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Financial Secretary John Tsang
I would like to extend my heartfelt thanks to the public and various sectors of the community for their valuable views on the Budget over the past two months. Members expressed their views on individual policy areas during the 18-hour debate held on two consecutive days last week, and five secretaries have just responded to their views in detail. Here is my response. I shall first give a brief account of the latest economic situation in Hong Kong, then share my views on maintaining fiscal stability and developing our economy.
The first is the economic situation. Beset by the weak global economic conditions, Hong Kong's economy grew only at a moderate pace in the past few years. Now, in 2015, the global economy is still shrouded by a multitude of uncertainties in a volatile climate.
Despite the launch of a new round of quantitative easing measures by the European Central Bank, the pace of recovery remains slow. The inflation rate in the Eurozone remained negative for four consecutive months, pointing to lingering deflation. Given the elevated level of unemployment, the instability of the geopolitical situation and the host of unresolved structural problems, the outlook is still a matter of concern.
Following the sales tax hike last year, Japan experienced two quarters of economic contraction before resuming growth in the fourth quarter. The rebound was, however, weaker than expected. The economy has yet to step out of the shadow of deflation and regain growth.
A "new normal" is, nevertheless, developing in the Mainland's economy. In the face of downward pressure, the Central Government has set the growth target for this year at 7%. The Mainland's economy will still likely outperform other major economies this year, and there is adequate policy headroom to achieve the intended target, assuming a crucial supporting role in bolstering Hong Kong's economy.
Ongoing outside uncertainties
The pace of recovery in the US is relatively steady. With strong employment growth, the unemployment rate dropped to a low level of 5.5% in March. Yet, the latest figures show slightly slackening growth in the US economy, as evidenced by the export performance being affected by a stronger exchange rate and lower-than-expected orders for durable goods and performance of retail businesses, along with the fact that the recovery of the housing market is awaiting further consolidation.
While the US Federal Reserve Board removed the word "patient" when referring to interest rate rises in its policy statement after the meeting in March, the Federal Open Market Committee made downward revisions to the forecast of US economic growth, inflation and the policy interest rate. It added uncertainties to the timing and pace of the US interest rate hike.
This, coupled with the Fed's monetary policy that runs counter to quantitative easing of the central banks of the Eurozone and Japan, arouses my concern that the global financial market will be more volatile this year, making it more difficult to keep track of capital flows, and thus affecting global economic growth.
The persistent extremely low interest rate environment has flooded the global markets with excessive liquidity, thus fuelling the local property market. The exact timing and pace of the US interest rate hike are still subject to uncertainties. We must not lose sight of the risk of a property bubble as long as the low-interest rate environment persists.
I shall continue to monitor the property market closely, and I will not hesitate to introduce measures when necessary to maintain the healthy and steady development of the property market and safeguard the stability of our macroeconomic and financial systems.
Goods exports slow
The complicated external environment, combined with a stronger US dollar, inevitably put a drag on Hong Kong's trade performance. Even viewed against the low base of comparison last year, Hong Kong's mechanise exports only saw moderate year-on-year growth in the first two months of this year. While the labour market holds stable and the unemployment rate stays at 3.3%, a level which signifies full employment, global economic slackening, if continued, may weigh on the local labour market.
In view of the slowdown in the growth of private consumption and the slight drop in the overall investment spending last year, I cannot be optimistic about the performance of our domestic economy this year. I forecast that the real growth rate of Hong Kong's economy will range only from 1 to 3% this year, lower than the average trend growth rate of 3.9% over the past 10 years.
The business of the retail industry and some other sectors was affected by the Occupy movement last year. Retail sales have been on a subdued trend and retail sales value in the first two months of this year recorded a year-on-year decrease of 2%. Inbound tourism stayed lacklustre, too. The number of non-Mainland visitors continued to fall, showing a year-on-year decrease of 5% in the first three months, and total visitor arrivals during the Ching Ming festive period in early April dropped over 10%, the first decline over the past five years. This is undoubtedly a warning sign.
In this year's Budget, I have announced an array of measures to support the small and medium enterprises and sectors which were affected by the Occupy movement. These measures can provide some timely support to ease the impact on the overall economy.
Relief measures bolster growth
To rebuild the global image of Hong Kong and the confidence of investors and tourists, I have announced in the Budget the allocation of $80 million for the Hong Kong Tourism Board to step up its promotional efforts in neighbouring regions and offer merchandise concessions to attract tourists. I shall also allocate an additional $26 million to the Information Services Department to further promote Brand Hong Kong internationally. I expect that these measures will all achieve the desired objectives.
In the face of the downside risks to our economy this year, I have proposed in the Budget relief measures amounting to $34 billion to alleviate the financial burden on the public as well as stimulate consumption, stabilise the economy and preserve employment. Together with other initiatives in the Budget, these expenditures will have a fiscal stimulus effect of boosting economic growth by 1 percentage point.
As to inflation, on the back of sub-par global economic growth, global commodity prices have softened, imported inflation has stayed benign and local cost pressures are also moderate. The underlying inflation rate in the first quarter of this year averaged 2.7%. I forecast that the underlying inflation rate for 2015 as a whole will be 3%, lower than the 3.5% in the last year.
Maintaining fiscal health
The global economy has stayed sluggish after the financial tsunami in 2008. However, Hong Kong has maintained economic stability and fiscal health during these years. This is largely attributable to the fact that we have been upholding fiscal discipline and managing public finances prudently.
In the medium-range forecast of this year's Budget, I have projected a surplus in the Government's Consolidated Account in the coming five years. Some say that the alert made earlier by the working group on long-term fiscal planning about the surfacing of a structural deficit within 10 years might be out of tune with the reality.
They may be unaware that the medium-range forecast has not taken into account the spending on new initiatives, let alone the impact of an ageing population on economic growth and government expenditure. The working group estimated in its first report that our working population would continue to expand in the next few years, thus economic growth and government revenue would still exceed government expenditure. This "living with surplus" period, according to the working group, might give the community a false sense of financial security.
However, when the short-to-medium term is over, the working population will be shrinking from 2018 onwards, slackening economic development and government revenue growth. An ageing population will inevitably result in an increase in public expenditure, especially on medical and welfare fronts. A structural deficit is bound to emerge when expenditure growth keeps outpacing revenue growth.
Fund to safeguard future
To maintain the Government's fiscal health, we must take forward a combination of measures to contain expenditure growth, stabilise revenue and save up appropriately. All this helps to sustain adequate fiscal strength and flexibility.
I have announced in the Budget the establishment of a Future Fund, which is meant to be long-term investment for a portion of the fiscal reserves to yield better investment returns. Some members worry that the establishment of the Future Fund is a financial management technique for the Government to freeze resources and avoid expenditure growth.
I must reiterate that establishing the Future Fund is an investment strategy of the fiscal reserves and has nothing to do with expenditure. The Future Fund will remain a component part of the fiscal reserves. If we are to use it, we must seek prior approval from the Legislative Council according to established practice. Besides, the establishment of the Future Fund will not at all affect the Government's commitments to people's livelihood and social development.
Developing a diversified economy
To maintain our fiscal health in the long run, the most fundamental means is to sustain Hong Kong's economic vibrancy and improve the business environment of the city, thereby providing diversified employment opportunities for people.
Hong Kong's traditional pillar industries, such as trading and logistics, business and professional services as well as financial services, have clear advantages internationally. Under the new development strategy of the ‘One belt, one road’ initiatives of our nation, emerging markets along the routes will further present tremendous opportunities and room for development for these industries. I consider that Hong Kong can actively take part in building the ‘One belt, one road’ as a supporter, connector and investor.
Hong Kong is a major asset-management centre in Asia. With rich experience in the international market, our management talent is capable of providing related services for the development projects under the ‘One belt, one road’ initiatives. We can play a professional supporting role for these projects by rendering services in risk management, auditing and accounting, sales and marketing, legal and arbitration, as well as architecture, planning and surveying.
Intermediary role
As an international commercial hub with an extensive network of business connections, Hong Kong can play an intermediary role for governments and enterprises all over the world, facilitating economic and trade co-operation as well as spurring infrastructure and business development. Besides, infrastructure development in countries along the ‘One belt, one road’ will be seeking huge capital. Hong Kong, at the international leading edge of financial services, can provide an effective and high-quality financing platform to raise capital for these infrastructure projects.
The Asian Infrastructure Investment Bank currently under intense public discussion is a key initiative to promote financial intermediation under the ‘One belt, one road’. We have indicated to the Central Government that we intend to become a member of the AIIB. We have received support from the Central Government.
To grasp the latest developments, the Hong Kong Special Administrative Region Government's representatives have joined the Chinese delegation to attend the preparatory meetings of the AIIB. In the near future, we shall encourage and help the commercial sector to have a better understanding of the ‘One belt, one road’. I also plan to lead delegations to visit some economies along the ‘One belt, one road’ to strengthen our political and commercial ties with them.
The idea I put up in the Budget to introduce food trucks has aroused quite a response, an indication of fairly high expectations from the public. The Commerce & Economic Development Bureau has, in collaboration with departments concerned, including the Food & Health Bureau, the Food & Environmental Hygiene Department, the Transport Department, the Fire Services Department and the Electrical & Mechanical Services Department, studied such aspects as licensing, mode of operation, environmental hygiene and site selection.
Moreover, we are actively collating information on licensing and successful cases in overseas countries. We are also identifying suitable parking sites for food trucks. In order to introduce food trucks to Hong Kong as soon as practicable, we shall, in the first stage, seek to deal flexibly with the licensing of food trucks under the existing legislative framework as long as the requirements on food hygiene, fire safety and free traffic flow are met.
Forego unnecessary suffering
As in the past two years, some individual members have proposed a considerable number of amendments to the Appropriation Bill 2015. This year sees a record high of over 3,900 amendments. The number has been reduced to 618, after the ruling of Mr President. Yet, discussions on individual items take time, and voting alone will still require around 20 hours.
I have to point out that the funds on account totalling $81.6 billion previously authorised by this council are only sufficient to meet the overall government expenditure before the end of May. Government departments and the public sector will begin to see resources running out in early June, and thus be unable to maintain normal services. This will affect the payment of salary for June to civil servants and subvented sector staff, and even affect the release of social welfare payments at a later time.
The timely passage of the Budget has a bearing on significant economic and livelihood issues. It affects not only government operations and the delivery of such public services as healthcare, education, livelihood, enforcement and judicial services, but also the well-being of our citizens from all walks of life.
The Government will make every effort to support this council's scrutiny. In parallel, we shall also get ready for any possible scenarios to minimise the negative effects of insufficient resources on the community at large.
The passage of the Budget will enable the early implementation of the support and relief measures announced, thus benefiting the general public and various sectors in a timely manner. The beneficiaries will include over 1 million eligible recipients of Comprehensive Social Security Allowance, Old Age Allowance, Old Age Living Allowance and Disability Allowance.
For the tourism industry and sectors affected by the Occupy movement, the promotional and support measures laid out in the Budget are also of great significance amid the current difficult time.
I earnestly seek members' support for an early passage of the Appropriation Bill in the overall interests of the community. And I sincerely appeal to members not to delay the passage with meaningless filibustering tactics just because they want to raise objections simply for the sake of doing so. Their act, out of personal political aims, will only lead to a lose-lose situation in which all sectors of the community will suffer unnecessarily.
Financial Secretary John Tsang gave these remarks at the Second Reading debate on the Appropriation Bill 2015 in the Legislative Council.
