THE 2002-03 BUDGET - Appendices

APPENDIX A

MEDIUM RANGE FORECAST

2001-2002 TO 2006-2007

INTRODUCTION

The Medium Range Forecast (MRF) is a projection of expenditure and revenue for the forecast period based on the forecasting assumptions and budgetary criteria outlined in Section I of this Appendix.

2 The MRF is presented in three sections:

(I) Forecasting assumptions and budgetary criteria.

(II) The MRF for 2001-2002 to 2006-2007.

(III) Relationship between Government Expenditure, Public Expenditure and GDP in the MRF.

3 Government's contingent liabilities at 31 March 2001 and an estimate at 31 March 2002 and 31 March 2003 respectively are provided in Section IV of this Appendix as supplementary information to the MRF.

SECTION I - FORECASTING ASSUMPTIONS AND BUDGETARY CRITERIA

4 A number of computer based models are used to derive the MRF. These models reflect a wide range of assumptions about the factors determining each of the components of Government's revenue and expenditure. Some are economic in nature (the general economic assumptions) while others deal with specific areas of Government's activity (the detailed assumptions). These are supported by studies of historical and anticipated trends.

General Economic Assumptions

Growth in Gross Domestic Product (GDP)

5 There is a clear link between many of Government's major revenue sources and economic growth. For planning purposes the medium range assumption as to trend annual GDP growth for 2002 to 2006 has been set at 3% in real terms.

Inflation

6 Over the forecast period of 2002 to 2006, the trend annual inflation in the economy, measured by the GDP deflator, is assumed to be 0.4%. The trend annual inflation in local consumption terms, measured by the Composite Consumer Price Index, is assumed to be 0.3%.

Methodology

7 In arriving at the yearly forecasts, account is taken of short-term fluctuations from the trend forecasts.

Detailed Assumptions

8 A wide range of detailed assumptions relating to developing expenditure and revenue patterns over the forecast period are taken into account. These include:

estimated cash flow of capital projects.
forecast completion dates of these capital projects and their related recurrent consequences in terms of staffing and running costs.
estimated cash flow arising from new commitments resulting from policy initiatives.
the expected pattern of demand for individual services.
the trend in yield from individual revenue sources.
new revenue measures in the 2002 Budget.

Budgetary Criteria

9 In addition to the above forecasting assumptions there are a number of criteria against which the results of forecasts are tested for overall acceptability in terms of budgetary policy. Any significant breach of important budgetary criteria results in a review and adjustments, where necessary, of the expenditure and revenue projections.

10 The following are the more important budgetary criteria:

Budget surplus/deficit

The Government aims to achieve balance in consolidated and operating accounts by 2006-2007. In the longer-term, the Government needs to achieve an operating surplus to partially finance capital expenditure.

Fiscal reserves

The Government aims to maintain the level of reserves at around 12 months of total government expenditure.

Total expenditure growth

The general principle is that, over time, expenditure growth should not exceed the growth of the economy, taking into account both real and nominal terms. The Government aims to keep public expenditure at or below 20% of GDP by 2006-2007.

Capital expenditure growth

By its nature some fluctuations in the level of capital expenditure are to be expected. However, over a period the aim is to contain capital expenditure growth within overall expenditure guidelines.

Revenue policy

Account is taken of the need to maintain over time the real yield from fees and charges, fixed duties etc. and to review periodically the various tax thresholds in the light of inflation.

SECTION II - THE MRF FOR 2001-2002 TO 2006-2007

11 The current MRF (Note a) is summarised in the following three tables which indicate the forecast operating position, capital financing position and consolidated reserves position.

Operating Account

Table 1

	Revised Estimate	Forecast
	2001-2002	2002-2003	2003-2004	2004-2005	2005-2006	2006-2007
	$m	$m	$m	$m	$m	$m
Operating revenue (Note b)	150,660	149,400	167,920	180,580	196,580	208,940
Less: Operating Expenditure (Note c)	201,530	211,360	210,440	212,790	215,550	219,760
Operating surplus/(deficit) before investment income	(50,870)	(61,960)	(42,520)	(32,210)	(18,970)	(10,820)
Investment income (Note b)	180	12,640	15,650	14,190	13,660	13,610
Operating surplus/(deficit) after investment income	(50,690)	(49,320)	(26,870)	(18,020)	(5,310)	2,790

Capital Financing Statement

Table 2

		Revised Estimate	Forecast
		2001-2002	2002-2003	2003-2004	2004-2005	2005-2006	2006-2007
		$m	$m	$m	$m	$m	$m
Capital revenue other than MTR share offer (Note d)		22,780	36,440	38,470	39,460	40,680	41,860
MTR share offer and sale of other government assets (Note d)		-	15,000	-	10,000	10,000	-
Less :	General Revenue Account capital expenditure (Note e)	2,160	4,160	3,680	3,770	3,860	3,970
:	Expenditure on capital projects (Note f)	29,620	34,360	34,570	35,120	35,680	36,260
:	Loans and investments (Notes g)	6,010	9,370	12,620	8,860	6,240	4,850
:	Aid for disaster relief (Note h)	10	-	-	-	-	-
:	Expenditure for innovation and technology (Note i)	360	560	580	690	720	720
Capital financing surplus/(deficit) before investment income		(15,380)	2,990	(12,980)	1,020	4,180	(3,940)
Investment income (Note d)		440	1,120	1,180	1,130	1,190	1,200
Capital financing surplus/(deficit) after investment income		(14,940)	4,110	(11,800)	2,150	5,370	(2,740)

Consolidated Reserves

Table 3

	Revised Estimate	Forecast
	2001-2002	2002-2003	2003-2004	2004-2005	2005-2006	2006-2007
	$m	$m	$m	$m	$m	$m
Fiscal Reserves at 1 April	430,280	369,760	325,580	286,910	271,040	271,100
Operating surplus/(deficit) (per Table 1)	(50,690)	(49,320)	(26,870)	(18,020)	(5,310)	2,790
Capital financing surplus/(deficit) (per Table 2)	(14,940)	4,110	(11,800)	2,150	5,370	(2,740)
Consolidated surplus/(deficit)	(65,630)	(45,210)	(38,670)	(15,870)	60	50
Write-back of provision for loss in investments with the Exchange Fund	5,110	1,030	-	-	-	-
Fiscal Reserves at 31 March (Note j)	369,760	325,580	286,910	271,040	271,100	271,150
As number of months of Government Expenditure	19	15	14	13	13	12

Notes on the Medium Range Forecast

(a)	Accounting policies

	(i)	The Medium Range Forecast, like Government's Accounts, is prepared on a cash basis and reflects forecast receipts and payments, whether or not they relate to recurrent or capital transactions.
	(ii)	The Medium Range Forecast includes the General Revenue Account and the Funds (the Capital Works Reserve Fund, the Loan Fund, the Capital Investment Fund, the Disaster Relief Fund, the Civil Service Pension Reserve Fund, the Land Fund and the Innovation and Technology Fund).

(b)	Operating revenue

	(i)	Operating revenue is defined in Appendix C.
	(ii)	For the purpose of the Medium Range forecast, the investment earnings of the balance of the General Revenue Account which is credited to revenue head Properties and Investments and the investment earnings of the Land Fund are consolidated and shown separately under Investment Income in Table 1. The rate of return on investment earnings is assumed at 4% in 2002-2003 and 5.5% in 2003-2004 to 2006-2007.
	(iii)	The level of operating revenue in 2002-2003 has taken into account the revenue concession and revenue-raising measures in the 2002 Budget.

(c)	Operating expenditure

	(i)	Operating expenditure is defined in Appendix C.
	(ii)	The operating expenditure in 2001-2002 to 2006-2007 includes provision for some major expenditure items which are one-off in nature. They include compensatory payments and commuted pension gratuity payments under the Voluntary Retirement Scheme and the Voluntary Department Scheme introduced in 2000-2001 and forecast to amount to $12.5 billion ($5.8 billion in 2001-2002, $3.3 billion in 2002-2003, $1.3 billion in 2003-2004, $0.7 billion in 2004-2005,$0.7 billion in 2005-2006 and $0.7 billion in 2006-2007), and total commitments of $7.1 billion for funding the various funds/schemes announced in the 2001Policy Address (the $5 billion Continuing Education Fund, the $1.9 billion funds to support small and medium enterprises, the $0.1 billion Community Investment and Inclusion Fund, and the $0.1 billion fund for supporting the comprehensive development of professional services).
	(iii)	The level of operating expenditure in 2002-2003 to 2006-2007 has assumed a 4.75% reduction in the salaries of the civil service and the salary-related portion of recurrent subventions to take effect from 1 October 2002. This assumed salary reduction, if implemented, will save about $3 billion in 2002-2003 and $6 billion in a full year in subsequent years.

(d)	Capital revenue

	(i)	The breakdown of capital revenue to the various General Revenue Account and the Funds is -

	2001-2002	2002-2003	2003-2004	2004-2005	2005-2006	2006-2007
	$m	$m	$m	$m	$m	$m
General Revenue Account	4,830	19,720	4,960	14,470	14,460	4,380
Capital Works Reserve Fund	10,080	25,650	26,560	27,620	28,820	30,080
Capital Investment Fund	2,820	2,200	2,150	2,200	2,220	2,220
Civil Service Pension Reserve Fund	0	480	690	730	770	810
Loan Fund	5,470	4,330	5,060	5,370	5,430	5,430
Innovation and Technology Fund	20	180	230	200	170	140
	_______	_______	_______	_______	_______	_______
Total	23,220	52,560	39,650	50,590	51,870	43,060
	_______	_______	_______	_______	_______	_______

	(ii)	For the purpose of the Medium Range Forecast, the investment earnings on the balances of the Funds other than the Land Fund are shown separately under Investment Income in Table 2. The forecast receipts of $15 billion in 2002-2003 from the second tranche of MTR Corporation Limited share offer, and the assumed receipts of $10 billion each in 2004-2005 and 2005-2006 from sale of government assets, which are to be credited as capital revenue to the General Revenue Account, are also shown separately in Table 2.
	(iii)	For the purpose of the Medium Range Forecast, the annual land premia included under the Capital Works Reserve Fund for 2002-2003 to 2006-2007 are assumed at 2% of GDP.


(e)	General Revenue Account capital expenditure

	This comprises expenditure chargeable to the General Revenue Account in respect of purchase of equipment and works of a minor nature.

(f)	Expenditure on capital projects

	This comprises expenditure chargeable to the Capital Works Reserve Fund in respect of the Public Works Programme, land acquisition, capital subventions, major systems and equipment and computerisation.

(g)	Loans and investments

	(i)	These comprise loans made from the Loan Fund, including loans to schools, teachers, students, housing loans, and loans under the special finance scheme for small and medium enterprises, and advances and equity investments made from the Capital Investment Fund mainly to Trading Funds and statutory bodies.

	(ii)	The forecast of payments from the Loan Fund is -


2001-2002	2002-2003	2003-2004	2004-2005	2005-2006	2006-2007
$m	$m	$m	$m	$m	$m
5,670	3,810	4,030	3,270	3,290	3,300


	(iii)	The forecast of payments from the Capital Investment Fund is -


2001-2002	2002-2003	2003-2004	2004-2005	2005-2006	2006-2007
$m	$m	$m	$m	$m	$m
340	5,560	8,590	5,590	2,950	1,550

(h)	Aid for disaster relief

	This is actual expenditure made from the Disaster Relief Fund for providing relief to disasters that occur outside Hong Kong. Because of the unpredictable nature of disasters, no estimate of future expenditure is made for the forecast period.

(i)	Expenditure for Innovation and Technology

	This comprises expenditure chargeable to the Innovation and Technology Fund to finance projects to help promote innovation and technology upgrading in manufacturing and service industries.

(j)	Fiscal reserves

	The fiscal reserves represent the accumulated balances of the General Revenue Account and the Funds.

APPENDIX B

ANALYSIS OF PUBLIC/GOVERNMENT EXPENDITURE
1997-1998 TO 2002-2003

CONTENTS

SECTION I - THE ESTIMATES IN THE CONTEXT OF THE ECONOMY

Relationship between Government Expenditure,
Public Expenditure and GDP in 2002-2003

SECTION II - ANALYSIS OF RECURRENT PUBLIC/GOVERNMENT EXPENDITURE BY POLICY AREA GROUP

Recurrent Public Expenditure - Year on Year Change

Commentary on the Changes
Growth in Major Policy Area Groups

Percentage Share of Expenditure by Policy Area Group -

Recurrent Public Expenditure
Recurrent Government Expenditure

SECTION III - ANALYSIS OF TOTAL PUBLIC/GOVERNMENT EXPENDITURE BY POLICY AREA GROUP

Total Public Expenditure - Year on Year Change

Commentary on the Changes

Percentage Share of Expenditure by Policy Area Group -

Total Public Expenditure
Total Government Expenditure

SECTION IV - MAJOR CAPITAL PROJECTS TO BEGIN IN 2002-2003

SECTION V - TRENDS IN PUBLIC EXPENDITURE : 1997-1998 TO 2002-2003

SECTION VI - KEY TO CLASSIFICATION OF EXPENDITURE

SECTION I - THE ESTIMATES^(Note) IN THE CONTEXT OF THE ECONOMY

Relationship between Government Expenditure, Public Expenditure and GDP in 2002-2003

	(All figures in $million at 2002-2003 prices)
	Government Expenditure	Public Expenditure
General Revenue Account

Operating	211,360	211,360

Capital	4,160	4,160
	________	________

	215,520	215,520

Capital Works Reserve Fund	34,360	34,360

Loan Fund	3,810	3,810

Innovation and Technology Fund	560	560
	________	________

	254,250	254,250
	________

Trading Funds		3,520

Lotteries Fund		1,370

Housing Authority		28,040
		________

		287,180
		________

GDP		1,256,210

Government Expenditure as a % of GDP		20.2%

Public Expenditure as a % of GDP		22.9%

Note :	The 2002-2003 expenditure estimates in this Appendix have assumed a 4.75% reduction in the salaries of the civil service and the salary-related portion of recurrent subventions to take effect from 1 October 2002.

SECTION II - ANALYSIS OF RECURRENT PUBLIC/GOVERNMENT EXPENDITURE BY POLICY AREA GROUP

Recurrent Public Expenditure - Year on Year Change

	(All figures in $million)
	2001-2002	2002-2003	Increase	%Increase/Decrease
	Revised Estimate	Estimate		in Nominal Terms	in Real Terms
					(see Note)
Education	46,380	49,315	+2,935	+6.3	+8.0
Health	32,030	32,450	+420	+1.3	+3.6
Social Welfare	29,640	32,125	+2,485	+8.4	+9.0
Support
Central Management of the Civil Service	18,800	18,170	-630	-3.4	-3.3
Others	10,360	10,260	-100	-1.0	+0.5
	______	______	______	______	______

	29,160	28,430	-730	-2.5	-1.9
	______	______	______	______	______

Security	24,900	24,810	-90	-0.4	+1.8
Housing	12,615	12,235	-380	-3.0	-1.8
Infrastructure
Water Supply	5,380	5,505	+125	+2.3	+2.6
Buildings, Lands and Planning	3,225	3,330	+105	+3.3	+5.3
Transport	2,985	3,105	+120	+4.0	+5.5
	______	______	______	______	______

	11,590	11,940	+350	+3.0	+4.1
	______	______	______	______	______

Economic	11,095	11,825	+730	+6.6	+8.3
Environment and Food	8,345	9,005	+660	+7.9	+9.6
Community and External Affairs

Recreation, Culture and Amenities	5,650	5,660	+10	+0.2	+1.4
District and Community Relations	1,815	1,910	+95	+5.3	+6.4
	______	______	______	______	______

	7,465	7,570	+105	+1.5	+2.6
	______	______	______	______	______

Total Recurrent Public Expenditure	213,220	219,705	+6,485	+3.0	+4.5
	_______	_______	_______	_______	_______

Note :

As the above 2002-2003 estimate has included assumptions on price changes for various expenditure components (e.g. operating expenses, plant and equipment, etc.) and an assumed reduction of 4.75% in salaries for the civil service and salary-related portion of recurrent subventions, the % increase/decrease is calculated after adjustment to bring the expenditure figures for 2001-2002 and 2002-2003 to the same price level.

Recurrent Public Expenditure - Commentary on the Changes

Recurrent public expenditure is expected to grow by $6,485 million, or 4.5% in real terms over the revised estimate for 2001-2002. Within this overall growth, recurrent government expenditure will increase by $6,925 million, or 5.0% in real terms over the revised estimate for 2001-2002. This level of year-on-year growth in recurrent government expenditure is partly attributable to expenditure in 2001-2002 being lower than the original estimate, reflecting significant efforts on the part of Controlling Officers to control costs. The growth in recurrent government expenditure in 2002-2003 over the original estimate for 2001-2002 will be $1,895 million, or 2.4% in real terms.

The significant changes in recurrent public expenditure in real terms by policy area groups are:

Support (-1.9%)
The decrease mainly reflects the reduced requirement on pension payment under the Voluntary Retirement Scheme due to the decreased number of officers retiring in 2002-2003 as compared to 2001-2002 as the scheme tapers off.

Housing (-1.8%)
The decrease reflects the reduced expenditure of the Housing Authority.

Infrastructure (+4.1%)
The increase mainly arises from additional spending on stepped up efforts to remove unauthorised building works and structures; on large scale clearance operations; on operation and maintenance of additional waterworks installations; and on road maintenance and management of public transport interchanges.

Economic (+8.3%)
The increase mainly arises from the provision of recurrent funding to expenditure initiatives on employment/training.

Environment and Food (+9.6%)
The increase reflects additional spending on monitoring food safety; on managing construction and demolition materials; on enhancing waste reduction and recovery; on enhancing cleanliness of Hong Kong; and on operating new sewage treatment facilities.

Community and External Affairs (+2.6%)
The increase reflects the additional provision on district and community relations; management of more major recreation, culture and amenities facilities; active planting in urban area and countryside; and grants to organise youth development programmes.

The major improvements in services in 2002-2003 in Education, Health, Social Welfare and Security policy area groups are detailed below :

Recurrent Public Expenditure - Growth in Major Policy Area Groups

The key improvements contributing to the real growth in recurrent public expenditure in Education, Health, Social Welfare and Security are detailed below:

Education (+8.0%)

—	Additional resources to support curriculum reform, including 249 additional primary school teachers for five years to serve as curriculum leaders

—	Native-speaking English Teachers and English Language Teaching Assistants for primary schools

—	IT Co-ordinators for primary and secondary schools in the next two school years

—	Cash grants to strengthen student guidance service in primary schools

—	Operating about 40 more primary schools on whole-day basis

—	Improving and rationalising various student financial assistance schemes

—	Implementing financial assistance schemes for students to support the expansion of post-secondary education

—	Enhancing the Kindergarten Subsidy Scheme to encourage kindergartens to recruit more qualified kindergarten teachers

—	Additional training places for serving kindergarten principals and child care centre supervisors

—	Enhancing school-based educational psychology service for primary schools

—	Extending the Smart Teen Challenge Project to more students for four school years

—	Strengthening the support for subject-related teacher organisations

Health (+$3.6%)

—	Opening net 166 additional hospital beds

—	Opening 80 additional day hospital places

—	Employing 1 000 additional care assistants to strengthen extended care service in hospitals

—	Introducing an intensive rehabilitation and treatment programme for psychiatric patients to facilitate their early integration into the community

—	Launching an adolescent health programme, developing a cervical screening programme, piloting a men's health programme, and implementing a parenting programme

—	Opening a Primary Health Care Centre in Fanling with a maternal and child health centre, a child assessment centre, a school dental clinic, and an integrated day treatment centre

Social Welfare (+9.0%)

—	An additional 2 702 subsidised residential places, 10 social centres (including 6 in multi-service centres), 3 multi-service centres, 280 day care centre places and enhanced home and community care services for the elders

—	An additional 185 residential places, 135 day places, 40 early education and training centre places, 40 special child care centre places and 13 additional home-based training teams for the disabled

—	An additional 500 day nursery places, 2 occasional child care units, 90 foster care places and 1 refuge centre for women

—	An additional 12 integrated teams for young people

—	47 additional speech therapists for pre-school disabled children

—	3 additional school social workers for new schools, 150 peer counsellors and 154 Understanding the Adolescent Projects in secondary schools

—	Additional time-limited jobs to strengthen various services including those under the Promoting Self-reliance Strategy, services for the elders, family and child services and rehabilitation services

Security (+1.8%)

—	133 additional police officers for strengthening operational front-line capability and traffic enforcement in new towns and new infrastructures

—	19 additional police officers for strengthening crime detection capability

—	127 additional fire fighting and ambulance officers for manning new fire stations, ambulance depots and fire motorcycles

—	50 additional ambulance officers for implementing full paramedic ambulance service

—	11 additional staff in Fire Services Department for implementing the Railway Development Strategy and formulating the fire services requirement for Hong Kong Disneyland

—	33 additional staff in Independent Commission Against Corruption for enhancing investigative capability, strengthening information technology support services and improving the handling of case properties

—	121 additional customs officers for manning customs facilities at Container Terminal No. 9 and for facilitating cross boundary traffic at Lok Ma Chau and Lo Wu Control Points

—	10 additional staff in Correctional Services Department for implementing the new Rehabilitation Centres Programmes for young offenders

—	10 additional correctional services officers for strengthening escort service to implement the proposal of shortening the maximum remand period from eight to three days

—	93 additional immigration officers for strengthening immigration control at boundary control points

—	30 additional staff in Immigration Department for implementing the new Registration of Persons System which supports the issue of smart identity card

—	32 additional staff in Immigration Department for implementing Phase I of the updated Information Systems Strategy

SECTION III - ANALYSIS OF TOTAL PUBLIC/GOVERNMENT EXPENDITURE BY POLICY AREA GROUP

Total Public Expenditure - Year on Year Change

	(All figures in $million)
	2001-2002	2002-2003	Increase	%Increase/Decrease
	Revised Estimate	Estimate		in Nominal Terms	in Real Terms
					(see Note)
Education	52,600	61,395	+8,795	+16.7	+18.5
Support
Others	14,960	16,870	+1,910	+12.8	+14.1
Central Management of the Civil Service	20,750	19,580	-1,170	-5.6	-5.4
	______	______	______	______	______

	35,710	36,450	+740	+2.1	+2.8
	______	______	______	______	______

Health	34,015	34,410	+395	+1.2	+3.4
Social Welfare	30,730	33,740	+3,010	+9.8	+10.4
Housing	33,185	28,735	-4,450	-13.4	-13.0
Security	28,065	28,600	+535	+1.9	+4.0
Infrastructure
Buildings, Lands and Planning	10,840	10,590	-250	-2.4	-1.8
Water Supply	7,765	7,435	-330	-4.3	-3.8
Transport	6,335	7,365	+1,030	+16.4	+17.3
	______	______	______	______	______

	24,940	25,390	+450	+1.8	+2.4
	______	______	______	______	______

Economic	14,100	17,140	+3,040	+21.6	+23.5
Environment and Food	11,330	12,480	+1,150	+10.2	+11.7
Community and External Affairs

Recreation, Culture and Amenities	6,525	6,470	-55	-0.8	+0.4
District and Community Relations	1,950	2,370	+420	+21.4	+22.6
	______	______	______	______	______

	8,475	8,840	+365	+4.3	+5.5
	______	______	______	______	______

Total Public Expenditure	273,150	287,180	+14,030	+5.1	+6.5
	_______	_______	_______	_______	_______

Note :

Total Public Expenditure - Commentary on the Changes

Total public expenditure is forecast to grow in 2002-2003 by $14,030 million, or 6.5% in real terms over the revised estimate for 2001-2002. Within this, government expenditure will grow by $14,905 million, or 7.7% in real terms. The growth in government expenditure comprises growth in recurrent expenditure of $6,925 million or 5.0%, and growth in capital expenditure of $7,980 million or 20.5%. Expenditure from the Capital Works Reserve Fund, which makes up the majority of capital expenditure, is forecast to grow by $4,740 million or 16.3% in real terms.

The significant changes in capital expenditure contributing to the growth in total public expenditure are:

Education (+$8,795 million)
Capital spending on Education will rise by $5,860 million, or 97% in real terms, reflecting provision for the setting up of the Continuing Education Fund, additional loans to students pursuing higher education and additional loans to post-secondary education providers, and additional expenditure on the continuing programme of school-building and improvement works, University Grants Committee - funded building projects, capital payments to subvented primary and secondary schools for maintenance, repairs and minor improvement works, and enhancement to the information technology infrastructure for schools and the Education Department.

Support (+$740 million)
Capital spending in this policy area group is forecast to rise by $1,470 million or 23.7% in real terms. The increase reflects additional provision for various minor works for items in Category D of the Public Works Programme.

Health (+$395 million)
Capital spending on Health is forecast to reduce by $25 million, reflecting the near completion of a number of redevelopment hospital projects in 2002-2003.

Social Welfare (+$3,010 million)
Capital spending on Social Welfare is forecast to rise by $525 million or 48.6% in real terms. The increase reflects additional spending under the Lotteries Fund for various social welfare non-recurrent grants.

Housing (-$4,450 million)
The reduction mainly reflects the forecast capital expenditure of the Housing Authority in 2002-2003

Security (+$535 million)
Capital spending on Security is forecast to rise by $625 million or 21.9% in real terms. This reflects the planned expenditure on the redevelopment of Police Headquarters, and on implementation of the HKSAR Identity Card Project and an updated Information Systems Strategy for the Immigration Department.

Infrastructure (+$450 million)
Capital spending on Infrastructure is expected to rise by $100 million or 1.0% in real terms. This arises mainly from increased expenditure on supporting infrastructure works for Hong Kong Disneyland, Container Terminal No.9 and road works.

Economic (+$3,040 million)
Capital spending in this policy area group will rise by $2,310 million or 79.6% in real terms, reflecting additional funding support for innovation and technology, including planned expenditure on the Science Park at Pak Shek Kok; funding for 4 new funding schemes for small and medium enterprises; and additional provision to Skills Upgrading Scheme.

Environment and Food (+$1,150 million)
Capital spending in this policy area group will increase by $490 million or 17.5% in real terms. This reflects provision for new and improvement works for market complexes and various sewerage and sewage treatment works.

Community and External Affairs (+$365 million)
Capital spending in this policy area group will rise by $260 million or 26.8% in real terms, reflecting additional provision for leisure and cultural facilities; and for restoration of historical buildings.

SECTION IV - MAJOR CAPITAL PROJECTS TO BEGIN IN 2002-2003

Funds allocated for capital projects to start in 2002-2003 include :

		$million

Infrastructure		14,923
—	Tsuen Wan Road upgrading
—	Investigation, design and construction of the remaining associated infrastructure and landscaping works for the Hong Kong Disneyland on Lantau Island
—	Central Reclamation phase III - engineering works
—	Development at Anderson Road
—	Drainage improvement - Northern Hong Kong Island, West Kowloon, Tsuen Wan, Kwai Chung and Tsing Yi

Education		12,110
—	Construction of additional primary, secondary and special schools
—	School Improvement Programme, Final Phase
—	Teaching facilities and student hostels for universities
—	Education resource centre at Kowloon Tong

Environment and Food		__ 836
—	Central, Western, and Wan Chai West sewerage, stage 2 phase 2 works
—	Yuen Long and Kam Tin sewerage, stage 3

Community and External Affairs		819
—	International Wetland Park and Visitor Centre in Tin Shui Wai-phase 2 works
—	Kowloon Bay Recreation Ground
—	Joint-user building at Rock Hill Street, Kennedy Town

Economic		714
—	Applied Science and Technology Research Institute

Health		______590
—	Establishment of a Radiotherapy Centre and redevelopment of the Accident and Emergency Department in Princess Margaret Hospital

Security		______171
—	Improvements to Lo Wu Terminal Building and Lo Wu Footbridge

SECTION V - TRENDS IN PUBLIC EXPENDITURE : 1997-1998 TO 2002-2003

Introduction

The section presents trends in public expenditure over the period 1997-1998 to 2002-2003. This analysis is expressed in public expenditure terms and includes expenditure by the Trading Funds, the Housing Authority, the Lotteries Fund and the previous Provisional Urban Council and Provisional Regional Council (up to 31 December 1999). It shows the actual and estimated recurrent and total expenditure during this period and expresses this in terms of ten main policy area groups. Where appropriate, policy area groups are further analysed by policy areas.

2 Details of the individual heads of expenditure contributing to a particular policy area are provided in an index in Volume I of the 2002-2003 Estimates. This index further provides details by head of expenditure of individual programmes which contribute to a policy area.

3 The analysis provided in this section shows how resources have been and will, in 2002-2003, be allocated to different policy area groups. Where appropriate, historical figures have been adjusted to comply with the current classification of expenditure.

Recurrent Public Expenditure by Policy Area Group 1997-1998 to 2002-2003

Policy Area Groups	Actual				Revised Estimate	Estimate
	1997-1998	1998-1999	1999-2000	2000-2001	2001-2002	2002-2003
	%	%	%	%	%	%
Education	21.2	21.8	22.0	22.3	21.8	22.4
Health	15.1	15.3	15.3	15.4	15.0	14.8
Social Welfare	11.8	13.5	13.7	13.8	13.9	14.6
Support	13.4	11.9	12.2	12.7	13.7	12.9
Security
Internal Security	10.1	9.7	9.4	9.3	9.0	8.7
Other	1.6	1.7	1.8	1.6	1.6	1.6
Immigration	1.1	1.1	1.1	1.1	1.1	1.0
	12.8	12.5	12.3	12.0	11.7	11.3
Housing	6.6	6.3	6.0	5.8	5.9	5.6
Economic	5.8	5.4	5.2	5.2	5.2	5.5
Infrastructure
Water Supply	2.6	2.6	2.6	2.6	2.5	2.5
Buildings, Lands and Planning	1.4	1.4	1.5	1.4	1.5	1.5
Transport	1.4	1.4	1.5	1.4	1.4	1.4
	5.4	5.4	5.5	5.4	5.4	5.4
Environment and Food	4.3	4.2	4.2	4.0	3.9	4.1
Community and External Affairs
Recreation, Culture and Amenities	2.9	2.9	2.8	2.6	2.6	2.5
District and Community Relations	0.7	0.8	0.8	0.8	0.9	0.9
	3.6	3.7	3.6	3.4	3.5	3.4
	100.0	100.0	100.0	100.0	100.0	100.0

Total Recurrent Public Expenditure	$m	$m	$m	$m	$m	$m
Total Recurrent Public Expenditure	172,419	187,857	195,272	198,619	213,220	219,705

Total Public Expenditure by Policy Area Group 1997-1998 to 2002-2003

Policy Area Groups	Actual				Revised Estimate	Estimate
	1997-1998	1998-1999	1999-2000	2000-2001	2001-2002	2002-2003
	%	%	%	%	%	%
Education	20.0	18.2	18.7	19.2	19.3	21.4
Support	12.9	11.1	11.6	11.6	13.1	12.7
Health	11.9	11.8	11.8	12.2	12.5	12.0
Social Welfare	9.3	9.9	10.2	10.5	11.2	11.7
Housing	10.5	14.6	17.0	15.9	12.1	10.0
Security
Internal Security	8.0	7.3	7.5	7.8	8.0	7.8
Other	1.3	1.3	0.8	1.4	1.4	1.3
Immigration	0.8	0.8	1.3	0.8	0.9	0.9
	10.1	9.4	9.6	10.0	10.3	10.0
Infrastructure
Buildings, Lands and Planning	3.2	3.1	3.0	3.2	4.0	3.7
Water Supply	2.7	3.1	3.1	3.0	2.8	2.6
Transport	3.1	2.5	2.4	2.4	2.3	2.5
	9.0	8.7	8.5	8.6	9.1	8.8
Economic	7.3	8.0	4.6	4.7	5.2	6.0
Environment and Food	5.6	5.0	4.6	4.2	4.1	4.3
Community and External Affairs
Recreation, Culture and Amenities	2.8	2.7	2.8	2.4	2.4	2.3
District and Community Relations	0.6	0.6	0.6	0.7	0.7	0.8
	3.4	3.3	3.4	3.1	3.1	3.1
	100.0	100.0	100.0	100.0	100.0	100.0

Total Public Expenditure	$m	$m	$m	$m	$m	$m
Total Public Expenditure	234,780	266,448	269,484	267,507	273,150	287,180

SECTION VI - KEY TO CLASSIFICATION OF EXPENDITURE

Index Of Policy Area Groups

Policy Area Group	Description by Policy Area	Reference (Note)
Community and External Affairs	District and Community Relations	19
Community and External Affairs	Recreation, Culture, Amenities and Entertainment Licensing	18

Economic	Air and Sea Communications	3
	Commerce and Industry	6
	Employment	8
	Financial Services	1
	Information Technology, and Broadcasting	17
	Posts, Power, Competition Policy and Consumer Protection	4
	Public Safety	7
	Travel and Tourism	5

Education	Education	16

Environment and Food	Environmental Hygiene	32
	Environmental Protection and Conservation	23
	Agriculture, Fisheries and Food Safety	2

Health	Health	15

Housing	Housing	31

Infrastructure	Buildings, Lands and Planning	22
	Transport	21
	Water Supply	24

Security	Immigration Control	10
	Internal Security	9
	Administration of Justice	12
	Anti-Corruption	13
	Legal Administration	11
	Legal Aid	20

Social Welfare	Social Welfare	14
	Women's Interest	33

Support	Central Management of the Civil Service	26
	Complaints Against Maladministration	30
	Constitutional Affairs	28
	Intra-Governmental Services	27
	Revenue Collection and Financial Control	25
	Support for Members of the Legislative Council	29

Note:

The Policy Area Reference corresponds with that used in the Index of Policy Areas in the Estimates of Expenditure.

	Revised Estimate	Forecast
	2001-2002	2002-2003	2003-2004	2004-2005	2005-2006	2006-2007
	$m	$m	$m	$m	$m	$m
Operating expenditure	201,530	211,360	210,440	212,790	215,550	219,760
Capital expenditure	37,820	42,890	42,860	42,850	43,550	44,250
Total government expenditure	239,350	254,250	253,300	255,640	259,100	264,010
Add: Other public bodies	33,800	32,930	38,540	34,590	33,510	34,990
Total public expenditure (Note 1)	273,150	287,180	291,840	290,230	292,610	299,000
Gross Domestic Product (calendar year)	1,262,590	1,256,210	1,311,480	1,369,190	1,429,430	1,492,330
Growth in GDP (Note 2)
Money terms	-0.3%	-0.5%	4.4%	4.4%	4.4%	4.4%
Real terms	0.1%	1.0%	3.5%	3.5%	3.5%	3.5%
Growth in government expenditure
Money terms	+6.5%	+6.2%	-0.4%	+0.9%	+1.4%	+1.9%
Real terms	+5.7%	+7.7%	+0.4%	+0.5%	+0.9%	+1.5%
Growth in public expenditure
Money terms	+2.1%	+5.1%	+1.6%	-0.6%	+0.8%	+2.2%
Real terms	+1.7%	+6.5%	+2.2%	-0.9%	+0.4%	+1.8%
Government expenditure as a percentage of GDP (Note 3)	19.0%	20.2%	19.3%	18.7%	18.1%	17.7%
Public expenditure as a percentage of GDP (Note 3)	21.6%	22.9%	22.3%	21.2%	20.5%	20.0%

Note 1	Public expenditure comprises government expenditure (i.e. all expenditure charged to the General Revenue Account and financed by the Government's statutory funds excluding Capital Investment Fund), and expenditure by the Trading Funds, the Housing Authority and the Lotteries Fund. But not included is expenditure by those organisations, including statutory organisations, in which the Government has only an equity position, such as the Airport Authority, the MTR Corp Ltd and the Kowloon-Canton Railway Corporation. Similarly, advances and equity investments from the Capital Investment Fund are excluded as they do not reflect the actual consumption of resources by the Government.
Note 2	Over the period 2002 to 2006, the forcast trend nominal growth in GDP is 3.4% and the trend real growth in GDP is 3%.
Note 3	Caution should be exercised in interpreting these percentages as government expenditure and public expenditure are estimated on a fiscal year basis while the GDP is estimated on a calendar year basis.

Components of expenditure and revenue		Appropriation	Government expenditure and revenue			Public Expenditure
Components of expenditure and revenue		Appropriation	Operating	Capital	Total	Public Expenditure
		$m	$m	$m	$m	$m
Expenditure General Revenue Account:
Recurrent account		207,830	207,830	-	207,830	207,830
Capital account
Plant, equipment and works		2,760	-	2,760	2,760	2,760
Other non-recurrent		6,480	6,480	-	6,480	6,480
Subventions		1,400	-	1,400	1,400	1,400
		218,470	214,310	4,160	218,470	218,470
Transfers to Funds		21,020	-	-	-	-
Capital Works Reserve Fund		-	-	34,360	34,360	34,360
Load Fund		-	-	3,810	3,810	3,810
Innovation and Technology Fund		-	-	560	560	560
Trading funds		-	-	-	-	3,570
Lotteries Fund		-	-	-	-	1,370
Housing Authority		-	-	-	-	28,150
		239,490	214,310	42,890	257,200	290,290
Less : Assumed salary reduction		-	(2,950)	-	(2,950)	(3,110)
		239,490	211,360	42,890	254,250	287,180
Revenue (before Budget revenue measures)
General Revenue Account:
Taxation			127,100	1,610	128,710
Other revenue			30,950	3,110	34,060
			158,050	4,720	162,770
MTR share offer			-	15,000	15,000
Land Fund			10,090	-	10,090
			168,140	19,720	187,860


Capital Works Reserve Fund			-	25,650	25,650
Capital Investment Fund			-	2,200	2,200
Civil Service Pension Reserve Fund			-	480	480
Disaster Relief Fund			-	-	-
Load Fund			-	4,330	4,330
Innovation and Technology Fund			-	180	180
			168,140	52,560	220,700
Surplus/(deficit) before Budget revenue measures			(43,220)	9,670	(33,550)
Less:	Effect of Budget revenue measures		(6,100)	-	(6,100)
Surplus/(deficit) after Budget revenue measures			(49,320)	9,670	(39,650)
Less:	Advances and equity investments from the Capital Investment Fund⁽¹⁾		-	(5,560)	(5,560)
Consolidated surplus/(deficit)			(49,320)	4,110	(45,210)

	2000-2001	Estimate 2001-2002	Estimate 2002-2003
	$m	$m	$m
Guarantee to the Hong Kong Export Credit Insurance Corporation for liabilities under contracts of insurance	8,889	9,500	11,000
Litigation	4,788	4,800	4,700
Possible capital subscriptions to the Asian Development Bank	1,763	1,800	1,800
Guarantees provided under the Special Finance Scheme, the Self-employment Business Start-up Assistance Scheme and the SME Business Installations and Equipment Loan Guarantee Scheme for Small and Medium Enterprises	4,605	2,500	6,500
	_________	________	________
Total	20,045	18,600	24,000
	_________	________	________


13 Table 5 shows the sum to be appropriated in the 2002 Budget analysed between operating and capital expenditure and after including expenditure from the Funds and other public bodies. It also shows the derivation of public expenditure for 2002-2003 given in Table 4.

14 Table 5 also illustrates the effect of the Budget revenue measures on the overall surplus/deficit position for 2002-2003.