I move that the Appropriation Bill 2001 be read a second time.
Over the past five years, Hong Kong has experienced some extraordinary
ebbs and flows of the economic tide. As Financial Secretary, I have had to
help chart a course through these. In my early Budgets, I was able to
offer generous tax concessions up to the level allowed by our economic
growth and buoyant public finances at the time. On 1 July 1997, our
reunification with the Mainland took us into a new era. Then, in the wake
of the Asian financial turmoil, we were buffeted by a series of
unprecedented shockwaves that threatened our very economic survival. To
our relief, the economy turned around in 1999. And in my Budget last year,
I was able to greet the arrival of the new millenium with renewed
optimism. Throughout this period Hong Kong has continued its economic
restructuring. It is little wonder that I have found the preparation of
each Budget a unique challenge and experience. This, my final Budget, is
Over the years, I have stressed the importance of prudent financial
management and balanced budgets. This year, the need for balance has been
particularly close to my heart. In recent months, many in the community,
including honourable Members of this Council, have urged me not to put at
risk our continued economic growth by seeking too rapid an improvement in
our fiscal position. They have also pointed out that I should consider not
just the buoyant economic indicators but also the standard of living of
ordinary people. But, on the other hand, there are those, both in Hong
Kong and overseas, who caution against the further use of fiscal stimuli
and urge an early return to balanced budgets. As the Chief Executive said
in his 2000 Policy Address, the Administration needs to strike the right
balance in policy formulation, so that we foster Hong Kong's long-term
development and improve the standard of living of our people. I trust that
the community will support the balanced judgements which I have tried to
make in this Budget.
I will begin by addressing the state of the economy and Hong Kong's way
forward to continued economic development. I will then deal with our
public finances in the short to medium term and my budget proposals for
the coming year.
|The Hong Kong Economy
|Economic Performance in 2000
The economy returned to positive growth in the second quarter of 1999 and
continued to flourish during 2000. Last year -
The Hong Kong economy has continued to grow
We have seen a continued steady decline in the rate of unemployment, from
a high of 6.3 per cent in 1999 to 4.3 per cent in the quarter ended 31
Unemployment continues to come down
These figures indicate that the level of economic activity has picked up
dramatically. The adjustment in prices, wages and rents has been crucial
to our economic recovery. We have enhanced our productivity and the
competitiveness of our exports. The performance of other economies has
also helped. This remarkable achievement has once again demonstrated Hong
Kong's tenacity and resilience.
But I have not lost sight of the fact that many in the community have yet
to experience an improvement in their own circumstances. For businesses,
profit margins are tight and fall short of those before the financial
crisis. Although the adjustment in wages has helped our economic recovery,
it has been difficult and painful, particularly for those who have
suffered pay freezes or reductions. Although the rate of unemployment is
falling, it remains higher than before our recent economic setbacks. The
downward adjustment in the property market also means that a considerable
number of middle-income households find that the value of their flats has
fallen. All this has been in the forefront of my mind as I prepared this
|Economic Prospects for 2001 and
Overall, Hong Kong's growth should moderate in 2001. On the downside, I
expect our economic performance to be affected by the rapid slowdown of
the US economy, continued economic stagnation in Japan and slower growth
in domestic demand in East Asia. On a positive note, we should stand to
benefit from steady economic growth in the European Union and the
sustained vigorous growth of the Mainland economy. In particular, China's
coming accession to the World Trade Organisation will give us new impetus.
Domestically, local consumption and investment spending should continue to
grow. We can expect to see improved employment prospects and wages picking
up modestly. But I should point out that there are no grounds for
complacency. Increasing globalisation means we are, more than ever, prey
to adverse political and economic events elsewhere and we must be alert to
any potential dangers.
I am forecasting that in 2001 -
The fall in consumer prices is gradually
Over the medium term, I expect the economy to continue to grow steadily,
but the external factors which I have mentioned may still pose some
challenges. Last year, I forecast a trend GDP growth of 4 per cent a year,
in real terms, for the period from 2000 to 2003. I believe this trend
growth rate remains valid for the period from 2001 to 2004. I expect
prices to rise gradually after zero inflation in 2001. The GDP deflator is
forecast to be 2.5 per cent a year over the medium term.
|Strategies for Development
Last year, in his Policy Address, the Chief Executive made it clear that
we must seize the opportunities presented by our country's coming
accession to the WTO and the development of its Western Region. We must
upgrade our human capital. We must also hone our strengths as a centre for
international finance and high-value-added services. It is success in
these areas that will drive our economic growth to the benefit of the
whole community. I would now like to elaborate on how I see these
developments being taken forward. As always, the market will lead, with
the Government in support.
|China's Accession to WTO
|Opportunities and Challenges
China will soon become a member of the WTO and will further open up its
market to competition. This will be a milestone in history and will herald
a new chapter in world trade. The decision to develop Western China, which
covers more than half of our country, will expand the already enormous
China market. These developments will put the Mainland on the road to
greater prosperity and will open up to the world, especially Hong Kong,
vast development potential and business opportunities.
China's accession to the WTO will affect everyone in the community. This
is not just a matter of trade. It is a significant step that will trigger
off a chain reaction throughout our economy. It will bring opportunities
and challenges to all businesses, big and small.
Our economy is linked very closely to that of the Mainland. Last year,
some US$44 billion, or 70 per cent of the capital raised on the Hong Kong
securities market was for Mainland enterprises. In 2000, the number of
overseas companies with regional offices in Hong Kong increased by 20 per
cent because of Hong Kong's obvious value as an intermediary for
developing business on the Mainland. These are but two indicators of the
huge potential for Hong Kong arising from China's accession to the WTO.
The stage is now set for another economic take-off.
with these opportunities will come challenges. Although Hong Kong is a
Special Administrative Region of China, it does not enjoy any preferential
trade treatment from the Mainland. Our role as an intermediary between the
Mainland and the rest of the world will come under challenge. There will
be competition not only from overseas markets but also from Mainland
cities, whose remarkable performance in recent years must not be
overlooked. To turn these challenges into opportunities, Hong Kong needs
to build on its traditional strengths with pragmatism and a spirit of
"One Country, Two Systems" gives us an enviable advantage. Hong
Kong stands on the doorstep of the vast China market. The majority of our
population is Chinese, steeped in Chinese culture and sharing a common
heritage. Our trading partnerships with businesses on the Mainland go back
many generations. We have excellent commercial networks linking the
Mainland with overseas markets. We know the business environment. What is
more, we pride ourselves on living by the rule of law, maintaining a level
playing field, upholding all our freedoms and providing clean government.
All these have made Hong Kong a magnet for international businesses.
Capitalising on "One Country, Two Systems", we must build on
these advantages and reinforce our economic partnership with the Mainland,
starting with our neighbour, Guangdong, and particularly with the Pearl
River Delta. We must aim to complement each other, making the most of our
different strengths, turning them into a competitive advantage for the
entire South China region. We must grasp this opportunity to become the
World City of Asia and a first-class international financial centre,
providing an unrivalled breadth and depth of financial and
high-value-added services. All this will contribute to the development of
our country and enhance Hong Kong's unparalleled value as an SAR of
We cannot sit back and wait for this to happen. We must work together with
the Mainland. We must take the initiative to step up co-operation with
Guangdong. The interbureau research group which I am leading is, as a
matter of priority, examining practical ways of helping Hong Kong
businesses capture opportunities in the new markets that will emerge
following China's accession to the WTO. We have been holding intensive
discussions with the Central People's Government and other Mainland
authorities. Focusing on the services industry and professional services
in which Hong Kong has an edge, we aim to help Hong Kong businessmen gain
first-hand access to the latest market information and to help them
explore the scope for co-operation with their Mainland counterparts.
Our efforts will not stop there. Hong Kong needs better infrastructural
links, greater support services for businesses and more exchanges of
people and knowledge.
|Enhancing Infrastructural Links
|Developing a Regional Transportation
I will start with infrastructural links. Since reunification, there has
been an increasing flow of economic and social activities between Hong
Kong and the Mainland, particularly Guangdong. On average, 330,000
passengers travel between Hong Kong and the Mainland each day. The growth
in passenger traffic by land has been particularly impressive. It has
surged by nearly 80 per cent since reunification. The average daily
throughput of cargo exceeds three million tonnes. Over the last three
years, the throughput of land cargo has increased by more than 250 per
To cater for the burgeoning economic activities between Hong Kong and the
Mainland, we are already expanding our facilities and services. Projects
include early construction of the Shenzhen Western Corridor connecting
Hong Kong with Shekou, the Deep Bay Link and the Lok Ma Chau Spur Line. We
are also seeking a further expansion of air services between Hong Kong and
the Mainland. And the Airport Authority is pursuing the development of a
high-value-added logistics centre and a marine cargo terminal at the
But we need to do more. Improvements to infrastructural connections with
the Pearl River Delta and intermodal transport interchanges in the South
China region should be priorities. We need to smooth the flow of people
and goods across the entire region. This should help to increase
efficiency and sharpen the competitive advantage of the region to the
benefit of both Guangdong and Hong Kong.
As the Chief Executive reminded us last October in his Policy Address, we
need a new way of thinking. So we must continue to innovate. In this
direction, we must find ways for our railway corporations and their
Mainland counterparts to work more closely together. I would like to see
particular emphasis being placed on improving cross-boundary services and
expanding the railway network in the region. We will also put forward
proposals for a regional transportation network, in the light of the
findings of strategic studies to be completed later in the year on the
development of our port, airport and logistics centres. In addition, we
should expand transport links between our international airport at Chek
Lap Kok and ports and airports in the Pearl River Delta. The Airport
Authority will also seek to strengthen co-operation between airports in
The liberalisation of our telecommunications market has resulted in the
formation of an advanced telecommunications infrastructure by the private
sector. Over the past 12 months, the capacity between the Mainland and
Hong Kong has, amazingly, increased more than eight times. This is a
significant boost towards meeting the demand for internet and digital
communications between the two places. Greater competition has also
reduced the cost of private-leased circuits between Hong Kong and the
Mainland by more than 50 per cent since January 2000.
As the market develops further, we will continue to issue new licences to
qualified applicants, promoting investment in infrastructure to increase
telecommunications capacity between Hong Kong and the Mainland. To
encourage the development of cross-boundary electronic commerce, we will
step up our discussions with Mainland authorities on cross-certification
arrangements. We recognise that the development of IT is market-led and we
will bring together the IT industry of the two places, encouraging both
sides to explore further scope for co-operation.
|Providing Support Services
We intend to introduce a series of
measures to help businesses, especially Small and Medium Enterprises, to
start up or expand their activities on the Mainland.
|Special Support for Small and Medium
I have asked the Trade Development Council to enhance its support for SMEs.
Specifically, I am looking to the TDC to provide SMEs with more market
information and advice on doing business on the Mainland. The TDC will
conduct an in-depth analysis of the South China region, covering the
development potential in different sectors, the distribution systems and
import channels. It will also liaise with the relevant Mainland parties to
secure the most comprehensive and timely market information for Hong Kong
businesses. The TDC will set up a China Business Advisory Unit to provide
SMEs with one-stop services for doing business in Guangdong.
We are considering setting up an Economic and Trade Office in Guangdong to
strengthen our liaison with the local governmental trade and commerce
|Enhancing Efficiency at Boundary
We are helping to speed up the flow of people, vehicles and goods between
Hong Kong and the Mainland. We will -
The growth in cross-boundary traffic is so rapid that these measures,
while meeting the short-term situation, will be insufficient to deal with
longer-term demand. We will initiate a fresh and comprehensive assessment
of traffic volumes in the medium to long term and will draw up plans for
new and improved cross-boundary facilities and arrangements.
|Encouraging Exchanges and Deepening
As China opens up more, the world will gain a better awareness of the
Mainland market. To stay ahead of the race we must deepen our own
understanding of our country, her geography, culture, language, political
and economic environment, and development potential.
I support the private sector's efforts in conducting exchange visits and
staff exchange programmes with their Mainland counterparts. Indeed, I
encourage them to do more. Various government bureaux and departments will
actively participate in these programmes. I want to encourage and help
Hong Kong businesses to capture the opportunities in the Western Region.
In May, I will be leading a high-level delegation, comprising government
representatives and local businessmen, to major cities in Western China. I
hope this will kick-start economic activity between the two places. In
addition, the Immigration Department will continue to maintain close
contact with the Mainland authorities with a view to simplifying
procedures for Mainland residents coming to Hong Kong for business and
I also appeal to the education sector for its support. We must improve our
students' knowledge of China. We must equip our primary and secondary
students with the skills necessary to write good Chinese and English and
to speak fluently, not only in Cantonese, but also in Putonghua and
English. And we must help them to understand our extensive economic ties
with the Mainland.
People are our most precious asset. In a knowledge-based economy, we must
upgrade their capacity to acquire and apply new skills. We need to blend
their traditional strengths with these new skills, particularly in IT, so
that they are better-equipped to meet the challenges of the 21st Century.
|Strengthening Training and Easing
In recent years, we have devoted considerable effort and resources to
training and retraining our workforce. On top of recurrent funding of over
$2 billion a year for the Vocational Training Council, we have allocated
nearly $1 billion over three years to various training institutions to run
courses that meet market needs. Over that period, their wide range of
programmes has offered over 400,000 places, with over 70 per cent of
attendees successfully finding jobs on completion of their training. In
addition, we have embarked on aggressive job placement programmes to help
To augment these efforts, the Chief Executive announced, in his 2000
Policy Address, a series of new measures. They include the provision of
recurrent funding for the Employees Retraining Board and a special grant
for skills upgrading. We have earmarked sufficient funds in the draft
Estimates for these measures.
To strengthen the training of IT manpower, we have formed a Task Force
comprising representatives from the IT industry and training institutions.
We are pursuing the Task Force's recommendations. These include inviting
international training institutions to provide training programmes on IT
and multimedia content creation, engaging the industry in the provision of
IT education in schools, examining the provision of accreditation for
non-degree IT courses, increasing the IT content in vocational training
and providing opportunities for overseas training.
The Government, employers and the rest of the community must work together
if Hong Kong is to succeed in upgrading its human capital and realising
the objective of lifelong learning. The Government will continue to invest
in training. By the end of this year, we will also complete a review of
the division of responsibilities among the various training and retraining
institutions to improve cost-effectiveness. For their part, employers must
provide their employees with training suited to business needs. They must
be prepared to employ less-experienced staff and provide them with
on-the-job training. Individuals must recognise the challenges ahead and
take full advantage of the training opportunities available.
|Supporting Employers' Staff
During the Budget consultations, many, including Members of this Council,
suggested that the Government should offer employers, especially SMEs, tax
concessions or subsidies to encourage their investment in staff training.
Such suggestions have rightly focused on the fact that many SMEs, by their
nature, are inhibited from investing in staff training. I recognise this problem and I have decided to set aside $300 million for
the establishment of a training fund to subsidise SMEs' training
initiatives. I will invite the SME Committee to advise on the detailed
operation of the fund, including the scope of training, the eligibility
criteria and the amount of subsidy to be provided. The Trade and Industry
Department will administer the fund.
|Government Setting an Example
As the largest employer in Hong Kong, the Government will set an example
in taking forward the policy objective of promoting lifelong learning.
With the additional $50 million recently approved by the Finance
Committee, we will enhance the training of civil servants over the next
three years. Heads of departments and grades will draw up detailed
training and staff-development plans. We will consult the Staff Side and
work closely with them as we take forward these training initiatives.
|Admission of Mainland Professionals
According to the latest manpower projections, Hong Kong will face a
shortage of as many as 120,000 people with high academic qualifications
over the next five years. Although we will continue to invest in education
and training, we have to ensure that we have an adequate supply of the
right manpower skills in the short to medium term to sustain Hong Kong's
For foreign professionals with skills which are in short supply in Hong
Kong, there is generally no restriction on entry for employment. But
professionals from the Mainland are currently admitted for employment only
if they qualify as top-notch talent under the Admission of Talents Scheme.
To overcome our manpower shortage, we have decided to revive in modified
form the Admission of Mainland Professionals Scheme implemented in the
mid-90s. We will consult Members on the implementation framework. I will
mention the major features of the scheme -
In addition, we are devising a scheme that will allow Mainland students
studying in our universities to remain in Hong Kong for employment upon
graduation, provided they fulfill prescribed eligibility criteria.
Let me stress that these admission schemes are intended to meet the
shortage of professionals in Hong Kong in the short to medium term. They
will not deprive local professionals or local graduates of jobs. Nor will
they bring in semi- or low-skilled workers. We will set reasonable
admission criteria and require remuneration packages to be broadly
comparable with those for local professionals.
These schemes will boost Hong Kong's economic development. By bridging the
gap between supply and demand, we will be helping businesses to grow,
thereby creating more job opportunities. The admission of professionals
will bring about a much-needed transfer of knowledge and experience of the
Mainland. This will be invaluable to us in the competition for an expanded
China market. Failure to take immediate measures, when other economies are
already making similar moves, will undermine Hong Kong's competitiveness.
Upgrading the skills of the workforce
is not only essential for Hong Kong's economic development but also an
effective means of tackling the wealth gap within the community. In recent
times, the question of a wealth gap has attracted attention. No doubt this
is because the recent recession has hit those most affected by the ongoing
restructuring of our economy and resulted in the displacement of some of
our low-skilled workers who have limited education.
A wealth gap is common among developed and developing countries. Some
countries have tried to tackle this through welfarism and a high-tax
policy. These measures have often created even greater problems than the
ones they sought to remedy. They have brought upon their economies a
series of structural problems. We must not make the same mistake. Our
focus cannot be to remove this wealth gap. Instead we must provide the
poor with a basic level of social security and help them escape poverty.
As the Chief Executive pointed out in his Policy Address, the key to
helping the poor is to ensure sustained economic development and the
creation of more job opportunities and, at the same time, to enhance their
employment prospects through education and training. And, of course, we
must also ensure that our society remains free and open, so that people
from all walks of life can move between different occupational sectors and
progress to better jobs. We must all strive to excel and help our children
to do the same.
According to a recent survey, of the 20 per cent lowest-paid workers ten
years ago, nearly 60 per cent have now risen above this level. This
finding demonstrates the high upward mobility of Hong Kong workers and
indicates that those who are able and hardworking have every opportunity
to better themselves. But there are some who, through no fault of their
own, cannot escape the effects of misfortune when it strikes. They are the
ones who most need our help.
Hong Kong as an International Financial andHigh-value-added Services Centre
|Developing High-value-added Services
Hong Kong has established a strong foothold as an international financial
and services centre. We aim to become a leading player in both areas. We
need to continue to improve our quality, efficiency and service
diversification. Harnessing the latest developments in IT and capitalising
on China's accession to the WTO, we will stay at the cutting edge of
market trends and pioneer new development frontiers.
Given the breadth of our service industries, I will be focusing on only a
few areas this afternoon. I have already mentioned the future development
of transport and logistics services. I would now like to say a few words
on tourism, one of the pillars of our economy.
The number of visitor arrivals was at a record high in 2000
Last year, more than 13 million tourists visited Hong Kong and total
income from tourism exceeded $60 billion, contributing about 5 per cent of
our GDP. Our mission is to ensure that Hong Kong remains the leading
tourist destination in Asia. We have created the Tourism Commission and
revamped the work of the Tourist Association. We have published a
strategic plan mapping out more than 50 short- and long-term initiatives.
We are making good progress on a number of exciting projects, including
Hong Kong Disneyland and a cable car system on North Lantau. We are
committed to improving the quality of service to tourists, particularly in
our hotels, shops and restaurants. To help achieve this, we will promote
the Quality Tourism Services Scheme and improve the regulatory system for
local travel agents. We will work with the Mainland authorities on two
fronts: to attract more visitors from the Mainland and to devise new
travel packages combining Hong Kong and Mainland destinations for overseas
Information technology is a linchpin for the development of
high-value-added services. Hong Kong has invested heavily in this sector
in recent years. The wave of "dotcoms" brought fresh impetus, at
one stage, to our equities market. That excitement soon evaporated and
rapid adjustments in the market brought a painful shock to many. But we
must not let that deter us from developing IT. We must not confuse the
speculative trading of IT stocks with investment in IT infrastructure.
Hong Kong has in place one of the best infrastructures for a
knowledge-based economy. The Cyberport will open in phases between 2002
and 2003 and will bring together new capital, facilities and talent. We
have liberalised the local and international telecommunications markets.
Our external communications capacity will grow tenfold over the next three
years, entailing investment of over $9 billion. Our broadband network now
covers all commercial buildings and 95 per cent of residential buildings,
a coverage rate which is among the highest in the world. In less than two
years we have implemented the Electronic Service Delivery Scheme, opening
up a new arena for e-government and e-business. That makes Hong Kong a
front-runner in Asia. In the middle of this year we intend to award four
licences for third generation mobile services.
We continue to upgrade our financial infrastructure, making the best use
of IT to increase efficiency, reduce costs and risks, and enhance market
We have achieved good progress in implementing the short-term initiatives
in the securities and futures markets recommended by the Steering
Committee on the Enhancement of the Financial Infrastructure. In
particular, the Securities and Futures Commission has set up the
Securities and Derivatives Network and last August ushered in its first
application, the electronic filing of Financial Resources Rules returns.
Last month, the Commission successfully linked the SDNet with the Hong
Kong Monetary Authority's electronic network for submission of banking
returns. This is a first step towards forming FinNet, a robust, efficient
and secure network for financial market transactions.
Last September, we introduced the first electronic initial public offering
for the MTR Privatisation Share Offer. Public response was encouraging and
this has laid a good foundation for other eIPOs. Last year, the Stock
Exchange of Hong Kong also successfully launched the third generation of
the Automatic Order Execution and Matching System to enable the industry
to exploit the full potential for on-line trading.
I have tasked the Steering Committee to produce a detailed roadmap and
timetable to implement the longer-term measures. These include
straight-through processing, scripless transactions and single clearing
arrangements. The Steering Committee will work closely with the relevant
government agencies, financial regulators and the industry.
In the currency market, we successfully launched the US Dollar Clearing
System in the second half of last year. A few months on, more than 20
overseas banks have joined the System, in addition to banks in Hong Kong.
Apart from providing for the efficient settlement of US dollar
transactions in Hong Kong and the region, the System eliminates settlement
risks which could arise when a transaction spreads across different time
zones. In addition, the System allows participating banks to conduct US
Dollar Real-Time Gross Settlement for interbank payments. It is also the
first Payment versus Payment foreign exchange transaction system in the
world. This has increased Hong Kong's attractiveness to global investors
as a trading platform. The average daily turnover of the System has now
reached US$3 to 4 billion. It can also handle other investment instruments
denominated in US dollars such as securities and bonds, helping to develop
our securities and bond markets further. Following the success of the US
Dollar Clearing System, the HKMA is now studying the possibility of
introducing clearing systems in other foreign currencies.
After more than a year's extensive consultation, we introduced the
Securities and Futures Bill into this Council last November. Enactment of
the Bill will help businesses to raise capital in our market. It will also
consolidate Hong Kong's position as an international financial centre
and the premier capital formation centre for the Mainland. The proposals
to combat market misconduct and enhance disclosure will help raise our
corporate governance standards. I hope that, with the full support of
Members and the industry, the Bill will gain early enactment in the
current legislative session.
The HKMA is examining the establishment of a commercial credit reference
agency in Hong Kong. This would help meet the financing needs of SMEs,
increase market transparency and strengthen the risk management system of
the banking sector. In this exercise, the HKMA has enlisted the help of
representatives from the banking sector, other businessmen and the Office
of the Privacy Commissioner for Personal Data. They will consider various
matters, including the agency's ownership and management rights and
whether banks should be required to disclose information. The HKMA will
make specific proposals later in the year.
Looking ahead, we will foster creativity in the market and encourage it to
introduce new financial and securities products. Over time, new channels
for raising capital will emerge. Our aim is to provide the best financial
intermediary services, comparable to those available in New York and
London. The Secretary for Financial Services will draw up a plan with the
industry's help and oversee its implementation.
The HKMA is widely respected, both in Hong Kong and overseas, for its
professionalism, fairness and transparency. But to keep pace with
financial market developments and to reinforce transparency and
accountability, I will consider how to improve Hong Kong's monetary
High standards of corporate governance are the hallmark of a first-class
international financial and business centre. In my Budget Speech last
year, I announced that the Standing Committee on Company Law Reform would
conduct a comprehensive study on corporate governance standards in Hong
Kong. The study is making good progress. In the coming year, we will
continue to strengthen our corporate governance regime. We will -
In addition, the Standing Committee is conducting an overall review of
directors' duties and responsibilities, shareholders' rights and the
disclosure of corporate information. It will also conduct in-depth
research into institutional investors' perception of corporate governance
standards in Hong Kong, the correlation between shareholder profile and
corporate performance and the latest developments in enhanced corporate
governance standards in other regions.
Our aim is to establish Hong Kong as a paragon of corporate governance,
ensuring that those investing in Hong Kong are afforded the best
protection and that our listed companies are managed with excellence,
complying with the highest international standards including those
relating to risk management and disclosure of information. I firmly
believe that this is a core area of work that will help us maintain our
leading position in financial services in our Asian time zone.
Let me turn now to our public finances. I will deal first with the
estimated outturn for the current financial year. I will then set out my
budget strategy and my budget measures for 2001-02, followed by an
analysis of the Government's financial position over the medium term.
A year ago, I forecast a deficit of $6.2 billion for 2000-01. I now estimate a larger deficit of $11.4 billion for the year. I expect
revenue to be $21.4 billion lower than originally forecast. But this is
partially offset by reduced expenditure of $16.2 billion.
On the revenue side, the estimated reduction is largely attributable to -
On the expenditure side, the estimated reduction mainly comprises -
Although our overall deficit is larger than forecast, I now expect an
operating deficit of $19.2 billion, lower than the $25 billion which I
fiscal reserves will drop from $444.3 billion at 31 March 2000 to $432.9
billion at 31 March 2001.
|Budget Strategy for
In deciding my budget strategy for 2001-02, I have taken into account
the state of our economy, people's livelihood, the future direction of
Hong Kong's economic development and Government's financial position. I have also ensured that the budget strategy is built upon the
well-established budget principles with which Members are so familiar.
They are -
My budget strategy for 2001-02 has four main elements -
Let me now elaborate on each of these elements and on the budgetary measures which I propose.
|Maintaining Steady Economic Growth
The strong performance of the economy last year was hard-earned. It came about largely because of the community's industry and
perseverance. But the fact remains that, after much pain, the recovery has
taken root. We must let those roots grow stronger for the benefit of all.
So long as we can afford to hold back, I agree with those who have said we
should not rush to improve our finances at the expense of economic growth.
2001-02 could be another eventful year. We are facing China's accession
to the WTO, continuing economic restructuring in Hong Kong and a rapid
slowdown in the US economy. Another year of consolidation makes good
I propose two concessions which should assist Hong Kong's development.
|Salaries Tax Deductions
To take forward a suggestion made by the Chief Executive in his 2000
Policy Address, and to further encourage lifelong learning, I propose to
increase the maximum amount of deduction for self-education expenses under
salaries tax, from $30,000 to $40,000. This concession is expected to cost
$10 million in 2001-02 and $70 million over the period of the Medium
Range Forecast to 2004-05.
|Stamp Duty on Stock Transactions
To maintain our position as an international financial centre, keeping our
stock market competitive rates as a high priority. At present, no stamp
duty is levied on transactions in many stock markets around the world,
including the US, Japan, Germany, Singapore and New Zealand. Indeed, the
worldwide trend is to reduce or entirely abolish stamp duty on stock
In view of this, I reduced the duty by 10 per cent last year. At that
time, I encouraged the Stock Exchange to reduce brokerage commissions,
which constitute two-thirds of the cost of stock transactions. I also
urged the industry to open up to competition.
I am very pleased to learn that Hong Kong Exchange and Clearing has
decided to abolish the minimum brokerage commission rate and to open up
the brokerage licensing system from 1 April 2002. To complement their
efforts, I propose to lower the stamp duty on stock transactions from
0.225 per cent to 0.2 per cent per round transaction. This concession is
expected to cost $680 million in 2001-02 and $4.2 billion over the next
At the same time, there is a need to set up a new Investor Compensation
Fund through a levy on stock transactions, as proposed under the
Securities and Futures Bill. The Securities and Futures Commission will
shortly consult the public on the details, including the transfer of
assets from the existing Unified Exchange and Futures Compensation Funds
to the new Fund, and the existing transaction levy increasing from 0.01
per cent to 0.012 per cent for a limited period until such time as the new
fund has accumulated $1 billion. I want to stress that this small rise in
the levy, though increasing the cost of stock transactions, is essential
to provide reasonable protection for investors in Hong Kong securities and
futures products. We will implement the stamp duty reduction and the levy
increase proposals at the same time. In combination, they will lower the
overall transaction cost to investors by about 10 per cent.
The proposed stamp duty reduction is much more than a cost saving for
investors. It is a positive move to promote the development of our
financial market and will, over time, bring about additional revenues. I should also point out that, given the operating deficits which we are
likely to experience over the next few years, we will need to take a cautious and
step-by-step approach when we consider further reductions in the stamp
duty on stock transactions. We will keep a careful watch on the effects of
the reduction in transaction costs and the deregulatory measures taken by
the brokerage industry.
Other than these two items, I do not propose any further tax concessions.
Given the adjustments underway in the economy, further fiscal stimuli are
unnecessary and could undermine the stability of our public finances.
Although I am proposing no more concessions, I hope Members and the
community alike will appreciate that, as a result of the cumulative
decline in prices of 7.5 per cent over the past two years, the various
salaries tax allowances have already increased in real value.
There is one other area in which most taxpayers will pay less: rates. The
latest revaluation shows an average reduction of 1 per cent in rateable
values. With no change to the rates percentage charge, 70 per cent of
ratepayers will, on average, pay 7 per cent less in 2001-02 than in the
|Addressing the Needs of the Community
Let me now turn to the second element of my budget strategy, which is to
address the needs of the community, particularly the grassroots and the
For the past two years, I have emphasised the need to bring the cumulative
growth in government expenditure into line, over time, with the cumulative
growth in GDP. To achieve this, I said last year that we needed to keep
the growth in government expenditure below the GDP trend growth rate of 4
per cent up to 2003-04. Specifically, I said I would contain growth to
2.5 per cent from 2001-02 to 2003-04.
Last Friday, the Secretary for Treasury published the draft Estimates of
Expenditure for 2001-02, setting out details of spending under all
policy areas. Not counting payments of $2 billion from the Capital
Investment Fund, government expenditure will amount to $252.7 billion, an
increase of $26.6 billion over the revised estimate for 2000-01. We have
made provision for all the new initiatives and improvements announced in
the Chief Executive's Policy Addresses. We have also earmarked
sufficient funds for the various measures and expenditure initiatives in
this Budget Speech. I have already announced my proposal to set up a
training fund. Let me now describe other expenditure initiatives which are
targeted at the grassroots and the disadvantaged.
In drawing up this Budget, I have constantly borne in mind the need to
care for the disadvantaged, to give them the positive assistance they need
to integrate into the community and to share in our economic prosperity.
Last year, the Chief Executive emphasised in his Policy Address the need
for compassion and goodwill towards the disadvantaged and set out a number
of initiatives to help those who are less fortunate. In the same spirit,
and in response to views received during my budget consultation, I propose
to allocate additional funding to assist the disabled, youth at risk and
people with low educational attainment.
|Support for the Disabled
Thoughts of the disabled bring touching scenes to mind: our disabled
athletes running in international games; a student overcoming her severe
physical disability to write with great determination and achieving high
marks in a public exam; the innocent smiles on the faces of the mentally
handicapped; parents shouldering the lifelong challenge of caring for
their disabled child without resentment or complaint. I cannot fail to
admire and respect the resilience of the disabled and the parents who find
themselves in such situations. Those of us who do not have to face such
problems should count our blessings. As a community we have an obligation
to do more to help.
At present, 5,400 disabled people are waiting for residential places. The
average waiting time is four to five years. The provision of day services
such as sheltered workshops and supported employment also falls short of
the demand. In addition, 1,800 young children with special needs are
waiting for pre-school services. The situation will deteriorate unless we
provide more resources.
To strengthen our services for the disabled, I have earmarked $219 million
in 2001-02 to implement a package of measures to address their basic
needs, improve their employment prospects and help them realise their
potential. The measures include -
In the long term, the Government will provide annual recurrent funding
amounting to over $240 million a year for this package of measures.
|Care for Youth at Risk
There is increasing concern about young people. We are all aware of the
problems of youths roaming the streets at night, joining gangs and abusing
psychotropic substances. Surveys suggest that many young people are
disenchanted with life. Young people are the future pillars of our
society. If we turn a blind eye to youths who risk following this path,
Hong Kong will lose out.
The Chief Executive has pointed out in his Policy Address that we should
tackle this through the early identification of problems and timely
counselling. Accordingly, I have earmarked $84 million in the draft
Estimates, rising to about $180 million a year by 2003-04, to launch a
comprehensive programme of support services for youth at risk. We will -
Rehabilitation of youths at risk is a
demanding mission. It requires genuine care, listening and counselling. In
addition to the Government's increased commitment on this front, I appeal
for the collaboration of parents, teachers, social workers and the media.
Together we must save Hong Kong's younger generation at risk.
|Training for those with Low
In recent years we have provided a wide range of vocational training and
retraining programmes for those with low educational attainment. Some have
suggested that these programmes are too sector-specific and skills-based
and that there is not enough basic induction training for adults with low
educational levels. To help overcome these deficiencies, I propose to
allocate an additional sum of $72 million over the next two years for
practical adult education. Specifically, we will provide subsidies for
educational institutions and non-government organisations to run courses
focusing on generic workplace skills, including language, IT and
interpersonal skills. We believe these courses will improve the employment
prospects of new arrivals, those who have been in Hong Kong for some time
but are still seeking employment, and other Hong Kong residents who have
never had the chance to receive formal education.
|Strengthening the Role of the
My final spending initiative is to improve
community facilities and promote community-building. The Home Affairs
Bureau is reviewing the functions of the District Councils to strengthen
their role in their local communities and will make recommendations later
this year. I have earmarked an additional $100 million a year in the draft
Estimates to allow an early start in implementing the recommendations of
this review. The District Councils will of course be fully consulted.
|Enhancing Public Sector
It is vital to ensure that the money we are spending achieves the best
possible results. This is all the more important when we are containing
the growth in government expenditure.
We are committed to improving the management and operation of the public
sector. Over the past two years, we have introduced civil service reforms,
implemented the Enhanced Productivity Programme, contained the size and
growth of the Civil Service and re-engineered services delivery. We have
two main aims -
We have made great strides on these fronts.
We have -
Cumulative savings under the Enhanced Productivity
Programme in the public sector since 2000-01
These achievements have not come easily. They
underscore the strong team spirit of the Civil Service and its continuous
drive for improvement and greater value for money. Increasing productivity
with reduced resources is always a challenge, for management and staff
alike. Each post deleted and every dollar saved inevitably have an impact
on workloads or involve operating in new ways. My thanks go to all those
colleagues who have set aside their own interests and staunchly supported
these many reforms for the wider public good.
|Lifting the Recruitment
As we have made such a successful start in
reducing the size of the Civil Service, I have, in consultation with the
Chief Secretary for Administration, decided to lift the freeze on
recruitment which has been in force for two years. I am confident that
this will not trigger off an expansion of the Civil Service. Departments
now meet most demands for additional services through redeployment of
resources or process re-engineering, rather than simply taking on new
staff. In addition, under the Voluntary Retirement Scheme, some 50 grades
may not conduct open recruitment for the next five years. And government procedures for vetting the creation of new
posts are well-established and stringent.
|Keeping Up Our Effort
Enhancing public sector productivity is our
pledge to the community. We will not allow complacency to creep in. With
the management culture changing and experience growing, the public sector
is set to become yet more enterprising. We will keep up our effort. Our
major targets include -
|Striving to Achieve Fiscal
Enhancing productivity and controlling
expenditure can only go so far towards achieving fiscal balance. When they
alone cannot balance the books, we must critically consider the need to
raise revenue. But, I have acknowledged earlier in this speech that we
should refrain from imposing too great a burden on the community at this
time. On balance, I propose to make only modest adjustments to a small
number of revenue items that do not impact on economic growth and have a
negligible effect on people's living standards. Let me explain my
I propose to increase tobacco duty by 5 per
cent with immediate effect. This proposal will generate additional revenue
of $130 million in 2001-02 and $580 million over the period of the
Medium Range Forecast to 2004-05.
The duty increase should not lead to a rise
in the smuggling and peddling of contraband cigarettes. With the provision
of additional resources in 2000-01, the Customs and Excise Department
has strengthened its enforcement work. I am most pleased with the results.
The number of successful operations has increased 40 per cent and the
number of peddling black spots has decreased by 70 per cent. But we will
not be complacent. The Department will continue to step up enforcement to
protect both government revenue and public health.
|Duty on Alcoholic Beverages
The duty rates on alcoholic beverages, except
wine, have remained unchanged since 1994. For the purpose of raising
revenue, I propose with immediate effect to increase from 30 per cent to
40 per cent the duty rate on liquors with an alcoholic content of 30 per
cent and below.
I have decided not to increase the duty rates
on strong spirits or wine, which are already taxed at rates of 100 per
cent and 60 per cent respectively. Increasing these duty rates might
significantly push up retail prices and risk a switch to the consumption
of cheaper products, defeating my objective of increasing revenue.
This proposal is expected to generate
additional revenue of $90 million in 2001-02 and $360 million over the
period to 2004-05.
|Vehicle and Driving Licence Fees
I also propose a modest 10 per cent increase
in driving licence fees and in vehicle licence fees for private cars,
motor cycles and motor tricycles. For new licences, the new fees will take
immediate effect. For licence renewals, the new fees will apply only to
licences expiring on or after 7 July 2001, as announced by the
Commissioner for Transport last week.
There has been no revision in these licence
fees since 1991. Over that period we have experienced cumulative inflation
of 52 per cent. An upward adjustment of 10 per cent will fall far short of
restoring the real value of these fees, although it can still help to
reduce our operating deficit. My proposals should have a negligible impact
on living standards, given the small share these fees have in household
expenditure and the modest level of the increase. The proposal to increase
private vehicle licences will not impact on the transportation sector, and
the increase in driving licence fees will have minimal impact in the
medium term as most drivers have opted, in recent years, for ten-year
This increase is estimated to bring in
additional revenue of $160 million in 2001-02 and $1.1 billion over the
next four years.
|On-street Parking Meter Charges
On-street parking meter charges have always
been a stable source of income for the Government and an effective traffic
management measure. I propose to raise the maximum charge from $2 to $3 for every 15 minutes.
In proposing this adjustment, I have noted
that parking meter charges have not increased since 1994. I am also
conscious of the high utilisation rate, both on weekdays and weekends, of
metered parking spaces in busy areas. The proposed increase will bring the
hourly rate for on-street parking to $12, which is closer to, but still
considerably below, the charges made by off-street carparks in busy
locations. This should help traffic management by discouraging the use of
metered parking for lengthy periods.
Subject to the approval of this Council, I propose to phase in the new
charge over a six-month period, to allow for necessary modifications to
parking meters. This proposal should generate additional revenue of $110
million in 2001-02 and $500 million over the four-year period to 2004-05.
|Air Passenger Departure Tax
I propose to increase Air Passenger Departure
Tax from $50 to $80 and to widen the tax base to include passengers
departing by helicopter. This proposal will not take effect until some
months after the enactment of the relevant legislation, in order to allow
the airlines and helicopter operators sufficient time to make the
This increase will not affect people's
livelihood. Neither should it affect tourism, airline businesses or
airport operation. Our Air Passenger Departure Tax will still be the
lowest in the region for international flights. It is also an
insignificant portion of the price of air tickets and of the overall cost
of travelling. An increase of $30 should have no impact in attracting
tourists to Hong Kong nor should it deter local residents from air travel.
For tourists, the availability of good facilities, attractive tourist
spots and quality service is far more important. Past experience has shown
that an Air Passenger Departure Tax as high as $100 or even $150 did not
affect our tourism industry. The other part of the proposal, to cover
helicopter passengers, is made as a matter of equity.
In total, I expect this proposal to yield additional revenue of $170
million in 2001-02 and $1.3 billion over the period to 2004-05.
|Implementation of Revenue Proposals
That concludes my revenue proposals. The
proposals to increase tobacco duty, the duty on certain alcoholic
beverages, driving licence fees and vehicle licence fees have taken effect
from 2:30 this afternoon under a Public Revenue Protection Order. My
proposal to increase Air Passenger Departure Tax will not take effect
until some months after enactment of the relevant legislation. My other
proposals for increased on-street parking meter charges, reduced stamp
duty on stock transactions and an increased level of deductions for
training expenses under salaries tax will take effect once the relevant
legislative amendments have been passed.
|Unchanged Revenue Items
Before leaving the subject of revenue
measures, I will highlight some of the revenue items which will remain
Views are diverse on whether or not the
Government should adjust profits tax. Some in the community believe there
is scope for a modest increase in the profits tax rate without undermining
Hong Kong's competitiveness, as our profits tax regime is already one of
the most attractive in the region and indeed the world. Others have
cautioned against such complacency, citing uncertainties in the world
economy. After thinking long and hard, I have decided to maintain the
Some have suggested that Hong Kong should
introduce a progressive profits tax system. I remain of the view that this
would be a retrograde step, creating opportunities for abuse and running
counter to the world trend towards simpler tax regimes. It makes no sense
to undermine our own competitiveness by bucking this trend.
I have considered not only raising the rates
of salaries tax but also reducing allowances to cut our operating
deficits. Such adjustments could yield substantial additional revenue. But
they would hit middle-income earners hardest and could adversely affect
local consumption and hence our economic growth. I have decided not to
pursue such a course at this time.
To provide relief for home owners,
particularly those with negative assets, there have been suggestions that
the Government should increase the maximum amount of deduction for home
loan interest and extend the entitlement period for such deductions. I
fully appreciate that, to many people in Hong Kong, home purchase is the
biggest investment in their lifetime. I also understand that such interest
payments constitute a large share of household expenses in Hong Kong. That
said, recent successive reductions in mortgage interest rates have reduced
the burden on mortgage-payers. Stabilisation of the property market should
provide relief for those with negative equity. Even a small increase in
the maximum amount of deduction would result in a substantial loss of
revenue. For example, increasing the maximum deduction from $100,000 to
$120,000 would cause a revenue loss of about $1 billion over the forecast
period to 2004-05. Having taken all these factors into consideration, I
do not think it is appropriate for Government to provide further
concessions and aggravate the problem of operating deficits.
|Land and Sea Departure Tax
Last year I promised to come back to this
Council when the time was ripe on the question of a land and sea departure
tax. I received diverse views on this topic during my Budget
consultations: some in favour and some against. I remain convinced that a
land and sea departure tax is equitable and would provide a major boost to
our recurrent revenue. But I will examine the recommendations of the Task
Force on Review of Public Finances and the Advisory Committee on New
Broad-based Taxes before proceeding.
Betting duty and the so-called
"green" taxes, which have attracted considerable attention in
recent years, are similar in nature, in that they do not simply entail
fiscal considerations but also important social policy implications.
Faced with continued operating deficits, I was very tempted to increase
betting duty, a tax which is not related to livelihood.
But having considered the hard facts, I have
come to the conclusion that this would be counterproductive. In the last
three years, betting turnover per horse race has fallen by 17 per cent.
Although the slack in the economy may have accounted for the lower
turnover, it seems to have had no such effect on other gambling
activities. On the contrary, we have seen the rampant spread of betting on
horses and the Mark Six through illegal bookmakers, extraterritorial
betting, gambling on soccer matches and internet gambling. Illicit
activities have become so widespread that dividend payouts are openly
advertised in the media. I was staggered to hear that even conservative
estimates placed the annual turnover on these illicit gambling activities
at tens of billions of dollars.
I am concerned that an increase in betting
duty might further divert money from legal betting avenues, undercut our
duty revenue and, more important, pose a threat to law and order. The
latter could have serious ramifications.
To address the problem, we need a two-pronged
approach. First, we must step up enforcement action against illegal
gambling to maintain law and order in Hong Kong. Second, we must face up
to reality. There has been increasing interest in, and demand for, soccer
betting within the community. This has become so popular that it is
unlikely to be curbed. We cannot arrest all the Hong Kong residents
placing illegal bets on soccer matches nor can we stifle overseas
bookmaking. Rather than aiming to achieve the impossible, we should
examine the case for providing a legal avenue for soccer betting. With the
approach of the World Cup in 2002, we need to address the problem urgently
and in a rational and objective manner. Gambling has always been a
sensitive subject. We would like to hear the views of the community on
this problem before coming up with an appropriate and effective solution.
I now refer to a subject that has come
increasingly and understandably to the forefront of many people's
concerns in recent years: the environment. Quite apart from the health
costs and other social burdens associated with a poor quality environment,
whether it be on land, in the sea or in the air, comes another major
concern. Hong Kong cannot hope to maintain and improve on its position as
a leading financial and commercial centre in the region if it does not
clean up its act. Improving the environment ought to be a goal shared by
us all and not solely the domain of a few pressure groups. For its part,
the Government has made a number of major revenue concessions in recent
years aimed at improving air quality by the use of cleaner fuel. But there
is a limit to the number of "carrots" of this nature that we can
or ought to be giving out to reduce pollution. It is clear that these
"carrots" are insufficient. We need to wield the
"stick" as well.
In the run-up to this Budget, I have received a good number of proposals
for "green" taxes. But, with respect, I consider these merely
scratch the surface of the problem and do not address the fundamental
issues. I believe it is high time that the community, as a whole, faced squarely
up to the reality of our deteriorating environment. We need to take an
honest look at some of the inconsistencies that have got us to where we
are today. For example -
The answer to these questions is that it
seems expedient to most of us to continue doing so. Higher tariffs cause
some pain in the community. I understand that very well. But we must as a
community understand that if our environmental sores are left to fester,
inaction will, over time, result in far worse pain and far greater costs
than will an early cure. Most of the rest of the world seems to have woken
up to that fact. When will Hong Kong? So, although I do not put forward
any "green" measures in this Budget, I want to use this as a
focus for the community to start to change its mindset about our
environment and accept that the polluter must pay to clean up his mess. If
nothing else, that is simple economic justice. I hope I can look to
Members to support and encourage this trend so that we can become as
"green" a city as any in the years to come.
government spending next year, including the expenditure initiatives which
I have announced today, will amount to $254.7 billion. I estimate that, after implementation of my revenue proposals and the
budgeted receipt of $15 billion in the year from the sale of a second
tranche of MTR shares, total revenue will be $251.7 billion. As a
consequence, I am forecasting a small overall deficit of $3 billion, with
the fiscal reserves falling slightly to $429.9 billion at 31 March 2002.
Within these overall figures I must point out
that in 2001-02 we will face an operating deficit of $16.6 billion. Put
simply, our recurrent expenditure will once again exceed our recurrent
revenue by a significant margin.
I must emphasise that these figures are our
best estimates. Experience in recent years has shown that market
volatility can cause the outturn from a number of major revenue items,
such as the investment return on our fiscal reserves, land sales premia
and stamp duty on stock and property transactions, to deviate considerably
from the estimates. Increasing globalisation may lead to greater and more
frequent volatility in world markets.
The windfall gain from our investment return
on the fiscal reserves in 1999-2000 is one example of the effects of
market volatility. That resulted, somewhat dramatically, in a surplus for
the year of nearly $10 billion, against an original estimated budget
deficit of over $30 billion. In the current financial year, on the other
hand, the less-than-satisfactory return from the Exchange Fund in the
first half of 2000, albeit with improved performance in the second half of
the year, has resulted in investment earnings for the year which are some
$8.7 billion below our original estimate and hence an increase in the
deficit. I cite these examples only to illustrate the difficulty of
ensuring accuracy in budgeting. I have often been criticised for
"crying wolf", but let me assure Members that it is never my
intention to under- or to over-estimate.
In the light of recent fluctuations in the
investment return on the fiscal reserves, the Finance Bureau has explored
with the HKMA various measures to minimise these fluctuations. Having
considered the limitations of such options, we have decided not to change
the arrangements at this time. We will monitor the investment return over
the next few years before deciding on the way forward. This will mean that
our estimates of investment earnings will continue to be subject to market
volatility. I ask for Members' understanding in this regard.
|Medium Range Forecast
A sound budget strategy cannot focus on the
coming financial year alone. I have had to take into account the effect of
my revenue and expenditure proposals on our financial position over the
medium term. Only in this way will we be sure that we can afford our
recurrent spending commitments and that my revenue proposals are
consistent with our financial position over the medium term.
My detailed Medium Range Forecast is
published as an appendix to the printed version of this speech. I have
based it on a forecast trend GDP growth of 4 per cent a year in real terms
and a trend annual GDP deflator of 2.5 per cent. I have also assumed that,
starting from 2002-03, government expenditure will grow by 4 per cent in
real terms, in line with the trend GDP growth rate.
In each of the next three financial years, I
am forecasting a very small overall deficit followed by a fairly healthy
surplus in 2004-05, the final year of the forecast period. Being less
than 0.5 per cent of GDP, the deficits are quite insignificant, and we can
regard the budgets for those years essentially as balanced.
As a consequence, the Medium Range Forecast
shows that our fiscal reserves will fall slightly over the next three
financial years before picking up again in 2004-05. At the end of the
forecast period the reserves will stand at $427.5 billion. This is within
the guidelines set out in my 1998 Budget Speech, albeit very close to the
lower end of the range.
We have been running operating deficits since
1998-99. I expect this situation to last until 2004-05. In 2001-02,
the surplus on non-recurrent items will offset much of the operating
deficit. But non-recurrent items are by their nature unstable and
unreliable sources of revenue.
Our forecasts indicate a gradual reduction in
operating deficits over the medium term. Nevertheless, they remain a
matter of concern. The International Monetary Fund and the international
credit rating agencies will look with nervousness on a government which,
over the longer term, continues to let its recurrent expenditure exceed
its recurrent revenue. This could lower investors' confidence and mean a
lower credit rating for Hong Kong. Borrowing costs would then increase for
all Hong Kong businesses that need to raise capital in the markets. And
higher borrowing costs for businesses ultimately translate into reduced
economic growth, fewer jobs and lower living standards. This is not hollow
theory, but a very real problem of the kind that all economies must guard
against. The IMF and the major credit rating agencies will continue to
monitor our performance closely.
|Dissecting the Problem
I would like to make the point that
successive operating deficits are not the result of unrestrained
government spending or the Government's lack of vigour in raising revenue.
I have, after all, for many years been emphasising fiscal prudence and the
need to achieve fiscal balance. More recently, we have exercised stricter
control over spending to narrow the gap between the growth of government
expenditure and that of GDP. Indeed, I have my critics for being overly
conservative in the management of public finances.
We do not know whether this series of
successive operating deficits is cyclical or structural in nature and this
leads to uncertainty. But we know for sure that, while the relief packages
of expenditure and revenue measures introduced in recent years have helped
people ride out the Asian financial storms, they have put pressure on
My Medium Range Forecast assumes that
government expenditure will grow by 4 per cent a year starting in 2002-03. This is worth remembering. It is 1.5 percentage points higher
than in my Medium Range Forecast last year. I believe that, as some
Members have suggested, we should allow the growth rate of government
expenditure to come into line with the trend growth of GDP and hence
provide more services and facilities for the benefit of the community.
This should be affordable unless changing economic circumstances erode our
recurrent revenue in the medium to long term.
I wish that I could say, today, with
certainty that there will be no such erosion. But I cannot. We need to
monitor the trend of our revenue collections during times of steady
economic growth before we can come to that or any other conclusion. The
Task Force headed by the Secretary for the Treasury, which I announced
last year, continues to study this problem.
Meanwhile, the Advisory Committee on New
Broad-based Taxes, set up last year, is looking into new taxes suitable
for Hong Kong, so that we have appropriate strategies at hand if it is
confirmed that the operating deficits are structural in nature.
In the interests of Hong Kong's long-term
development, we must not overlook the current and medium-term phenomenon
of operating deficits. The Advisory Committee and the Task Force will
report their findings later this year. I hope that Members of this Council
and the public will study their reports carefully and with open minds. I
must stress that our objective remains to keep a simple and predictable
tax regime with low tax rates.
The phenomenon of successive operating
deficits makes it all the more important to uphold prudent fiscal
principles. Although supporting the need for fiscal prudence, some Members
of this Council have called on the Government to relax its style of fiscal
management. They have suggested that the Government could, for example,
afford expenditure growth faster than GDP growth and that the fiscal
reserves could be run down to finance its outlays.
I am puzzled as to how we can relax standards
on the one hand and claim, on the other, that we have not deviated from
the principles of fiscal prudence. The fact is that if government
expenditure grows faster than trend GDP growth, we will incur excessive
financial obligations, not only in the short term, but also in the long
run. This is because a large proportion of our expenditure is devoted to
funding recurrent services and facilities which represent a long-term
commitment on the part of the Government. Put simply, any excess amount
spent today may increase the pressure for tax increases tomorrow.
I must also point out that, notwithstanding
the adequate level of our fiscal reserves, we should not take the easy way
out and rely on them for a living. This would undermine our ability to
cope with unforeseen circumstances which may arise at any time. It would
also compromise our fiscal discipline and jeopardise our international
credibility. Such action could have very serious consequences. Taking the
easy way out today could cost every man, woman and child in Hong Kong
dearly over the longer term. That would be far too high a price to ask our
future generations to pay.
Let me turn back to the expenditure programme
for 2001-02. During my Budget consultations some Members suggested that
I should raise the expenditure guideline by more than 2.5 per cent. The
robust growth of our economy last year restored the balance between the
cumulative growth in government expenditure and cumulative economic growth
earlier than we had expected. But I do not think it prudent to deviate
from my stated intention of allowing the expenditure guideline to increase
by 2.5 per cent in 2001-02.
Let me explain why. First, we are expecting a
substantial operating deficit of over $16 billion in 2001-02 and the
situation will start to improve in the following year only if all goes
well. Second, we do not yet know whether successive years of operating
deficits represent a structural problem or merely a cyclical phenomenon.
Third, I think it is wrong to increase taxes substantially, at this time,
to support a higher level of expenditure. Fourth, I have noted that, in
2001-02, government expenditure as a proportion of GDP will be at its
highest level since the introduction of the Medium Range Forecast in
1986-87. We must see to it that the public sector does not overexpand.
Preparing this Budget has been a challenge. I need to take care of the
present needs of the community and at the same time cater for the future
development of Hong Kong. I have to keep our public finances healthy and
at the same time promote development and improve living standards. I must
take care of those in need but without forsaking fiscal prudence. I am
most grateful to Members of this Council, representatives from various
sectors and members of the public, who have all shared with me their
observations and suggestions. Your ideas have helped shape my thinking and
have influenced the initiatives that I have announced this afternoon.
This Budget is a deliberately conservative
one. I have proposed to spend what I promised last year to meet the
community's needs. I have also proposed modest revenue measures to uphold
our principles of fiscal prudence. I do not yet have enough evidence to
determine whether the problem with our public finances is structural or
cyclical. It is too soon to come to a verdict. It would be unwise to rush
into major tax increases or new taxes at the risk of prejudicing economic
But we must have a clear vision of our future
direction and continue to hone our strengths in the economic interests of
In our public finances, we must face up to
the reality of successive operating deficits and a narrow tax base. We
must come up with suitable solutions in a practical, reasonable and open
manner. We must not let expediency override fundamental financial and
In economic development, we must grasp the
opportunities of China's accession to the WTO and the development of
Western China. We must capitalise on Hong Kong's synergy with Guangdong
and the Pearl River Delta, and initiate joint development. As a community,
we must pull together and focus on our next economic take-off. We must
strive to excel as Asia's World City.
I also appeal to the community to consider
the less fortunate among us and to provide them with the support and
assistance they need.
I have proposed various measures to help
members of the public rise to the new challenges of a knowledge-based
economy. Members of the community must take every opportunity to upgrade
their own knowledge and skills. Their personal advancement and that of
Hong Kong depend on this.
I firmly believe that, despite the many
external uncertainties which may face us in 2001, we should be able to
withstand any economic fluctuations that may arise so long as we are
properly equipped. Hong Kong has in recent years been through a baptism of
fire and has emerged stronger than ever. We have become more competitive
than we were before the financial crisis. We have strengthened our
monetary and financial systems. Our public sector has become more
efficient and forward-looking. Most important, the people of Hong Kong
have become more down-to-earth and realistic, focusing more on the fruits
of real endeavours than on quick gains.
We can look forward with hope, but we must at
the same time be aware of the challenges we face. We must keep up the hard
work. Only by doing our best will we succeed.
I leave my post of Financial Secretary
confident in the future of Hong Kong.