Mapped out: Financial Secretary Antony Leung.

Delivering his Budget speech on March 5, Financial Secretary Antony Leung mapped out a plan to address the growing fiscal deficit and stimulate economic recovery. He estimates his measures will result in an $8.1 billion surplus to the consolidated accounts in 2006-07.

Quoting Charles Dickens - "It was the best of times; it was the worst of times" - Mr Leung said the phrase aptly described Hong Kong's present situation.

He has set three fiscal targets: to restore balance in both the operating and consolidated accounts, and to reduce public expenditure to 20% or less of GDP in 2006-07.

Recovering economy

Hong Kong's economy is on an upward trend, he noted. The real economic growth rate for 2002 was 2.3%. The real economic growth rate for 2003 is forecast to be 3%.

The Financial Secretary said that between now and 2006-07, economic growth will bring the Government about $30 billion in additional revenue.

However, deflation will persist in the short term, affecting personal income, corporate profits and Government revenue.

Fiscal deficit remains serious

The consolidated deficit for 2002-03 is forecast to be $70 billion - $24.8 billion higher than the original estimate, Mr Leung said. A 19.2% shortfall in Government revenue is mostly to blame: Capital revenue is forecast to be $29.1 billion less than expected.

The operating account, which reflects Government day-to-day spending and revenues, has been in deficit for five years running. Excluding income from the fiscal reserves, it has increased from $32 billion in 1998-99 to $67.6 billion in 2002-03, equivalent to 5.3% of GDP.

The fiscal reserves are shrinking, too, from $457 billion in 1997-98 to $303 billion in 2002-03.

Over the past decade, public expenditure in money terms has increased by an annual average of 8.3% - higher than the 4.9% annual average nominal economic growth over the same period. The share of public expenditure in the economy has increased from 15.6% to 21.5% for this year.

At the same time, the Government has cut taxes, fees and charges. This source of revenue, as a percentage of total Government recurrent expenditure, has fallen from 18% to 6% over the past decade.

"The principles of 'big market, small government' and low taxation are the cornerstones of Hong Kong's development," Mr Leung said.

Last year, he proposed to contain public expenditure to 20% of GDP or below - a goal that is still a top priority.

To secure a stable source of public revenue and broaden the tax base, the Government believes that it is necessary to introduce a goods and services tax.

In view of the present economic situation, the Government will not introduce such a tax for the time being, Mr Leung said. 

Balancing act

He introduced a list of concrete measures the Government plans to take to balance the budget by 2006-07. These include revitalising the economy, controlling public expenditure and raising revenues.

"If the economy grows according to our projections and all the foregoing expenditure-cutting and revenue-raising measures are successfully implemented, we will achieve our three fiscal targets," he said.

Including the extraordinary expenditure of $3.3 billion for implementing the second Voluntary Retirement Scheme, he forecast an operating deficit of $53.4 billion for 2003-04, $0.4 billion more than the forecast operating deficit for 2002-03. The operating deficits will gradually decline, he said, falling to $0.5 billion in 2006-07.

He estimates that the consolidated accounts will see a deficit of $67.9 billion in 2003-04, $2.1 billion less than 2002-03. But he expects the consolidated deficits to decrease over the next two years and register a surplus of $8.1 billion in 2006-07.

In the next five years, fiscal reserves will be maintained at a level between $190 billion and $240 billion, the equivalent of nine to 11 months of Government expenditure.

Restoring confidence

"We believe that the package of measures announced this afternoon will enable us to restore balance in our public finances over the medium term, thereby eliminating a factor that may lead to a financial crisis," Mr Leung said.

"Investors' confidence in Hong Kong will also be enhanced. People's anxiety about the future will be alleviated when they see that the tax increases and expenditure cuts in the coming years will be mild."

The proposals put forward may have short-term impact, he said, but they will prevent larger, long-term problems. He added that the proposals are not so drastic as to impede economic recovery, and that they have taken into account the affordability of those who will be affected.

"Hong Kong people have conquered one mountain after another and this time is no exception."