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Following is a speech of the Secretary for the Treasury, Miss Denise Yue, at a meeting of LegCo's Financial Affairs Panel on October 9 (English translation only):
INTRODUCTION
Finance Bureau's Policy Objective is prudent management of public finances. Our primary aim is to maintain sound and stable public finances and foster a fiscal environment conducive to continued economic growth and success. In meeting this Policy Objective, we will ensure that the right balance is struck between meeting public demand for better government services on the one hand, and adhering to our principles of small government and low taxes on the other.
As set out in our Policy Objective booklet, which has been distributed to Members, there are 6 Key Result Areas underpinning our Policy Objective. To save time, I will not read them out here.
Today's briefing will focus on two aspects, they are -
* First, the overall position on Government expenditure in the coming year and provision of funds for the initiatives announced in the Chief Executive's Policy Address; and
* Second, the launching of an Enhanced Productivity Programme across Government announced by the Chief Executive in the Policy Address.
OVERALL POSITION ON GOVERNMENT EXPENDITURE
The Trend Growth Rate
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Members are familiar with the fundamental budgetary guideline of ensuring Government expenditure over time will grow no faster than the trend growth of the economy as a whole.
Two points are important here. First, we are looking at the likely performance of the economy over the medium term, not just this year or next year. The medium term covers a span of five years. In the context of the Policy Address, the five years covers 1998-99 to 2002-03.
Secondly, we are using trend growth rate. We estimate the trend of economic growth for the five-year period as the basis for our control of government expenditure.
When the FS consulted Members of this Council on expenditure priorities for the coming year, he already forewarned that the 5% trend growth rate adopted since 1992 is probably not sustainable. At the moment we are still holding this view. In view of the many variables this year and in the coming months, we can only provide a provisional estimate based on the information we get on hand. Our provisional estimate is that, in the medium term of five years, the trend growth rate will be 4%.
We have also adopted for the time being a medium term trend growth rate of 4% for the purpose of planning government expenditure in the coming year. This figure is the latest forecast from the Government Economist. Nevertheless, in the coming few months, we will examine external factors and changes in the local economy before making a final decision. This final decision on the Medium Range Forecast will be announced by the Financial Secretary in the Budget speech in March next year.
Recurrent Expenditure
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We are therefore planning Government expenditure to increase at 4% in real terms. With a total recurrent expenditure of $170 billion in 1998-99, this means an additional $6.8 billion in 1999-2000 for new or improved services. In the coming year, there will still be substantial growth in the key areas of social services, namely -
Real growth in 1999-2000 % increase Social Welfare 12.5% Basic Education (kindergarten, primary and secondary education but excluding tertiary education) 4.2% Health 3.2%
I should add that within the 12.5% real growth for Social Welfare, over three-quarters of that increase in spending is due to CSSA. Total CSSA spending is likely to be around $13 billion in 1998-99 and $15 billion in 1999-2000.
The 4% growth in recurrent expenditure will enable us to deliver all the pledges in the 1997 Policy Address and the 1998 Policy Address. Other significant initiatives funded under recurrent expenditure in the coming year include the strengthening of public health and food safety, the stepping up of fire prevention and building and slope safety and enforcement against infringement of intellectual property rights.
Capital Works Expenditure
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In this year's resource allocation, we have earmarked funding for over 100 new projects, including the Lantau North-South road link between Tai Ho Wan and Mui Wo, the widening of Tolo Highway and Fanling Highway, the redevelopment and expansion of the Pok Oi Hospital, etc.
In the five-year period from 1998 to 2003, the main areas, in order of the size of total spending, are -
Estimated 5-year spending ($ billion) Transport 27.2 Education 26.7 Land formation and flood control 24.3 Environment 13.6
Equity Injections, Loans and Grants
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We have also been able to make use of part of the funding capacity under capital works to finance one-off non-recurrent items. The major ones, as announced in the 1998 Policy Address, include -
* the setting up of an Innovation and Technology Fund at a sum of $5 billion;
* a further grant of $500 million to the Employees Retraining Board;
* $100 million for setting up a Film Development Support Fund;
* an additional $330 million to support IT in education;
* $173 million earmarked for developing an Electronic Service Delivery of Government services to the public;
Enhanced Productivity Programme (EPP)
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I now turn to the second highlight in my briefing, that is the EPP.
Some Members may recall the expenditure pyramid in our slide presentation during FS's consultation with you. The base of the pyramid is existing operating expenditure; the middle part represents those items pledged in last year's policy address for implementation this year. We will have to earmark some resources there. The remaining uppermost part is that area requiring new resources for new initiatives which the public deems necessary.
The Financial Secretary has reiterated during the consultation with Members that when new money for allocation becomes limited in a slower growth environment, there is increasing pressure to tackle the baseline expenditure, i.e. the base of the pyramid. During the consultations, some Members have requested us to drive for higher productivity in the public service in order to do more with less as well as to release existing resources for meeting new demands.
EPP is our response. As stated in the Policy Address, we hope to deliver productivity gain amounting to 5% of our operating expenditure between now and the year 2002. We hope that the savings thus gained can be spent on new items. In other words, the savings are not meant to be pocketed by the Treasury. Instead, they will be earmarked for new expenditure items deemed necessary by the community.
I should make it clear that EPP is not about expenditure cuts or reduction in service or deterioration in standards or quality of the public service. We have made it clear to Heads of Department that we will not accept the delivery of the 5% target productivity gains by cutting back services other than those no longer needed in present day circumstances. We will strive to maximize the cost effectiveness of our limited resources on those services needed by the community with a view to attaining better value for money. It is the primary purpose of EPP. They must be genuine productivity gains achieved through one or more of the following -
* process re-engineering aiming at removing duplication of work, streamlining procedures and reviewing work practices;
* better use of technology;
* greater human resource management flexibility such as more use of contract appointments, out-sourcing of work.
Of the $170 billion recurrent expenditure in 1998-99, we estimate that some $100 billion are operating expenditure which is susceptible to 5% productivity gains. The rest of $70 billion are either statutory or contractual payments which we are required to pay under existing policies. Examples are pensions, social security and legal aid. It would be difficult to achieve a quantified 5% gain within two to three years in respect of these payments. The $70 billion also include the lion's share of school education expenditure. We recognise that a lot of new initiatives are being carried out in primary and secondary schools to improve the quality of education. We have therefore taken the decision to exempt school education expenditure from the 5% target in recognition of the many demands placed on schools with their baseline expenditure barely adequate to cope. This explains why for the time being we are only aiming at a 5% production gain from $100 billion of the total $170 billion operating expenditure.
Within the 5% target, we will give departmental managers maximum flexibility in determining the best way to find those productivity gains. Nevertheless, Finance Bureau, Civil Service Bureau and Efficiency Unit colleagues stand ready to offer assistance to the Heads of Departments on EPP.
We will be happy to brief Members on how we are doing with EPP from time to time. We also look to Members' support for some of our initiatives which may require approval of the Finance Committee.
End/Friday, October 9, 1998
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