| Causes of our Fiscal Deficit
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9. The persistent problem of huge deficits is a reflection of four changes that Hong Kong is facing: cyclical economic adjustment; economic restructuring; population ageing; and evolution of government policies.
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10. The impact of cyclical economic adjustment is mainly reflected in the consolidation of the property market and the bursting of the bubble economy, which have resulted in substantial decreases in revenues generated directly and indirectly from real estate activities.
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11. As for economic restructuring, the continuing expansion of the regional economy centred in southern China is greatly enhancing the mobility of production and services. Quite a few of Hong Kong's economic activities have shifted outwards. The majority of our industrial production processes have moved across the boundary in the past 20 years. Hong Kong's import and export trade, once dominated by domestic exports, has become re-export-led, and its development is marked by a recent shift towards offshore trade. Our service industries have also gradually expanded outwards. In the face of challenges brought about by economic restructuring, the Government is pursuing policies that help to increase external demand and promote the development of high value-added industries. Because Hong Kong has a territorial-based tax system, economic restructuring has a profound impact on our public finances.
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12. The ageing population has also brought challenges to our public finances. Over the past decade, the percentage of persons aged 65 and above has increased from 9% of the population to 11%, and is forecast to rise to 24% by 2031. An ageing population will lead to an increase in government expenditure on social welfare and health services. The declining proportion of the population in the workforce will also result in reduced revenue.
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13. The fourth development is the evolution of government policies. The services provided by the Government over the past decade have improved in both quality and quantity. In addition, due to rigidity in the pay adjustment mechanism for the Government and subvented organisations, the increase in unit costs has been greater than that of the price level in the overall economy. As a result, over the past decade, public expenditure in money terms has increased by an annual average of 8.3%, which is higher than the 4.9% annual average nominal economic growth over the same period. The share of public expenditure in the economy has increased from 15.6% to 21.5% for this year. There has been substantial growth in public expenditure in the major policy areas:
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|
1992-93
($ billion) |
2002-03
($ billion) |
Education |
22.2
[2.8%] |
54.9
[4.3%] |
Health |
13.6
[1.7%] |
33.9
[2.7%] |
Social
Welfare |
7.3
[0.9%] |
32.6
[2.6%] |
Housing |
12.9
[1.6%] |
29.1
[2.3%] |
[ ] expenditure as a percentage of GDP
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14. Moreover, the Government has reduced taxes, fees and charges several times in recent years. Revenue from various government fees and charges, as a percentage of total government recurrent expenditure, has decreased from 18% to 6% over the past decade.
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15.
Against the background of regionalisation and an ageing population, and as high levels of wages and welfare are no longer supported by high land prices, a structural fiscal deficit is inevitable.
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16. We have studied these issues in recent years. In February last year, the Task Force on Review of Public Finances submitted its report on the structural problems of our public finances. At about the same time, the Advisory Committee on New Broad-based Taxes published its report on widening the tax base. The report explored the relationship between direct and indirect taxes and our public finances, and recommended, inter alia, introduction of a Goods and Services Tax when appropriate.
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| 17. Considering the characteristics of Hong
Kong's economy and its past trends, we believe that the principles of
"big market, small government" and low taxation are the cornerstones of Hong
Kong's development. Last year, I proposed to contain public expenditure to 20% of GDP or below. Besides controlling public expenditure, the Government also considers that it is necessary in the long term to introduce a Goods and Services Tax to broaden the tax base and secure a stable source of public revenue. In view of the present economic situation, we will not introduce such a tax for the time being. We will continue to study details for future implementation.
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18. Since the problem of a huge fiscal deficit is serious and needs to be addressed immediately, the Government must propose specific measures to eliminate it.
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