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Future Challenges

50.   Although our economic performance at the moment is encouraging, many challenges lie ahead. While formulating our economic development and fiscal policies, we should be alert to all such challenges and address them with the best interests of our community at heart. This is the Government's commitment to the people of Hong Kong. In the near future, we face the potential risks of an avian influenza epidemic and volatility in the global financial markets. For the longer term, we have to deal with the following:

  • to meet the challenges of a knowledge-based economy, the quality of our human resources needs to be constantly upgraded, and at a quicker pace. This improvement in quality should include education, training and the fostering of cultural awareness, which will require huge resources;

  • the restructuring of the economy and mismatch of labour will continue to bring employment pressures to bear on low-skilled workers and widen the income gap;

  • the ageing population will give rise to a series of problems, including greater demand for elderly care services. As the ratio of working to total population will gradually decrease, we need to be prepared and continually upgrade our productivity and competitiveness; and

  • environmental problems will affect public health and the quality of life and impede the sustained development of Hong Kong as a cosmopolitan city.

These are only a few examples of the challenges that will put government finances under pressure.

51.   On the macroeconomic front, I am concerned as to how much further the unemployment rate can drop from its present level of 5.2 per cent and whether the ageing population will push up Hong Kong's natural unemployment rate. Our economic recovery has led to higher prices and a rebound in property rentals. The CCPI rose by 1.1 per cent last year. Inflation has once again emerged as an issue to watch.

52.   All these challenges will impact on our public finances. Over the past few years, we have implemented vigorous measures to contain expenditure. There is consequently limited scope for further cuts. Many of our revenue items are heavily dependent on the performance of our economy. In times of economic downturn, the risk of budget deficits will re-emerge. The Government's tax base is also too narrow: for example, only one third of the working population pays salaries tax. We also have to accept that land premiums and investment income, as volatile as they may be, are very important to our finances.

53.   The more advanced and affluent a society becomes, the higher are the public's expectations of its government. We will inevitably need to increase government expenditure substantially, if we are to meet all of our community's demands. We will need revenues to finance such expenditure, although maintaining a low-tax regime is the wish of the majority. I am also of the firm belief that leaving wealth with the people is a key driving force for economic development. The biggest challenge in managing public finances is to keep taxes low while at the same time satisfying the needs of the community.

54.   My fiscal targets are to keep our accounts in balance and the share of public expenditure in GDP at 20 per cent or below over the next few years. For 2006?7, public expenditure is forecast at around 18 per cent of GDP, lower than most other developed economies. Hong Kong is an externally-oriented economy and thus highly susceptible to outside shocks. As our economy is also subject to cyclical fluctuations, there is all the more reason for us to provide against a rainy day when the economy is strong, or else we will have too little room to introduce relief measures for our community during a downturn. We need to maintain the share of public expenditure in GDP at a low level in order to secure the health of our public finances.

55.   We would naturally have preferred to provide more welfare to our citizens. We would have liked to develop more parks, piazzas, open space and cultural and heritage sites. But where is the money for all these going to come from? In line with our belief in small government and given our limited resources, we must manage our finances prudently. On the welfare front, we provide the community with a basic safety net and aim to build a just and caring society. However, we cannot compare ourselves with welfare states as our community does not accept their high tax regimes. Maintaining the share of public expenditure in GDP at 20 per cent or below, I believe, strikes a proper balance between keeping taxation low and enhancing government services. Following the principle of ig Market, Small Government?helps to maintain our low-tax regime and requires us to spend within our means.  This is the approach that best serves the long-term interests of Hong Kong.

56.   We shall continue to maintain a strict fiscal discipline and ensure the effective use of resources. The Government will keep expenditure within the limits of revenues, strive to achieve a fiscal balance, avoid deficits, and keep the budget commensurate with the growth rate of GDP.

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2005 © | Important notices Last revision date : 22 February, 2006