• The consolidated deficit for 2002-03 is forecast to be $70 billion, equivalent to 5.5% of GDP.
• With investment income excluded, Hong Kong has had consecutive operating deficits over the past five years, and the situation is deteriorating.  The operating deficit has increased from $32 billion in 1998-99 to $67.6 billion in 2002-03.
• The Government's fiscal reserves have decreased from $457 billion in 1997-98 to $303 billion in 2002-03.
• With government expenditure remaining high and revenue declining, the structural trend of revenue falling short of expenditure must be reversed early. Otherwise, economic recovery will be impeded and a financial crisis may set in.

The Budget has set a target of achieving fiscal balance in 2006-07 and has formulated practical measures to solve the fiscal deficit problem with a three-pronged approach:

• Boost the economy
• Cut expenditure
• Raise revenue

The Government is implementing specific measures to carry out the economic blueprint of the Chief Executive and to improve people's livelihood:

• Big market, small government
  - reduce public expenditure from 22.3% of GDPto 20% or below
  - serve the public more effectively by reprioritising service provision, reorganising government department structures, reengineering procedures and making full use of the market
• Building Hong Kong into a regional metropolis
  - improve facilities at our boundary crossings to speed up the flow of people and goods
  - step up overseas promotions to attract foreign companies to invest into the Pearl River Delta and to set up regional office in Hong Kong
  - reach an arrangement on the main parts of a Mainland/Hong Kong Closer Economic Partnership Arrangement by June
  - study the construction of a bridge linking to the western part of the Pearl River Delta and a Guangzhou - Shenzhen-Hong Kong express railway
• Developing human resources and infrastructure
  - set up a $1 billion fund to award matching grants to universities which have succeeded in securing private donations
  - study a proposal to attract primary and secondary school students outside Hong Kong to receive education in Hong Kong
  - ease restrictions on the entry of Mainland professionals and further expand the scope for investment immigration
  - introduce a list of projects for private sector participation
  - earmark an average of about $29 billion annually for infrastructure works over the next five years, similar to that for the past five years
• Enhancing core industries, i.e. financial services, logistics, tourism and producer and professional services, and fostering the development of creative and high-tech industries
• Increasing employment opportunities
  - provide funding of $270 million to enhance training and extend temporary jobs

The Government has set a target to reduce operating expenditure by $20 billion, to $200 billion by 2006-07:

• reduce civil service establishment by 10%, launch a second round of the Voluntary Retirement Scheme and freeze civil service recruitment
• cut civil service pay by 6% in two phases over the next two years
• economise vigorously and optimise use of resources
• adjust social security payments downwards by 11%

Raise additional revenue of $20 billion in the next four years with $14 billion to be raised through the introduction of the following measures this year:

• Salaries Tax
  - restore marginal tax rates and tax bands to the levels before the concessions made in 1998-99
  - restore allowances to the levels before the concessions made in 1998-99, but maintain the dependent grandparent, parent and sibling allowances, the disabled dependant allowance, and the deduction for expenses on self-education, etc, at current levels
  - increase the standard rate by one percentage point to 16%
  - the above measures to be implemented in two phases
  - increase the allowance for the third to ninth child to $30,000, equal to that for the first and second child
• Profits Tax
  - increase by one and a half percentage points to 17.5%
• Property Tax
  - increase by one percentage point to 16% over a period of two years
• Motor Vehicle First Registration Tax
  - abolish tax exemption for accessories and for distributors' warranties; adjust the width of tax bands and tax rates; and introduce a marginal tax rate system
• Air Passenger Departure Tax
  - increase from $80 to $120
• Introduce a Football Betting Duty
• Introduce a Boundary Facilities Improvement Tax
• Ultra Low Sulphur Diesel Duty
  - extend the duty concession for another year, maintaining the duty rate at $1.11 per litre
• Sale of government assets

Achieve the following targets by 2006-07:

• Attain a balanced Operating Account
• Restore balance in the Consolidated Account
• Reduce public expenditure to 20% of GDP or below