities in East Asia should intensify further. The Mainland, Hong Kong's production hinterland and most important growing export market, looks set to have another year of good economic growth. The recent distinct turnaround in the Mainland's exports, together with its sustained strong import demand, bodes well for Hong Kong's trade performance in the near term.

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42.       As for our traditional export markets, the United States has been enjoying continued robust growth accompanied by strong consumer demand, while the European Union is now back on an upswing with improving business confidence. On the other hand, the international trade environment may pose some challenges in the near term with a possible slow-down in the United States following recent interest rate hikes, a slower than expected pick-up in the European Union, and re-emerging doubts about the Japanese economy. Potential volatility in global financial markets will have to be watched closely.

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43.      The on-going cost and price adjustments in the local economy coupled with stronger currencies in the rest of Asia should help enhance Hong Kong's external competitiveness.

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44.      Taking these factors together, I expect the total exports of goods to attain a growth of 8 per cent in real terms this year, comprising a decline of 4 per cent in domestic exports and an increase of 10 per cent in re-exports.

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45.      I also forecast a growth in the exports of services of 8 per cent in real terms, with continued growth in inbound tourism and a further pick-up in exports of trade-related, professional and other business services.

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46.       In our domestic economy, both consumption and investor sentiment have improved visibly of late. The impressive growth in technology-related investments has been particularly encouraging. The earlier risk premium in local interest rates is largely removed, and bank liquidity is now abundant. The property market has remained steady, while the stock market has rallied in hectic trading upon a more optimistic business outlook.

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47.       With sentiment much improved and unemployment falling, local consumer spending looks set to pick up further. Yet the current restraint on wages will continue to dampen demand. I am forecasting only a modest growth in consumer spending of 2.5 per cent in real terms for 2000.

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48.        The overhang of high real interest rates and the cautious attitude of the banks towards corporate lending may continue to affect private sector investment spending on machinery and equipment in the near term. Yet this financial stringency should ease in due course as business prospects turn better, giving renewed impetus to investment spending. We expect private sector building activity to stage an upturn over the course of this year, as projects commenced last year gather momentum. At the same time, public sector investment in infrastructure is also gathering pace, with a significant output boost from the priority railway projects and the continuation of the public housing programme. Overall, I forecast investment spending in 2000 to recover to a growth of around 6 per cent in real terms.

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49.      Thanks to the favourable domestic and external environment, I expect the economy to continue its vigorous growth in 2000. For the year as a whole, I forecast GDP to grow by 5 per cent in real terms.

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50.      Locally-generated price pressures should remain scant in the early part of this year. However, with the rebound in the economy, the downward drift in wages and rentals should decelerate. On the external front, import prices are likely to firm up in the near term, as world commodity prices pick up again and the effect of the earlier strengthening in the Japanese yen filters through. Fuel prices have already risen in recent months. Taking these factors together, I expect consumer prices to remain generally soft for the next few months and then gradually edge up in the latter part of the year. For 2000 as a whole, I forecast the Composite CPI to be down by an average of 1 per cent.

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Medium-term Prospects Beyond 2000

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51.       Hong Kong's economic outlook beyond the short term is favourable, underpinned in particular by sustained robust growth and further economic reform and liberalisation in the Mainland after its accession to the WTO.

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52.      With much of the earlier concerns about Hong Kong's growth prospects now alleviated, we have raised our forecast of trend GDP growth. We are now forecasting a trend growth of 4 per cent annually for the four-year period 2000-2003, as against the 3.5 per cent forecast in my previous Budget.

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Strategy for the 21st Century: Creating Wealth by Adding Value

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53.       As the Chief Executive pointed out in his Policy Address last year, our prospects in the longer term will be influenced by several major developments. The two most important are the irreversible trend of globalisation fuelled by technological advances and our country's more rapid development after entering the WTO. Domestically, Hong Kong is reinventing itself as a knowledge-based and technology-intensive economy, and this process will entail adjustments on the part of individuals and businesses as well as the Government. But if our experience in the last two difficult years has taught us anything, it must be that all challenges are but opportunities in disguise. I shall briefly discuss the likely impact of these developments. I shall also outline a number of initiatives that should help us turn the challenges to our advantage in accordance with the findings of the Commission on Strategic Development. Before I do so, perhaps it is timely to remind ourselves of some of Hong Kong's unique strengths.

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Consolidating Our Unique Strengths

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54.      We have recently been named yet again the world's freest economy by some of the world's most authoritative research institutes. The International Monetary Fund has called us "one of the most transparent, well-governed and least interventionist places for doing business".

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55.      Our telecommunications and Internet infrastructure is among the best in Asia, with a broadband network reaching practically all commercial buildings and over 80 per cent of our households. We also have the most liberalised telecommunications market and the freest flows of information. All these will enable our businesses to expand their horizons into cyberspace and spur our future growth.

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56.      Our unique position as both a Special Administrative Region of China and a cosmopolitan international city gives us another important competitive edge. No other place offers the same level of experience, contacts and expertise in doing business with China. And as an international financial centre that runs on free market principles, Hong Kong will continue to play an active and special role in the exciting process of our nation's continuing economic reform and liberalisation.

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57.      But above all else, Hong Kong's greatest strength is its people. It was the industry, nimble-mindedness, and enterprise of our citizens that created this economic miracle called Hong Kong in the last century. Casual observers might have focused only on the despondent mood of our people during the recent downturn. But the impressive speed with which our citizens and enterprises are embracing the new opportunities in information technology is proof enough that Hong Kong people have lost nothing of that well-known gumption and entrepreneurial spirit.

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58.       Armed with all these strengths, Hong Kong is set to benefit hugely from a more globalised economy and China's continuing growth.

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Harnessing the Forces of Globalisation

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59.       The economic benefits of globalisation are manifold. Trade and foreign investments have proven to be the major driving forces of global economic growth. As a result of the continued expansion of trade and capital flows over the three decades from 1960 to 1990, all economies that adopted an open market and free trade policies enjoyed significant growth in annual per capita income. During that period, Hong Kong's GDP increased by 9 times and its per capita income increased by 4.5 times, both in real terms.

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60.       The growth of multinational business activities has led to the spread of knowledge and advanced technology and the cross-fertilisation of business cultures. It has also helped to create jobs. Our latest figures show that 13 per cent of our labour force are employed by multinational companies.

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61.      Advances in information technology and communications as well as the liberalisation of these markets have slashed business costs and helped to level the playing field for individuals and small businesses. We estimate, for instance, that Hong Kong consumers saved some $2.5 billion on IDD tariffs last year as a result of the full liberalisation of the external telecommunications services market in January last year. The Internet will further reduce communication costs and enhance operational efficiency and productivity. A recent study suggests that global operating costs fell by US$17 billion last year thanks to e-commerce, and that such savings will rise to a staggering US$1,250 billion by 2002.

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62.      But globalisation also exacts a price. Instant and massive flows of capital are threatening to any small and open markets. The increase in off-shore or web-based business activities is likely to affect both the job prospects of low-skilled workers and government revenue. Growing global interdependence also means greater exposure to external volatility. The Asian financial crisis is a sobering reminder of this.

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63.       How should Hong Kong react to these powerful and engulfing forces? Research by the Harvard Institute for International Development indicates that the economies which have benefited the most from globalisation in the past 15 years share some common features. They adopt an open trade policy, have a clean and accountable government, uphold the rule of law, place a high premium on education, charge low tax rates, and have a flexible labour market. Time and again Hong Kong is cited as a prime example. Our fundamental strategy in response to further globalisation must be one that maintains and bolsters these advantages. In addition, we need to make better use of information technology to enhance Hong Kong's competitiveness if we are to maximise the benefits of globalisation and minimise its risks.

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Enhancing the Financial Infrastructure

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64.       The development in this century of the financial services sector, like all other sectors, will rely heavily on information technology. For this reason, I proposed in my Budget last year that we should upgrade our financial infrastructure to take full advantage of the exciting opportunities that information technology innovations might bring. I am glad to see that the Steering Committee on the Enhancement of the Financial Infrastructure chaired by the Chairman of the Securities and Futures Commission has completed its mission. It has produced the blueprint that will put Hong Kong in the technology forefront.

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65.       The most important recommendation of the Committee is the establishment of an open and secure electronic network that will allow all securities and derivatives transactions to be processed straight-through.

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66.      The newly-established Hong Kong Exchange and Clearing Company will need to complete the critical aspects of this new network within two years. This will include upgrading the securities clearing system and consolidating the clearing systems for various derivative products onto one platform. In the meantime, the organisations concerned will begin to implement other recommendations of the Committee. For example, the Securities and Futures Commission is ready to receive the filing of documentation from intermediaries on their intranet. The Hong Kong Exchange and Clearing Company expects to provide a new consolidated account reporting service within six months. Its securities clearing unit will also be able to offer better risk management functions through the Real Time Gross Settlement System.

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Developing a Multi-currency Clearing System

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67.      The globalisation of financial markets is constantly creating room for Hong Kong to reach out and expand. The strategic linkage between our Stock Exchange and NASDAQ last year has reinforced our position as the leading market for global shares in the Asian time zone. The next important step will be for us to develop a multi-currency capital market. Under this strategy, we will first, this year, build a US dollar-denominated capital market, with a Euro-denominated market as the next target.

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68.       To make this possible, the Hong Kong Monetary Authority is developing a reliable and efficient US dollar clearing system modelled on the present Hong Kong dollar Real Time Gross Settlement System. This new system will be introduced in phases beginning in the second half of this year. In parallel, the Hong Kong Exchange and Clearing Company will have ready a US dollar clearing system for securities. When both these clearing systems are in place, we will be able to build a new capital market that offers local and global investors access to a full spectrum of US dollar-denominated products. This will make Hong Kong the leading investment window in Asia. And, as all transactions will be US dollar-denominated, this will reinforce our monetary stability by reducing the pressure on the Hong Kong dollar since it will no longer be used for conducting non-domestic financial business.

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Building a Leading Debt Market in the Region

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69.       Developing the debt markets of Hong Kong and the region is another important task. Expanding our global network and forming strategic alliances with other markets are also pivotal to the competitiveness of our debt market. I have asked the Financial Services Bureau and other interested parties to focus on three main areas in the coming year -
  • to continue to attract companies outside Hong Kong, especially Mainland enterprises, to issue debt papers here, either in Hong Kong dollars or in foreign currencies, to increase the width and depth of our debt market;
  • to establish linkages with more central clearing and depository systems outside Hong Kong. Direct clearing, settlement and payment linkages have already been established with New Zealand, Australia, and Korea, as well as CEDEL and Euroclear. We must build on this excellent basis and reach out further; and
  • to continue to participate actively in Asia-Pacific Economic Cooperation activities and work closely with regional financial centres to cross-list and develop a liquid and mature Asian bond market.

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Reforming the Banking Sector

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70.      That the banking sector in Hong Kong has weathered the storm so well during the Asian financial turmoil is no small achievement. But we must stay alert to the challenges of an ever-changing global financial environment.

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71.      Over the next two years, we will continue our programme of reform by -
  • further deregulating the remaining interest rate rules covering time deposits and savings and current accounts;
  • conducting a detailed study to identify new measures that will better protect depositors¡¦ interests, including the possible introduction of deposit insurance. This will be followed by public consultation;
  • studying the feasibility of establishing a central credit register in Hong Kong to enable banks to better assess the creditworthiness and overall indebtedness of their customers; and
  • strengthening bank supervision through the new risk-based approach.

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Reducing Risks in the Financial Market

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72.       I mentioned a moment ago that the volatility of large capital flows constitutes one of the biggest risks that comes with globalisation. To date, there is a degree of recognition in the international financial community that the size, concentration of positions, and aggressive trading behaviour of highly leveraged institutions could pose systemic risks to small and open markets. Unfortunately there is, as yet, no consensus on how to reduce such risks.

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73.       As a member of the Financial Stability Forum, Hong Kong has been championing closer international co-operation to raise the disclosure and regulatory standards of international or offshore financial centres. We are now engaged in discussions with the international community on the development and implementation of a voluntary code of conduct for market participants, including highly leveraged institutions. The aim is to ensure fair and orderly transactions in the foreign exchange market.

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Enhancing the Regulatory Regime and Corporate Governance

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74.      Domestically, we need to press on with our efforts to improve Hong Kong's own regulatory regime and standards of corporate governance. We need to make sure that our risks defence system is adequately fortified and to make our financial market even more attractive to global investors.

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75.      We have largely completed drafting a new securities and futures bill. This will contain detailed and comprehensive proposals to enhance the efficiency, transparency and accountability of our regulatory regime as well as measures that will encourage listed companies to behave in a more open and responsible manner towards their shareholders. The bill also proposes improvements to the roles and powers of existing regulatory authorities.

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76.       As there is unlikely to be adequate time in the current legislative session for Members to consider this bill, we have decided to publish it in April as a White Bill for a three-month consultation with this Council and with the market. Our target is to introduce the Bill into this Council as soon as its next session begins, with a view to enactment by April 2001. We must lose no time. With the support of this Council and the industry, I hope to see early completion of the legislative process.

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77.       The standard of corporate governance in Hong Kong is among the highest in the region. But this does not mean that there is no room for improvement. Enhancement of corporate governance standards is a global trend. We need to stay ahead of the game if we are to maintain our status as an international financial centre. I have asked the Secretary for Financial Services, with the help of the Standing Committee on Company Law Reform, to conduct a comprehensive study on this subject this year. We aim to identify and plug any gaps in our corporate governance regime and to become a benchmark in the region. The concerted efforts of the market bodies, professional organisations and regulators will be pivotal to this endeavour.

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Attracting More Foreign Investment

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78.       The exponential growth of trans-national investments and business activities is another prominent feature of economic globalisation. We must capitalize on this trend in order to sharpen our competitive edge as an international financial centre. Hong Kong is already the regional headquarters for more than 800 multinational enterprises, the highest number for any Asian city. The growing presence here of multinational enterprises will reinforce our position as a world-class city. This will bring with it the transfer of advanced technology, expertise and management culture. It is important that we continue to attract these companies to come to Hong Kong.

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79.      That is why the Trade and Industry Bureau commissioned a consultancy study last year to see how we could do this better. The study's findings point to a need to develop a more proactive and professional investment promotion strategy focusing on areas where we already enjoy a competitive edge, such as financial and trade-related services.

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80.       A key recommendation was that we needed to change our institutional arrangements. We will set up a dedicated agency under the Trade and Industry Bureau to replace the inward investment unit in the Industry Department. Its sole responsibility will be to attract investment into Hong Kong and implement policies and initiatives formulated by a steering committee under my chairmanship.

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81.       The agency will work closely with all our Economic and Trade Offices and the overseas offices of the Hong Kong Trade Development Council. Together, they will implement a unified strategy to attract inward investment. Key positions in the agency will be filled by experts in the field to ensure a high degree of professionalism. We will adopt a more focused, proactive and flexible approach to investment promotion. We will also provide better, more comprehensive services to potential and existing investors.

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Providing Better Services to Business

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82.       In parallel, the Trade and Industry Bureau will place greater emphasis on improving our support and services to the industrial and commercial sectors in Hong Kong. To help achieve this -
  • we will merge the functions of the Business and Services Promotion Unit with the Trade and Industry Bureau. I will continue to oversee the business and services promotion programmes personally through my chairmanship of the two relevant committees;
  • we will transfer responsibility for consumer protection and competition policy from the Trade and Industry Bureau to the Economic Services Bureau where it will fit better with the latter's existing functions;
  • we will rename the Trade and Industry Bureau as the Commerce and Industry Bureau to reflect its new role; and
  • we will transfer responsibility for supporting our industries and small and medium enterprises from the Industry Department to the Trade Department. This will provide more efficient one-stop services to business. We will rename the Trade Department as the Trade and Industry Department.

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Strengthening Support for Innovation and Technology

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83.       In order to enhance Hong Kong's competitiveness in an increasingly technology-driven world economy, we must harness the power of innovation and technology. We are implementing the recommendations of the Chief Executive's Commission on Innovation and Technology chaired by Professor Chang-Lin Tien. In the coming year, we will improve Government's institutional framework in accordance with the Commission's advice. The Chief Executive will appoint a new Council of Advisors on Innovation and Technology. The Council will advise on all aspects of our innovation and technology policy. To provide stronger policy support we
will -
  • set up an inter-bureau committee, which I will chair, to co-ordinate the Government's efforts. This committee will work closely with the Council of Advisors;
  • set up a new Innovation and Technology Commission under the Commerce and Industry Bureau to manage and implement Government's programmes in this field. The Commission will take over the current innovation and technology-related functions of the Industry Department; and
  • recruit experts in the field to assist the Innovation and Technology Commission full-time to enhance the Government's technological skills and capacity.

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84.       As a further measure, the Secretary for Information Technology and Broadcasting will report to me from the beginning of next month. This will strengthen policy co-ordination between information technology and other business-related services.

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85.     The new institutional arrangements which I have just described will strengthen our support to both our manufacturing industry and the wider commercial community.

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Making the Most of Our China Advantage

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86.       Now I come to the opportunities and challenges arising from China's impending accession to the World Trade Organisation.

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Door to Prosperity

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87.      China is now the world's sixth largest trading entity. Over the past two decades, its GDP grew at an average annual rate of 9.7 per cent, driven mainly by external trade and foreign direct investment.

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88.      Hong Kong is China's closest economic partner in terms of both trade and external investment. The Mainland is Hong Kong's largest trading partner. In 1999, the Mainland's total trade with Hong Kong exceeded $1,000 billion, representing about 40 per cent of our total external trade. Hong Kong is also the most important entrepot for the Mainland as well as its largest source of foreign direct investment, handling around 40 per cent of its re-exports and 52 per cent of its inward investment. We expect that China's accession to the WTO will expand its trade links and investment relations with the rest of the world, bringing substantial gains to Hong Kong. Our initial assessment is that, as a result, our GDP will be 5.5 per cent higher by 2010.

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89.       After China's accession to the WTO, the Mainland market will open up further. This will bring substantial business opportunities for Hong Kong enterprises as well as new business rivals from around the world. Economic liberalisation in China will inevitably quicken the tempo of development in Mainland cities and they will also compete with Hong Kong. Indeed, opportunities and competition will come hand in hand. While we cannot have one without the other, our gains should far outweigh any losses.

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90.       For Hong Kong, the greatest gain comes from our national leaders' firm commitment to greater economic reform. As the business environment in China becomes more transparent and rule-based, our firms, especially small and medium ones, will benefit from fairer competition, reduced transaction costs and expanded trade and investment potential. The reform of state-owned enterprises and the opening up of China's services sector will generate abundant opportunities for our businesses. Our research indicates that Hong Kong's distributive trades, financial services, telecommunications, and tourism sectors as well as many other professional services will benefit handsomely.

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91.       Let the figures speak for themselves.
  • With over 1.3 billion consumers, China is one of the largest markets in the world. Retail sales have increased at an annual rate of 15 per cent over the past two decades.
  • Hong Kong is now a major capital-raising centre for China. So far, 87 Mainland companies are listed on the Stock Exchange main board and on the Growth Enterprise Market, raising $245.6 billion in total. More Mainland enterprises in the energy, petrochemicals, telecommunications and manufacturing sectors will be listed in Hong Kong this year. Such 'H' share listings are expected to raise $200 billion.
  • In 1998, telecommunications revenue in China reached US$23.5 billion, making it the world's fourth largest market after the United States, the European Union and Japan. From 1994 to 1998, the number of urban telephone subscribers almost tripled, from 22 million to 63 million. The number of mobile telephone subscribers increased at an even more staggering rate, from 1.6 million to 24 million.
  • The information technology market grew by 14 per cent from 1997 to 1998. The number of Internet users is expected to reach 40 million in 2001 and, by 2005, China should have overtaken the United States as the nation with the most Internet users in the world.
  • In 1997, 58 million tourists visited the Mainland. According to the World Tourism Organisation, China will become the world's top tourist destination by 2020, with visitor numbers growing by 8 per cent a year in the interim.

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92.      This is good news for Hong Kong; these tremendous market opportunities correspond neatly to the strengths of our own services industry. As an advanced service economy, Hong Kong's function will no longer be limited to acting as an intermediary between the Mainland and foreign enterprises. Once China opens up the services sector further, we will assume a more important role as the hub for high-value-added services, providing essential professional and support services to the Mainland and contributing more significantly to China's economic liberalisation.

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93.      Because of our many unique advantages we expect more Mainland and foreign enterprises to be interested in forming business partnerships with Hong Kong companies. Let me name a few of these advantages. Hong Kong is on Mainland China's doorstep and linked to the world by an excellent transport network. We are bilingual and have a business sector that knows how the Mainland and international markets operate. Our legal and intellectual property protection systems are well-established and reliable. We run an efficient and clean public sector. We impose no control over capital or information flows. Our tax rate is one of the lowest in the world and our tax system is simple and predictable. We are a low-crime cosmopolitan city known for the freedoms enjoyed by all its inhabitants. Many cities have some of our advantages, but few can rival Hong Kong's overall attractiveness when it comes to choosing a partner for entering the Mainland or the international market.

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Business Leads and Government Supports

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94.       China's accession to the WTO will open numerous doors to wealth for Hong Kong. They await the entrance of those with the vision and enterprise to lead Hong Kong into an era of even greater prosperity. We must not forget that, for the past two decades, it was tens of thousands of private citizens and businesses, not the Government, that propelled Hong Kong's economic growth by capitalising on China's economic reform and liberalisation. They do not need government nannying of any kind. I firmly believe that the tapping of commercial opportunities is best left to our businesses. The Government's priority must be to make sure that Hong Kong remains an excellent place for doing business.

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95.       But this does not mean we will do nothing. On the contrary, the Chief Executive made clear in his Policy Address last year that we should step up further communication and co-operation with the Mainland authorities. Since the establishment of an inter-bureau research group on China's accession to the WTO, we have been keeping close contact with the Central Government. This has allowed us to familiarize ourselves with the latest developments on China's accession to the WTO and its market liberalisation programme. We have reflected to Central Government officials the views of our business sector on investing and conducting business in the Mainland. Our ultimate goal is to maximize the growth prospects for businesses in Hong Kong and the Mainland.

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96.       Last November, a Joint Commission on Commerce and Trade was established between the Ministry of Foreign Trade and Economic Co-operation of the State Council and the Trade and Industry Bureau of the Hong Kong SAR. We will continue to participate actively in the Commission's work.

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97.       We will also continue to enhance the transport links between the Mainland and Hong Kong by adding new facilities and making more effective use of existing ones. Last month, we signed an air services arrangement with the Mainland authorities. This establishes a clear legal framework for air services between Hong Kong and the Mainland. It is set to bring a substantial boost to our passenger and cargo traffic. We will build on this important achievement.

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98.        On land transport, the Chief Executive has detailed a number of projects to improve our cross-boundary links. We have been working hard to this end. Phase One of the Lok Ma Chau improvement programme, completed last December, has shortened cross-boundary trips by 15 minutes. Phase Two will commence later this year. When completed by September 2003, the crossing will be able to handle 35,000 passengers and 32,000 vehicles per day.

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99.      The Mainland already accounts for about half of our external telecommunications traffic. To strengthen our information links with the Mainland, the Telecommunications Authority will issue three licences for external cable-based field telecommunications network services. These will increase connectivity between us more than ten-fold.

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100.       This is only the beginning. With the support of the Central Government, we will reinforce our economic links with the Mainland and the Macau Special Administrative Region. This will include co-ordinating our infrastructural developments and increasing the flow of passengers, freight and information further.

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Upgrading Our Human Capital

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101.      Now I come to a subject of concern to Members and many of our citizens: Hong Kong's human resources and employment prospects.

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Employment Prospects and Self-improvement

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102.      In the midst of the Asian financial crisis, our unemployment rate shot up three percentage points in one year and stood at its highest, at 6.3 per cent. It has come down to 6 per cent in the fourth quarter of 1999 and further to 5.7 per cent in the three months ending January this year. I believe that the employment situation will improve progressively as our economic recovery takes root.

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103.       Hong Kong's transformation into a knowledge-based economy, the impact of globalisation and China's entry into the WTO have raised fears of continued high unemployment levels. Some Members have even suggested that one or two million of our workforce will be out of a job. I can understand such fears, but our own analysis shows that such dire consequences would not arise and there is really no cause for alarm.

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104.       First of all, there are enough examples outside Hong Kong to suggest that the demand for services will surge as the economy revives, benefiting even unskilled workers. The United States is a case in point. Its record low unemployment rate in recent years is due in no small measure to its economic prosperity and the vast expansion of job opportunities in the services industry. From 1983 to 1993, the fastest-growing jobs were in the retail, food and healthcare-related services sectors. Official US estimates suggest that between 1998 and 2008, 90 per cent of new jobs will still come from the services industry. Although demand from information technology-related services will be the greatest, the ten fastest growing job markets also include those for retail sales staff, truck drivers and clerks. This shows that even in a technology- and knowledge-driven economy, the entire workforce stands to gain as long as the economy is vibrant and consumption continues to grow.

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105.       Nor must we forget that Hong Kong has been through economic re-structuring before. The relocation of jobs and greater competition are no new challenges to us. I still remember how in the early Eighties, when our factories started to move into the Mainland and Hong Kong began to become more services-oriented, there were frequent warnings that the trend of growing unemployment would be unstoppable. What happened was that in the Nineties, when Hong Kong's transformation into a fully-fledged service economy was complete, our unemployment rate consistently remained very low, at between 2 and 3 per cent.

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106.       But I agree fully with many academics and Members that for this round of transformation to succeed, we must have an educated and skilled workforce.

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107.       At present, Hong Kong's labour force stands at around 3.5 million, of which about 750,000 are low-skilled workers aged 40 or above, with average academic qualifications of secondary 3 or below. Every year some 20,000 of our young people between 15 and 19 leave school to look for a job. Within this group, 18 per cent are secondary 3 school-leavers. Less than 10 per cent have received any vocational or technical training. Last year, the unemployment rate of the 15 to 19 year olds reached 29 per cent. In addition, we have around 50,000 new immigrants joining our community every year from the Mainland. Most of those adults have only attended primary or junior secondary schools, and many look for a job on arrival. Helping all these citizens to improve their skills and knowledge is pivotal to achieving full employment in our community and ultimately to Hong Kong's economic success.

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108.       Moreover, it is increasingly clear that as science and technology change our economy and way of life, the knowledge and skills required by many occupations will keep on changing as well. This trend will affect all workers, not only those with lower academic qualifications and skills. For example, many companies now expect their managers to raise efficiency through the use of information technology, and many factory owners have to learn the ABCs of e-trading. In this new century, no one can rely on a single set of skills or knowledge to last for life. The reality is that we will all need to acquire new knowledge and skills continuously to keep pace with the changing times.

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109.       In his Policy Address last year, the Chief Executive highlighted the importance of education and life-long learning. The Government has been stepping up its efforts in these two areas as a matter of priority. We must make sure that everybody, regardless of age and qualifications, will have the avenues to upgrade their knowledge and continue to add value to what they already possess. Opportunities in the new economy must not become the privilege of only a fortunate few. I shall shortly outline a number of expenditure proposals on education, training and employment-related services.

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Invigorating the Public Sector

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110.       Let me now turn to the public sector. In almost all recent discussions on budget deficits and possible new taxes, one message came over consistently loud and clear. The public sector must first exercise greater prudence in its spending before dipping into taxpayers' pockets. Last year, I said I firmly believed that, like the rest of the community, the public sector should take full advantage of the recession to strengthen its fundamentals. This afternoon, I shall review the progress which we have made and outline a few initiatives which will help position the public sector to meet the challenges of the 21st Century.

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Progress of the Enhanced Productivity Programme

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111.       With the groundwork done since the introduction of the Enhanced Productivity Programme, departments and agencies have now geared up to meet the target of 5 per cent savings by 2002-03. To ensure that early savings are delivered to finance new initiatives, we required departments and agencies to reduce their operating expenditure by 1 per cent in 2000-01. I am pleased to report that 40 per cent of them have over-achieved the 1 per cent target, with three delivering the full 5 per cent savings in one go and four others fairly close to 5 per cent. Total productivity savings amount to $1,150 million. This helpful contribution has enabled us to introduce further expenditure initiatives in the coming year, which I shall announce later. In addition, the five Trading Fund departments have pledged total savings of $310 million in 2000-01 which will be reflected in the pricing of their services.

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112.       Managing a savings programme affecting over $100 billion of government expenditure is no easy task. The public, and Members of this Council, have expressed concern about the impact of EPP on the availability and quality of services. I can assure Members that we have fully addressed their concern. But I would not be doing justice to the management and staff at all levels if I tried to sum up their efforts in a few words. Instead, I commend to Members and the public the EPP Booklet which we published last Friday, together with the 2000-01 Draft Estimates of Expenditure. I also invite anyone interested to visit the Finance Bureau web-site to study the EPP plans of individual departments and agencies, including the safeguards they have put in place to ensure that the quality of service will not be compromised.

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Progress of the Civil Service Reform

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113.       I now turn to Civil Service reform. The controversies associated with the reform are, in my view, blessings in disguise. They reinforce our determination to reform the management system of the Civil Service to keep pace with the community it serves. They help shape some of the further measures I am about to outline.

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114.       The Civil Service Reform Consultation Document released in March 1999 covered an extensive range of Civil Service issues, from entry and exit mechanisms, pay and fringe benefits, to performance management and training. We have one common objective, and that is to make the Civil Service more flexible, open and motivated and to encourage a management culture based on providing the highest standards of service to the public.

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115.       Following the publication of the consultation document, public opinion has been very supportive of the direction of our proposals for reform. Most of the civil servant groups are in agreement with our objectives. And Members of this Council have given us their near-unanimous support. Indeed, some have criticised us for acting too slowly in comparison to the rapid changes in the private sector. Against this background, we could not but feel perplexed when Members initially rejected our proposals to lower the entry pay for new recruits. I hope Members will appreciate the old Chinese saying that "Drawing a circle with one hand and a square with the other will get us nowhere". There is no way we can achieve our shared objective of ensuring greater cost-effectiveness from the public service if Members demand fiscal prudence on the one hand but find themselves unable to support reasonable plans to rationalise spending and reduce costs on the other.

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Containing the Size of the Civil Service

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116.       Last year, given our wish to proceed with wide-ranging reforms, particularly those associated with the appointment system, we instituted a general freeze on hiring into the permanent Civil Service. While we are now ready to recruit into the Civil Service on the new entry pay and appointment terms, we consider it necessary to continue to impose a tight control over the size of the Civil Service.

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117.       The size of the Civil Service, expressed in terms of establishment, has grown steadily over recent years at an average rate of 1.3 per cent per year. Over the same period, a more rapid expansion in staff numbers has taken place in the subvented sector which now delivers the bulk of our hospital, education and social welfare services. The Civil Service establishment was previously estimated to exceed 200,000 by the end of 1999-2000. Thanks to EPP and efficiencies arising from the reorganisation of municipal services, we have deleted a total of 3,000 posts during the year. The Draft Estimates of Expenditure published last Friday indicate a further net reduction of 617 posts in 2000-01. Albeit modest, this is the first time that in spite of service expansion to meet increases in demand and new initiatives, we have seen a drop in Civil Service numbers. By the end of March 2001, the total Civil Service establishment is now estimated to stand at around 198,000.

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118.      The Chief Secretary for Administration and I have reviewed the growth in the Civil Service in the light of the measures taken to reform the Civil Service management and to enhance public sector productivity. We believe that the Civil Service will benefit from a lean and fit structure and sustained efforts to contain its size will give the community better value for money. A firm grip over head-count in the Civil Service will add impetus to increasing private sector participation in the delivery of public services, encouraging greater initiative and innovation.

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119.       We aim to reduce the total Civil Service establishment by 10,000, or roughly 5 per cent, over the period 2000-01 to 2002-03. This will then bring Civil Service numbers back to the 1995 level. We are confident of achieving this target. To do so, we will -
  • continue the general freeze on Civil Service recruitment for the year 2000-01. Exceptional recruitment for essential services will have to be justified on a case-by-case basis;
  • cease recruitment, until further notice, into those grades designated for the purpose of the Voluntary Retirement Scheme, an initiative I shall discuss shortly;
  • require departments with a size of over 2,000 each to undertake an establishment review to devise medium-term department-specific targets to reduce or contain the number of civil servants;
  • require all departments to delete their existing vacancies in favour of more contracting out or alternative modes of service provision, unless retention of in-house staffing resources is clearly justified;
  • ask Heads of Grades to draw up manpower plans on a grade-by-grade basis, taking account of the known and anticipated wastage, service requirements, the scope for in-service regrading and promotions from other grades of staff, before further intake into a grade is contemplated; and
  • ensure that, in future, the creation of Civil Service posts to meet the growth in demand for services will be the exception rather than the rule, and will only be allowed if out-sourcing proves to be impossible. To promote these endeavours, we will set up a help desk to assist departments in undertaking out-sourcing.

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120.       Whilst we are embarking on further reforms, let me make it clear that changing the way we provide services will not reduce Government's responsibility for such services in any way. Through these management reforms, we are bringing in the more customer-oriented, innovative private sector providers to deliver certain public services. We are injecting an entrepreneurial spirit into the public sector to enhance its productivity.

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Voluntary Retirement Scheme

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121.      We also have a responsibility to the thousands of civil servants who have served the community well through their dedication and professionalism. We are committed to avoiding redundancy. To this end, departments have planned their efficiency measures in line with natural wastage. We have put in place a central clearing house mechanism to help redeploy surplus staff who cannot be absorbed by their own departments. Whilst these measures have achieved their intended purpose, they are inevitably constraining the scope and pace of greater efficiency. Moreover, our experience so far suggests that re-absorption within the service is not without its problems. It creates unnecessary tension between staff and management and some staff are finding it difficult to adapt to changing job requirements or their new working environment.

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122.       In the light of feedback from staff associations, we are proposing to introduce in 2000-01 a Voluntary Retirement Scheme for existing staff in designated grades to leave the Civil Service on a strictly voluntary basis. We have designed a compensation package for the Voluntary Retirement Scheme which we believe is fair and sufficiently attractive to staff and will bring about longer-term savings in government expenditure. Following further consultation with staff and approval of the scheme by the Chief Executive in Council, we will approach this Council for the voting of funds.

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Transforming the Subvention System

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123.       No discussion of public sector efficiency would be complete without acknowledging the role and contribution of the many subvented organisations. Currently, the subventions provided to these organisations account for nearly 40 per cent of the Government's total recurrent expenditure. This amounts to $76 billion in 2000-01. Together they employ a workforce of over 140,000.

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124.       I am pleased to know that our counterparts in the subvented sector are likewise vigorously pursuing the Enhanced Productivity Programme. Some, such as the Hospital Authority, have drawn up manpower plans similar to those of the Government. But in order to develop the full potential of these non-government organisations in the public sector, we need to institute fundamental changes to the mode of subventions, service level agreements and funding arrangements. Basically, we need to liberalise the control on inputs currently exercised by Government over these organisations and to shift our emphasis to output- and performance-based evaluation. This process of change will strengthen our partnership and collaboration.

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125.       In the coming year, we will see a number of improvements to the subvention system -
  • in the social welfare sector, we will extend the lump-sum funding arrangement to all non-government organisations in receipt of subvention. The current system applies to 186 agencies running over 3,000 service units. It is rigid and administratively cumbersome. The new funding arrangement will provide them with greater flexibility and incentives for efficiency and innovation. To ensure that no agency will be worse off by migrating to the new funding arrangement, we have earmarked additional funding of $150 million for its implementation over the next two years;
  • in the aided school sector, we will give schools greater funding flexibility to support school-based management. As a start, in the coming school year, we will disburse the existing item-by-item non-salary grants to schools in the form of a single recurrent block grant. Schools will be able to use the funds within the block grant in a flexible manner and to retain any unspent funds for future use;
  • we will enter into a new memorandum of understanding with the Vocational Training Council. This will provide greater funding flexibility and, as a corollary, the Council will need to commit to clear performance targets; and
  • we will commence discussions with the Hospital Authority on an alternative funding basis with reference to the population served as opposed to the current bed-based formula which is not conducive to the promotion of preventive health and community care.

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Public Finances

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The 1999-2000 Outturn

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126.       Let me now discuss our public finances. First, the outturn for the current financial year. I now estimate a small deficit of $1.6 billion for the year. That is $34.9 billion better than the $36.5 billion deficit originally estimated.

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Revenue

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127.       This dramatic improvement in our financial position comes about almost single-handedly from an unexpected growth in the earnings on our fiscal reserves invested with the Exchange Fund*. The increase in the Hang Seng Index from 10,049 at the end of 1998 to 16,962 at the end of 1999 has boosted the value of the portfolio of Hong Kong stocks acquired by the Exchange Fund in 1998. As a result, the investment earnings on our fiscal reserves have soared to $44 billion, almost double our original estimate of $22.2 billion. In addition, revenue from land premia is expected to be $3.1 billion higher than previously estimated.

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128.       Other items of revenue have also shown some fluctuations from the original estimate. We have seen lower than forecast receipts from stamp duties, betting duties and excise duties but higher than expected receipts from salaries tax. But these ups and downs have virtually cancelled each other out.

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129.       In total, we estimate that revenue collections for the year will be $229.3 billion, or $24.2 billion higher than the original estimate of $205.1 billion.

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130.      A larger than expected income should be welcome, but I must add a word of caution. Receipts from land sales and especially the exceptional level of investment earnings this year are not sources of steady and recurrent income. Certainly we cannot expect a repeat of this windfall in investment earnings fuelled as it was by a near 70 per cent rise in the Hang Seng Index.

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* Since 1 April 1998, the return on our investment placed with the Exchange Fund has been directly linked to that achieved by the entire Exchange Fund.
Expenditure

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131.       A lower than expected level of expenditure also contributed to the reduced deficit.

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132.       Expenditure in the General Revenue Account was $7.1 billion less than we forecast a year ago. Of this saving, $1.5 billion arose from a slow-down in the growth of Comprehensive Social Security Assistance (CSSA) payments. There were also savings from lower than anticipated pension payments and as a result of the dissolution of the two Provisional Municipal Councils totalling $1 billion. The remaining saving of $4.6 billion came partly from reduced spending across government departments and partly from lower prices for goods and services.

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133.       After taking into account reduced demand on a number of loan schemes, we now expect total expenditure in the current year to be $230.9 billion, or $10.7 billion lower than forecast.

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Estimates for 2000-01

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134.       Let me turn to the estimates for the 2000-01 financial year. In formulating my expenditure and revenue proposals for the coming financial year, I had three objectives in mind -
  • to strike a balance between the need to improve our financial position and my wish not to undermine our economic recovery;
  • to exercise discipline in controlling the growth of our expenditure by returning after two exceptional years to the principle of keeping it commensurate, over time, with our economic growth; and
  • to continue to meet the needs of the community through funding essential public services.

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135.      Indeed all of these are in line with our long-held principles of fiscal management, and reflect the collective wisdom of our citizens, Members of this Council, academics and the media. All the views that we received have played a significant role in refining our thoughts throughout the budgetary process. We have taken on board a number of the key points made to us in formulating our expenditure and revenue proposals for the coming year.

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Revenue Estimates

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136.       I will deal with the estimates of revenue first. After taking into account the effect of my revenue proposals which I will explain shortly, I am forecasting total revenue to pick up to $244.2 billion.

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137.      While our recurrent revenues will start to pick up, two of our main sources of income ¡Ð profits tax and rates ¡Ð will do so at a rate much slower than our forecast GDP growth rate of 5 per cent, principally as a result of three factors -
  • under our provisional tax system, profits tax is calculated on the basis of profits in the previous year. This means that even if the economy improves this year, we will only start to collect a higher level of profits tax in the following financial year, i.e., in 2001-02;
  • the ability of companies to carry forward previous years' losses to offset against current year's profits will also depress profit tax collections in the short-term; and
  • the annual rating revaluation reflecting the continued decline in market rentals will depress our revenue from rates in the short term.

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Spending Constraints

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138.       Before turning to the expenditure figures for the new financial year, I must reiterate the message that I have stressed repeatedly since the last Budget. That is, in order to put our medium-term finances on a healthy footing we will need to exercise strict control over the growth in government expenditure. The Administration and politicians must resist the temptation to erode this fiscal discipline even when the economy picks up faster than expected.

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139.       In last year's Medium Range Forecast, I said that, in order to bring the cumulative growth in government expenditure fully back in line with cumulative economic growth over time, we would need to restrain the growth in government expenditure to a level lower than the trend growth of the economy. I indicated then that I would contain growth to 3 per cent for 2000-01 and 2.5 per cent for subsequent years, against a 3.5 per cent trend growth rate of GDP. Even with an increased trend growth forecast of 4 per cent, I do not intend to ease these constraints. This will allow us to restore the balance between the growth in government spending and the growth in the economy over the next four years.

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140.       Indeed, I am now pleased to report that with the combined effects of EPP and stabilised expenditure under the CSSA Scheme, we are able to restrain the growth in recurrent government spending to 2.5 per cent in 2000-01 and still have room for new spending initiatives. I have referred to progress on EPP earlier. Let me now discuss CSSA and welfare spending in general.

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141.       In 2000-01, recurrent spending on social welfare will reach nearly $30 billion. Slightly over half, or $15.5 billion, goes to the CSSA Scheme. Corresponding figures five years ago were $13.2 billion and $4.8 billion. We accept that social welfare is one of government's primary obligations and caring for those who are least able to look after themselves is essential to any compassionate society. But given the economic and financial limits to how much the Government can spend and the overriding constraint to live within our means, substantial increases in welfare spending year after year are clearly not sustainable. We must ensure that CSSA will not become an alternative to work. In other welfare services, we must instil a sense of shared responsibility.

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142.       Last June, we introduced some modifications to the CSSA Scheme which aimed at removing dependence on CSSA. They have achieved some encouraging results. The total CSSA caseload has declined by 2 per cent since June 1999, and that of the unemployed has dropped by 13 per cent. Total CSSA expenditure for the year 1999-2000 is now estimated to be $14 billion. This is $1.5 billion lower than the original estimate but still represents an increase of $1 billion over the previous year. For 2000-01, we are seeking a provision of $15.5 billion which we believe should be adequate to meet CSSA demands from an ageing population and any contingencies.

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143.       Total welfare recurrent spending in 2000-01 will grow by 9.2 per cent in real terms. While this is a welcome fiscal relief when compared to the double-digit growth of recent years, it still significantly outstrips the growth in other equally pressing areas, like education, health, and the environment. I look forward to receiving proposals from the Secretary for Health and Welfare to achieve cost-effectiveness in welfare expenditure and a sustainable social welfare programme in the medium and longer term.

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144.       The Harvard Report on Hong Kong's Health Care System may not have forged a consensus on the way forward, but it has certainly focused minds on the need for different sources of financing for the quality service that the community now enjoys. The Secretary for Health and Welfare will shortly unveil the Government's proposals in the form of a green paper for public consultation.

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145.       Members will be pleased to know that recurrent spending on environmental protection will rise by 7.6 per cent in real terms for the coming financial year. As the Chief Executive announced in his Policy Address, we will be making available $1.4 billion for various incentives aimed at assisting the transport industry to reduce exhaust emissions. I have earmarked sufficient money in 2000-01 for us to make a start on those items which are ready for implementation. In addition, we have set aside $100 million for carrying out community education programmes that should help our citizens understand more about the importance of environmental protection and conservation.

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Expenditure Estimates

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146.       For 2000-01, total government spending, including payments from the Capital Investment Fund, will rise to $250.4 billion. Members will have noticed from the Draft Estimates of Expenditure published last Friday that we have made provision for all the improvement initiatives announced in the Chief Executive's three Policy Addresses.

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Additional Expenditure Initiatives

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147.       I am happy to be able to announce a considerable number of additional spending initiatives for the coming year. Members will notice that these spending proposals reflect the views they expressed during our Budget consultations.

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Measures to Promote Employment

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148.       Although the economy is recovering quickly and unemployment is falling, Members are unanimously of the view that promoting employment must be one of our top priorities. I agree and have earmarked $300 million of recurrent expenditure for implementing a package of training, retraining and employment-related initiatives. Most of the proposals are based on the success of similar schemes launched under the guidance of the Task Force on Employment. The Secretary for Education and Manpower will introduce these measures in the next few days. I shall only outline them in brief -
  • we will continue and enhance the Youth Pre-employment Training Programme for over 10,000 secondary school leavers aged 15 to 19 each year, including an additional on-the-job training programme;
  • we will expand the programme for training junior information technology technicians, providing a total of 1,000 places each year;
  • we will provide an additional 1,500 training places in the Vocational Training Council for secondary 3 and secondary 5 school leavers;
  • we will support the introduction of bridging programmes by the Federation of Continuing Education in Tertiary Institutions to provide expanded continuing education opportunities for secondary school leavers and to support these students financially in pursuing their studies; and
  • we will widen the scope of the non-means-tested loan scheme to benefit more people pursuing continuing education.

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149.       These measures will enable our citizens to upgrade their knowledge and skills as they gear up for the challenges ahead.

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Measures to Promote Self-reliance

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150.       The initial success of the Support for Self-reliance programme introduced last June shows that it is important to help able-bodied CSSA recipients and potential recipients to overcome barriers to work. Accordingly, I have set aside $200 million in the coming year for the implementation of a service-oriented strategy. This strategy will offer targeted assistance to unemployed, low-income and single-parent CSSA recipients. It will also provide supporting services to the more vulnerable to prevent them from falling into the CSSA net. The Secretary for Health and Welfare will brief Members fully on these measures, which include -
  • extending the Active Employment Assistance scheme to all able-bodied CSSA recipients and offering special assistance to those who have been away from the job market for some time;
  • undertaking a pilot programme of job matching to help CSSA recipients to fill vacancies available under the Supplementary Labour Scheme;
  • expanding support services such as extended hours of child care facilities, after school programmes, community support for the aged and the sick so that the parents and the carers may go out to work. This service expansion proposal will also boost employment;
  • strengthening support services for single-parent families, new arrival families and victims of domestic violence; and
  • encouraging CSSA recipients to take up a job, by relaxing the current restrictions on disregarded earnings.

More Services for the Elderly and the Disabled

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151.       The development of residential services for the elderly and the disabled is often constrained by a lack of new premises. It is important that we make the fullest use of the facilities currently available. In consultation with the agencies concerned, the Director of Social Welfare has identified room for service expansion in existing facilities. In 2000-01, we will make available an extra $80 million for this purpose. This will provide an extra 870 residential places for the elderly and 250 residential places, 150 day places and 60 pre-school places for the disabled.

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More Financial Assistance to Needy School Students

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152.       When I consulted Members on this year's Budget, some suggested that the Government should improve the student financial assistance schemes to relieve low-income families of the cost of schooling for their children, when they are striving to make ends meet in the present economic circumstances. I am happy to agree to this and to provide $140 million a year to improve the textbook assistance and travel subsidy schemes beginning in the new school year in September.

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Improving Building Safety

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153.       In his 1999 Policy Address, the Chief Executive referred to our commitment to providing the community with a safe living environment. While we are pressing ahead with a new and proactive urban renewal approach, there are thousands of sub-standard buildings or unauthorised structures posing a threat to life and property. To tackle this problem, we will provide -
  • in phases over the next two years, 66 additional staff to Fire Services Department and 47 additional staff to Buildings Department to step up fire inspection and enforcement in private buildings, with particular attention paid to old composite buildings; and
  • $90 million over the next three years to the Buildings Department to launch a large-scale operation to clear unauthorised rooftop structures and building works on external walls of buildings.

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Investing in Quality Education

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154.       Quality education for our citizens has always been one of the Chief Executive's top policy priorities. I am pleased to note that the Quality Education Fund which we established in 1998 with a $5 billion grant has since risen to $6.4 billion, thanks to good financial management. This was achieved after disbursement of $400 million for over a thousand expenditure items.

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155.       I intend to allocate more funds to promote quality education in the coming financial year. The Education Commission has done excellent work in the first two stages of public consultation and no doubt will come up with a comprehensive proposal to reform our education system in due course. I have set aside a sum of $800 million in 2000-01, which will enable us to make an early start on those recommendations of the Commission that the Government and the community consider to warrant priority action. At the same time, I expect the public, particularly those benefiting from the fruits of education, to shoulder a greater share of the substantial additional cost involved in the implementation of the agreed reform package.

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156.       In total, our estimated expenditure for the coming financial year will be higher than our estimated revenue. I am therefore forecasting a deficit of $6.2 billion.

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Medium Range Forecast

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157.       This deficit forecast for 2000-01 means that we will have to endure a third successive year of budget deficits. As I made clear last year, this can only be acceptable if it is set in the context of a return to fiscal balance over the medium term.

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158.       My Medium Range Forecast, which is published as an annex to the printed version of this speech, shows that this is only marginally the case. The forecast is based on the increased forecast of trend GDP growth of 4 per cent which I have referred to earlier. It also assumes that we will restrict the growth of government expenditure to 2.5 per cent a year throughout the remaining years of the forecast period and, as last year, it assumes that we will receive $15 billion in both 2000-01 and 2001-02 from the partial privatisation of the MTRC. Even on this basis, we will achieve a modest budget surplus only at the end of the forecast period, in 2003-04.

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Returning to a Modest Budget Surplus
Only at the End of the Forecast Period
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159.      This would leave the fiscal reserves within the guidelines which I set out in my 1998 Budget Speech*, albeit towards the lower end of the range.

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160.       While this scenario appears acceptable, I must caution that our fiscal balance hinges on achieving a sufficient level of recurrent income. And, as always, my Medium Range Forecast assumes that, over the forecast period, we will be able to increase our revenue from items such as fees and charges and fixed duty rates in line with inflation. If not, the overriding need to achieve a sustainable fiscal position will leave us with no option but to increase existing taxes, introduce new taxes or a combination of the two. This is a theme to which I will return later.

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* In the 1998 Budget, we announced the adoption of the total of 12 months' government expenditure plus Hong Kong dollar money supply under the M1 definition as the benchmark for the appropriate level of fiscal reserves, allowing a range of plus or minus 25 per cent.
Revenue Proposals

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161.       In formulating any revenue proposals for the coming financial year, I have had to balance the needs on two fronts. The long-term interests of Hong Kong demand that I improve our financial position as much as possible and work towards a balanced budget. On the other hand, I also need to take account of the fact that our economy has only just begun to turn around and many citizens and businesses have not yet fully recovered from the turmoil of the last two years.

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162.       After taking these factors into consideration, I have decided to leave most revenue items as they are. Let me begin with the small number of revenue measures that I propose for the coming year.

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Stamp Duty on Stock Transactions

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163.       I propose to reduce the rate of stamp duty on stock transactions by 10 per cent, from 0.25 per cent to 0.225 per cent.

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164.       The purpose of this proposal is to help maintain the competitiveness of Hong Kong in the global financial marketplace. Many major stock markets around the world, including the United States, Japan, and New Zealand, are already not charging stamp duty on stock transactions to increase their transaction volumes. There is a practical need for Hong Kong to reduce its stock transaction costs as well for our market to remain attractive.

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165.       But I must point out that stamp duty is only a part of the total transaction cost. Brokerage commissions, which constitute two-thirds of that cost, also need to be reduced if we are to achieve a real impact in making our stock market more competitive. The market also needs to open up further to bring in more competition. I understand that the new Exchange will be studying these issues. I look forward to receiving some good news on lowered brokerage commissions. This will certainly help me look more sympathetically at any subsequent request from the industry for future reductions in the stamp duty on stock transactions.

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166.       I estimate that this proposal will cost the Government $520 million in 2000-01 and $2.9 billion over the period of the Medium Range Forecast to 2003-04.

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Diesel Duty

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167.       In June 1998, we reduced diesel duty from $2.89 to $2.00 per litre as part of our relief measures. I extended this temporary concession to 31 March 2000 in my Budget last year.

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168.       I now propose to extend the concession for a further nine months to 31 December 2000, after which the rate of duty will revert to $2.89 per litre.

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169.       The concession on diesel duty was introduced during a time of recession. I expect our economy to have much improved by January 2001, and that there should no longer be any grounds for continuing with the concession.

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170.       In addition, I have earmarked funds for helping diesel taxis to switch to LPG-fuelled vehicles in the coming financial year. I therefore expect that, by next January, the transport industry should find it much easier to reduce its dependence on diesel, and the impact of this proposal should diminish considerably.

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171.      My proposal to extend the concession on diesel duty is expected to cost $460 million in 2000-01.

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First Registration Tax Exemption for Electric Vehicles

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172.       I now come to another revenue proposal that helps to reduce exhaust pollution. In order to make electric vehicles more attractive by reducing their cost, I have, in my 1997 Budget, extended the exemption from first registration tax for such vehicles by a further three years to 31 March 2000. As another part of our package to combat air pollution, I now propose to extend this exemption for another three years in the hope of further encouraging the use and development of this type of environmentally-friendly vehicle.

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Review of Exemptions from First Registration Tax

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173.       On first registration tax for all other vehicles, my only proposal relates to the scope of exemptions.

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174.       In 1994, we reformed the basis on which first registration tax was calculated by charging an ad valorem rate on the published retail price of a vehicle instead of its cost, insurance and freight value. Reflecting trade practices of the time, the relevant Ordinance provides exemption for certain items when calculating the taxable value. These include air conditioners, audio equipment, anti-theft devices and distributors' warranties.

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175.       As trade practices have changed, the rationale for granting such exemptions may no longer be valid. We will conduct a comprehensive review of the scope of exemptions from first registration tax with a view to updating the system. We will consult the transport industry after the review is completed before submitting more detailed proposals to this Council.

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Implementation of Revenue Proposals

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176.       That concludes my revenue proposals this year. My proposals to mantain the reduced diesel duty rate for another nine months and exempt electric vehicles from first registration tax for another three years will take effect from 1 April 2000 under a Public Revenue Protection Order. The proposal to reduce the rate of stamp duty on stock transactions will come into effect after this Council has passed the necessary legislation.

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Unchanged Tax Items

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177.      Of all the tax items on which I propose no change, profits tax, salaries tax and rates are the three that generate the highest level of income. Let me explain why I am not introducing any change this year.

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Rates

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178.       I shall begin with rates. While I am proposing no change to the rates percentage charge, the latest general revaluation shows that the rateable values for properties have fallen on average by 7 per cent, reflecting the continued decline in market rentals. The vast majority of ratepayers will benefit from this reduction, which will take effect from 1 April this year.

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Profits Tax

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179.       Our existing profits tax rate and system are already extremely business-friendly by international standards. There is simply no case for further concessions in our present fiscal situation.

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180.       We charge a standard rate of 16 per cent on the profits of all incorporated companies. This is the lowest rate in the region and one of the lowest around the world.

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181.       Under our territorial source system, we charge tax only on profits originating in Hong Kong. This is in contrast to the far more common practice in other tax jurisdictions, whereby all profits made by resident enterprises, including those made overseas, are chargeable to tax. And we have an extensive range of depreciation allowances and deductions, some of which were enhanced in my 1998 Budget following our profits tax review.

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182.       We have carefully deliberated the pros and cons of the various profits tax proposals put forward to us. One suggestion was that we should introduce a progressive tax system. The argument for requiring enterprises with bigger marginal profits to pay tax at a higher rate is that this would be a fairer system which would also increase income for the Government. But our assessment is that this might only be true in theory. In practice, such a system might achieve the opposite results and leave us worse off. For example, it would place the tax burden on an even smaller number of companies. This could dampen the enthusiasm of investors and lead to more rampant avoidance.

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183.      Another important argument against such a change is that it will complicate our tax system and undermine our well-known principle of keeping it as simple as can be. Such a move would clearly not be a very helpful addition to all our efforts to raise Hong Kong's competitiveness.

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Salaries Tax

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184.       As a result of the salaries tax concessions granted in recent years, more than 60 per cent of our working population do not have to pay salaries tax. Seventeen per cent of our taxpayers contribute almost 80 per cent of our salaries tax income. And only 0.3 per cent of the entire working population pay the tax at the very low standard rate of 15 per cent.

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185.       Given the reduction in prices in the past two years, there is a strong case for reducing personal and other allowances. This would help widen the tax net. The tax burden would then be shared among a larger group of salary earners instead of resting on a restricted few. But I have decided not to take such a course of action this year because our economy is still at an early stage of recovery.

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Tobacco Duty

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186.       I proposed in my last Budget that we should rethink our policy on tobacco duty in view of the growth in the number of smokers and the drop in sales of duty-paid cigarettes. Our review showed that smuggling and the sale of contraband cigarettes remain rampant. Increasing the rate of tobacco duty would only make such cigarettes even more attractive. Bringing down the rate is not a viable option either as this would run counter to our objective of protecting health.

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187.      But I believe that we need to take more active steps to achieve the dual purposes of protecting the health of the public and increasing our revenue. To this end, we have reserved $20 million for the Council on Smoking and Health to carry out a three-year programme aimed at enhancing anti-smoking education and services.

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188.       We will also make an annual provision of $12 million available to the Customs and Excise Department for three years beginning from 2000-01. A special task force will be set up in the Department to step up its enforcement action against the sale of contraband cigarettes at street level. We will be monitoring the situation closely and will consider legislative measures if we need to take stronger action against such crime.

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Departure Tax

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189.      I now come to the subject of departure tax. In my Budget last year, I proposed that we should study the question of introducing a land and sea departure tax. This would provide a reliable and growing source of additional revenue and eliminate the inequitable treatment under which only some passengers leaving the territory are subject to departure tax.

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190.       An inter-departmental group convened by the Finance Bureau has been considering the detailed arrangements involved in this proposal. The scope of that study covers the collection mechanism, exemption arrangements, and safeguards against abuse.

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191.       I am grateful for all the views expressed by the community and Members in recent months. Objections to this tax have focused mainly on two areas. Some questioned the principle, while others expressed concern about the timing of its introduction. I remain convinced that the principle is correct. But in view of our nascent economic recovery, I have decided not to introduce a land and sea departure tax in the coming financial year in order not to put an additional burden on the community. When the time is ripe and we have completed our detailed implementation study, we will consult the industry and Members on our proposals.

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Government Fees and Charges

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192.       Government fees and charges are another important source of steady revenue. We froze most of them in February 1998. The reason for this is well known to Members and the community: we did not wish to impose an additional financial burden on the people of Hong Kong during the recession. But I have stated repeatedly that this was only an exceptional relief measure at a time of economic setback, and that as the economy improved, we would have to restore the fair 'User Pays' principle.

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193.       Some have urged us to continue with a blanket freeze on all fees and charges with no target end date. This is tantamount to asking taxpayers to keep subsidizing the users of these services indefinitely and at an increasing cost. It means in effect that the public will have to keep providing semi-free lunches to users who should pay a slightly higher fee, such as mahjong parlour licensees and owners of factories producing chemical waste. I cannot believe that the public and Members think that it would be fair for taxpayers to continue to subsidise such businesses. It is certainly not a very prudent way of managing public finances for a government that has to deal with the vexed question of a lingering deficit.

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194.       We will be coming to this Council to discuss how to deal with the revision of fees for different types of public services. We will first deal with fees that do not directly affect people's livelihood or general business activities. I look forward to Members giving our proposals a fair hearing.

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195.       Whatever our proposals, I can assure Members that we will continue to exercise vigorous cost control to reduce the pressure for fee increases.

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Review of Public Finances

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196.      Finally, I need to address the important question of our future public financial position, particularly the recurrent portion which represents the most significant part of our fiscal system.

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197.      From the figures published this afternoon, members of the public and this Council will see that we will have an operating deficit in 2000-01. Broadly speaking, this means our recurrent expenditure is estimated to exceed our recurrent revenue. This repeats our experience in 1998-99 and 1999-2000 and is forecast to continue up to 2002-03. This has not happened in the 50 years before 1998. If it persists, we will have a serious fiscal problem.

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198.       For the moment, we do not know whether the phenomenon of successive operating deficits is simply cyclical in nature, or whether it represents a more serious structural problem. We will know the answer only when we can see the extent to which our revenue picks up as the economy gathers momentum. This will take some time. But as a responsible Government, we simply cannot afford to scramble for solutions only when all the signs are there that Hong Kong does actually face a structural financial problem. To safeguard the long-term interests of the community, we need to take active steps now to make sure that we have ready some well-deliberated and feasible measures to keep Hong Kong safe from fiscal instability even under the worst case scenario and to maintain investors' confidence in our economy.

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199.       We also need to be alert to potential problems that may erode our revenue base. These include our very narrow and shrinking profits and salaries tax nets; the possible loss of profits tax due to globalisation; a decrease in revenue because of our inability to revise fees and charges for public services; threats to our betting duty yield from illegal gambling and the spread of e-gambling; and the erosive impact of global competition on our yields from stamp duty on stock transactions.

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200.       Our improved land supply mechanism has already brought a more abundant and steady supply of land to the market. As a result, we can expect that income from land transactions will be less volatile and unlikely to produce the kind of windfalls which we have seen in the past. The same applies to other types of land- and property-related revenue such as stamp duty on property transactions, and possibly even profits tax collections from the property and banking sectors.

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201.       I sincerely hope that our package of measures to encourage the transport industry to switch from diesel to LPG for environmental reasons proves successful. But if it does, one effect will be a gradual drop in our income from diesel duty from as early as next year.

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202.       The greatest uncertainty stems from the likely exponential growth of e-commerce and its impact on our tax regime. As more commercial activities take place on the Web, we can expect greater complications and difficulties in tax assessment and collection. This is a subject now being studied by many governments and international organizations. Hong Kong's territorial-based tax system, under which we tax only locally-derived income, is likely to make our revenue yield even more vulnerable to the impact of e-commerce.

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203.       If government revenue became unsustainable because of these factors, we could deal with the problem in three ways. The first is to exercise strict control over government expenditure. Indeed this is already what we are doing. My decision to reduce the growth rate of recurrent expenditure to 2.5 per cent for 2000-01, plus our EPP efforts and the measures to control Civil Service numbers outlined today, are solid proof that we are determined to achieve this aim. But there is an emerging school of thought that cutting down on government spending will cure all fiscal ills, as if this Government has been engaging in profligate spending. Nothing is further from the truth. The vast bulk of our expenditure is spent on the direct provision of public services such as housing, education, medical services, law and order and social welfare. Drastic cuts in expenditure in these areas would inevitably affect the level and quality of services to the public, and the ones to suffer most would be those in the low-income bracket. Such an outcome is not acceptable to the Government and I am sure it is unpalatable to Members and the entire community, not to mention that it would also undermine Hong Kong's long-term interests.

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204.       The second option is to do nothing about the structural deficits but to dip into our reserves every time expenditure outstrips income, until the time comes when our reserves are depleted and we have to find another way out. Such reckless behaviour would clearly be against the Basic Law requirement to strive for fiscal balance. It would also mean that, as our reserves run down, we would no longer have adequate means to defend our currency, provide relief to our citizens or maintain our spending programmes in an economic downturn. I cannot believe this is what Hong Kong people want. And investors would quit Hong Kong in droves.

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205.       The only remaining option is to increase revenue to make sure that the Government will have enough income to pay its bills. This could be achieved through widening our tax net and tax base, raising existing tax rates, or introducing new taxes. We know very well that any of these could have an impact on our economy and the livelihood of our citizens. Indeed, that is one reason why I have not tinkered with any major tax item this year. But a possible loss in revenue due to changing global and domestic circumstances could be a problem. We would be failing in our duty if we hid our heads in the sand and hoped that the problem would never arise or somehow disappear. This is especially true if we want to make sure that Hong Kong remains fiscally sound in the years to come and that the Government will continue to have the means to maintain and improve public services and enhance Hong Kong's competitiveness.

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206.       I have decided to take a two-pronged approach that would enable us to study the extent and nature of the problem as well as find the solutions. The Secretary for the Treasury will head a Task Force which will continue to monitor the correlation between our recurrent income and economic growth. This should enable us to identify whether we are indeed facing a short-term cyclical problem or a fundamental shift in our revenue base needing more radical remedies. In addition, the Task Force will critically examine the viability of our existing tax regime. In this process, it will elicit the views of Members and experts in the field.

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207.       In parallel, we will set up an independent committee comprising tax experts, professionals and academics. This committee will be tasked specifically to look into the suitability of introducing new types of broad-based taxes, including a consumption-based tax, and to consider what form such taxes should take and their practical implications. The job of the committee will be to weigh the relative pros and cons of the different options, and recommend to me as soon as possible the most feasible and desirable ones. The committee will publish its report.

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208.       In this context, I wish to make one point clear: maintaining our low, simple and predictable tax regime is an important building block of our prosperity. This is also in line with Article 108 of the Basic Law. Under no circumstances will I depart from this important principle and sacrifice Hong Kong's competitiveness.

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Conclusion

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209.       This year I have proposed fewer revenue measures than in any of my previous Budgets. This does not mean that we are bereft of ideas. It is our considered view that the interests of the community are best served at this time by a gentle hand on the tiller. We also need to have a clearer idea of our future revenue position.

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210.       If Members look back, they will find generous tax concessions in all my four previous Budgets. During the good times when the economy was buoyant and growing fast, we gave back as much as we could by reducing the tax burden on the community through substantial concessions. And when the economic climate turned foul, we had no hesitation in providing relief from hardship through tax rebates and by freezing fees and charges.

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211.       The storm has now passed and our economy is back on a growth track, although Government finances are still in the red. On balance, I have decided that this is a year for consolidation rather than dramatic steps. In this Budget, I have sought to -
  • re-affirm the economic and financial principles behind Hong Kong's success as we enter the 21st Century;
  • outline our strategy in response to the external and internal changes facing us and to position ourselves to take advantage of the enormous opportunities presented to us in this new era;
  • provide funding support to enhance social services, putting special focus on strengthening our human capital and encouraging our citizens to acquire new knowledge and skills;
  • continue to improve our financial position and our public services through controlling government spending and through public sector reform; and
  • explain clearly the potential problems which could challenge our prudent management of public finances in the future, with a view to stimulating more informed discussions on the way forward.

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212.       Hong Kong's past successes and the events of the last two years continue to remind us of the importance of sticking to our basic values. The new challenges ahead demand that we learn from past setbacks and remain vigilant. And the advent of a new century invites us to seize the fresh opportunities that lie in store for us.

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213.       Looking back at what we as a community achieved in the last century and the recent rapid rebound of our economy, I am confident that Hong Kong will continue to outdo itself in scaling new heights.

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