| Public
Finances
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| 47.
As in the past, the
Government will continue to follow the guiding principle of prudent
management of public finances. Article
107 of the Basic Law stipulates that the Hong Kong Special Administrative
Region shall follow the principle of keeping expenditure within the limits
of revenues in drawing up its budget, and strive to achieve a fiscal
balance, avoid deficits and keep the budget commensurate with the growth
rate of its gross domestic product.
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| 48.
Two weeks ago, the
Task Force on Review of Public Finances published its findings.
The Task Force concluded that our public finances are confronted
with structural problems. On the revenue side, consolidation in the property market has
resulted in a structural diminution in revenue from land premiums, profits
tax from the banking and property sectors, and stamp duty on property
transactions. The investment
income from our fiscal reserves will also suffer a structural reduction,
as successive years of fiscal deficits result in a rundown of the
reserves, and as the anticipated rate of return on investment income is
likely to drop alongside low inflation in the years ahead.
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| 49. On the expenditure
front, the Task Force pinpointed price rigidity in government expenditure,
which is particularly severe in times of deflation. Over the past three years, the general price level of the
economy1
has fallen by 12%, whereas the price of government expenditure2
has remained basically unchanged. Furthermore,
our ageing population will increase the demand for social security
payments. In the recent years
of economic downturn, the Government has also consciously embraced
counter-cyclical fiscal policies. As
the economy recovers, measures to redress these will have to be taken. Otherwise, our fiscal policies would be out of line with the
economy, and this would exacerbate the structural problem in our finances.
1 Price changes in the economy refer to the GDP deflator. 2 Price changes in government expenditure refer to the Government Consumption Expenditure deflator.
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| 50.
The Task Force was of
the view that, were the prevailing revenue and expenditure policies to
continue, the Government would face ongoing and persistent fiscal
deficits. It estimated that
the fiscal reserves would be depleted by 2008-09.
Obviously, this scenario is unacceptable.
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| 51.
Later on, I will
propose measures to restore fiscal balance.
Let me first discuss four issues concerning the management of
public finances, namely public expenditure as a share of the economy,
basis for comparison of growth in expenditure and the economy,
consolidated and operating balances, and purpose and level of fiscal
reserves.
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