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59.      Government expenditure comprises operating expenditure and capital expenditure. Operating expenditure is incurred by the Government to meet its daily operational requirements and to provide services. As such, it has long-term implications for the fiscal outlook. We must therefore strictly contain our operating expenditure. While accumulated deflation in terms of the GDP deflator has reached 20 per cent over the past five years, government operating expenditure has increased by 12 per cent. Given the serious deficit problem, operating expenditure should not keep on increasing. Reversing this trend is my priority.

60.      To contain government operating expenditure so as to achieve the target reductions to $200 billion by 2008-09, I have laid down guidelines for 2004-05 and the ensuing years. The reductions will be gradual and I will adopt a pragmatic and measured approach to their implementation: they will not be uniform across all policy bureaux. The guidelines are as follows-


Financial Year

Operating Expenditure
($ billion)

61.      In line with the target that I announced on 22 October last year, in order to reduce operating expenditure from $218 billion in 2003-04 to $200 billion in 2008-09, the total for 2004-05 should be $214.4 billion. Despite additional financial commitments as a result of implementing measures to prevent epidemics and extend temporary jobs, however, and in order to demonstrate our commitment to streamline our establishment and reduce expenditure, I am still holding government operating expenditure for 2004-05 to the level of $212.2 billion as pledged in last year's Budget, but which had not taken into account such expenditure items.

62.      Many citizens have suggested to me that the Government should cut down on expenditure before raising revenue. I fully agree that the Government should first put its own house in order by containing expenditure stringently before considering tax increases.

63.      In order to reduce expenditure, we have already begun streamlining departmental structures. The establishment of the civil service has been reduced from 198 000 in early 2000 to 172 000 at present, with a further reduction to about 166 500 by the end of March next year. We aim to cut the establishment to about 160 000 by 2006-07. As regards civil service pay, the first phase of the pay cut was implemented in January this year, and the second phase will come into effect 12 months later. A stable civil service is a key element of Hong Kong's long-term development. In implementing the foregoing measures, we will strive to maintain civil service morale.

64.      In reducing expenditure, we will make every effort to do more with less while ensuring that essential services are not affected. Last year, the Chief Secretary for Administration designated the Director of Administration and the Head of the Efficiency Unit to co-ordinate an exercise to review how the Government should use resources more efficiently and avoid wastage. Directors of Bureaux have proposed a number of initiatives in such areas as reprioritisation of service provision, structural reorganisation and streamlining of procedures. These management initiatives will not only achieve savings for the Government, but also put public resources to more effective use. The Government will continue to implement various cost-saving measures.

65.      I am very pleased that the community generally agrees that reducing expenditure is the right direction and has demonstrated support for resolving the problem of fiscal deficits. As Financial Secretary, I have the difficult task of allocating scarce resources within the community. An increase in resources for certain policy areas means a reduction for others. However, in order to eliminate the instability that persistently large budget deficits bring, each policy area needs to do its bit. I would like to take this opportunity to thank my colleagues for their understanding and assistance.

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2003 | Important notices
Last revision date : 10 March, 2004