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The Urgency of Solving the Deficit Problem
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19. Some commentators claim that, as Hong Kong is undergoing economic restructuring and has been suffering from deflation and high unemployment for consecutive years, the Government should, given its fiscal reserves, reduce taxes and increase public expenditure to stimulate the economy, thus solving the problem of the fiscal deficit. I disagree. The European Union (EU) requires its member states to contain their fiscal deficit within 3% of GDP. Though the United States (US) is facing a huge deficit, the total amount will not exceed 3% of its GDP either. In contrast, our fiscal deficit is as high as 5.5%. If the situation continues deteriorating, it may lead to an outflow of capital, thus pushing up interest rates. It will also impede the trend of economic recovery and could even trigger a financial crisis.
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| 20. Many economists and international financial institutions have commented that the fiscal deficit poses potential problems for Hong Kong's economy. In its annual visit last month, a delegation from the International Monetary Fund (IMF) observed that "the continued deterioration of the fiscal position has made it the main source of potential macroeconomic vulnerabilities". The IMF called on the Government to formulate "a well-specified deficit reduction plan to bolster market confidence. Despite the uncertain macroeconomic outlook, credible fiscal consolidation has to begin in fiscal year 2003. This will require the implementation of sizeable structural deficit reduction measures in fiscal year 2003 and a commitment to more substantial consolidation, supported by concrete measures, in the next three years." 2
2 Refer to the IMF delegation's Concluding Statement for the Article IV
Consultation with the People's Republic of China in respect of the Hong
Kong Special Administrative Region in
February 2003.
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21. The Government has repeatedly stressed that the problem of the fiscal deficit has to be solved with a three-pronged approach, namely boost the economy, cut expenditure and raise revenue. There is general support in the community for this. Economic growth is a key to solving the problem. Failure to find a decisive solution will in turn stifle economic development. The two are interactive.
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22. As Hong Kong's economy is externally-oriented, any attempt to stimulate it through expenditure increases and tax reduction will have limited impact. We believe that a more effective way to address the problem of deflation without increasing our financial burden is to increase external demand, which means attracting more visitors, overseas talent and investment immigrants to come to Hong Kong; more foreign enterprises to set up regional offices here; more people to attend schools in Hong Kong and seek medical treatment at our private hospitals; and more foreign capital inflows into Hong Kong's financial market. These measures will reinforce the vigour of various sectors.
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