Press Release

 

 

Speech by FS at business community luncheon

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The following is the speech (English only) by the Financial Secretary, Mr Donald Tsang, at the Hong Kong Business Community Luncheon today (Monday):

Chamber chairmen, ladies and gentlemen,

Thank you for giving me the opportunity to speak to such a distinguished gathering of 27 chambers. This function, coming so close on the heels of the budget, has become an important date on the calendar of the Financial Secretary of the day.

This has been an excellent forum for me to address the many issues arising from the budget. Responding to the 'brickbats and bouquets' that are an annual ritual with any budget, whether a benign document, as is the case this year, or something rather more controversial.

Although the 'comfort meter' today seems to be pointing more towards the favourable zone, I am ever mindful of the vicissitudes of public opinion. And it's always worrying when a Financial Secretary produces a budget that has been described, in one poll, as the most popular since the SAR was established. Mind you that was only two and a half years ago!

I am sure most of you here today would agree that even with the enormous array of new technology at our fingertips, it has really not made life any easier for us to plan and draw up annual budgets. And I believe the processes my colleagues and I have just been through are a case in point. It is a fascinating story of the roller coaster ride we had virtually throughout the fiscal year. The highs and lows of our experiences as we grappled with the dying roar of the Asian financial crisis. But, I will come back to that point a little later.

First I would like to set the scene. We are now emerging from the most serious threat to our prosperity of the past 40 years. I believe we have overcome the worst of our setbacks and are returning to what I would like to call a more normal period of steady economic growth. But as we emerge from one crisis we are confronting a new and perhaps just as daunting challenge to successfully interface with the so-called new economy. While not forgetting the lessons of the Asian financial turmoil, we are pursuing the twin goals of market reform and technological transformation.

As prosperity returns it is not a question of 'business as usual'. Post-recession Hong Kong is a very different place from the world of 1996. Even by the traditional standards of resilience and risk-taking of our business executives, the speed with which they are moving into the information age and forging new relations with the leading technology and internet multinationals is astonishing.

It is the private sector leading the way. Providing the engine of growth and the generation of new wealth. And if there is any lingering doubt in your minds about this state of affairs let me reiterate - in Hong Kong, market forces will continue to drive the economy. Central planning by the backdoor, or any other door for that matter, is not in the government's lexicon. But the transformation, stemming from the hardships of the recession which ended four decades of unbroken GDP growth, has proved a painful experience. Many continue to suffer considerable anxiety about their jobs and business survival. We now realise that while the increased sophistication and globalisation of Hong Kong have generated new wealth, they have also increased the volatility of our economy.

They have also brought into sharp focus the overwhelming priority that must be given to our ability to compete. Unrealistic property prices and rents no longer dominate and distort our economy. And we now have a very different labour market. The recession has forced us to search for new standards of productivity from the work force. Competition is the firmest assurance that a community will obtain the best value for the money it spends. It provides the most credible pledge that enterprise, talent and hard work will be adequately rewarded.

Our acceptance of competition has enabled us to radically transform our economy three times since 1950. It was market forces that drove Hong Kong to establish a manufacturing centre after the loss of the entrepot business at the start of the 1950s. It was market forces that drove Hong Kong to establish a services-oriented economy as manufacturing relocated across the border in the 1980s. And, it is market forces driving our technological revolution built on a partnership between science-based innovation for the information age and the provision of sophisticated services to the highest global standards.

The market's crucial role in promoting economic success has been demonstrated more dramatically over the past couple of years than ever before. When rents and prices plummeted at the height of the recession, Hong Kong's large and, in some cases, not so large corporations responded to the dramatic shrinking of their balance sheets with boldness and imagination. They mobilised their capital to create new leading-edge industries almost faster than rapid-eye-movement. That is the way Hong Kong has always operated. Adapting to change through the entrepreneurial spirit and flair of our people.

It is inconceivable that bureaucratic direction or government intervention could have achieved such a dramatic and successful transformation as we have witnessed over the past twelve months or so. Allowing the economy to be led by market forces rather than directed by bureaucrats is not a recipe for conservatism, or an argument for leaving things as they are. It is based [as Hayek put it] "on the conviction that when effective competition can be created, it is a better way of guiding individual efforts than any other."

That's why we believe in small government. That is why we are exercising strict control over the growth in government expenditure, keeping it pegged to 2.5% growth over the medium term despite projections of 4% economic growth over the same period. That is why we are shedding 10,000 jobs in the civil service over the next three years; and other positions may go through the Enhanced Productivity Programme.

We are a government that passionately espouses maximum support and minimum intervention. Where we have taken the lead to develop new directions for business and initiatives for investors, we have done so with special regard to remaining neutral - politically and economically. It's an extension of our role as a facilitator. The same way as Hong Kong entrepreneurs act as facilitators for global businesses wanting a foothold in the Chinese market; or the role Hong Kong itself plays as the gateway to the Mainland.

And it is this connection which leads me back to our economic recovery and the processes we went through to produce Budget 2000. As I mentioned on budget day, the recovery was largely export-led, both in commodities and services, following a resurgence in demand in Asia as well as stronger growth in the US and Europe. Firmer currency values throughout the region also made the prices of our own exports more competitive. And the turnaround in the Mainland's exports, together with its sustained strong import demand, is a positive indicator for our trade performance in the near term.

But during 1999, the overall economic situation was not always so bright - a factor that, in one sense, played 'merry hell' with our income and revenue forecasting and predictions for our GDP growth.

In normal times, there are two economic indicators that are of particular importance - the GDP trend growth rate, and the GDP projection for the budget, or current, year. With the ups and downs of the economy as a result of the regional financial turmoil, these economic indicators become even more important - and, of course, more volatile. As you know, our economy was taken on a roller coaster ride last year, ranging from a negative 3% growth in the first quarter to a positive 8.7% in the final quarter - the highest quarterly growth rate since 1987! This left us with a real growth rate of 2.9% for the year as a whole.

None of this was confirmed when our budgetary process began last November. At the time, we only had the raw figure for the 3rd quarter which showed a growth rate of some 4.5% and the best estimate for the full year growth of around 1.5%. The really good news didn't come until early last month, which enabled us to project the revised revenue estimates for the current fiscal year and to set the estimates for the coming year. In addition, we were able to calculate the projected growth of 5% for 2000.

The timing also coincided with a distinct pick-up in some of our revenue sources; and this, together with the higher than expected GDP growth, encouraged us to take a more optimistic view of our prospects. Around the same time, the trend GDP growth rate was raised from 3.5% to 4% for the medium range forecast.

Another set of figures at the end of January put the icing on the cake when the Exchange Fund - whose investments include about half the government's fiscal reserves - notified us of its year-end performance.

With trading of the Tracker Fund on the stock exchange in November and December at a time when the Hang Seng Index was rising, the return on the Exchange Fund investment was much better than expected. This in turn, meant that the return on our fiscal reserves was also much higher than originally estimated, allowing us to almost double the amount to $44 billion. This wiped off a large chunk of our projected deficit. Of course, we recognise that this is probably a one-off, or short-term, gain. But with such a windfall, I think we would have been pilloried by our legislators and the community, had we attempted to introduce some form of new taxation. And higher taxes ran the risk that we could well have stalled our nascent recovery.

As you can imagine, there was more than a flurry of activity in the offices of the Government Economist, his staff and those of the Finance Bureau. Their normal long days and nights became even longer in those last few weeks leading up to budget day. They had to throw out our earlier forecasts; revise figures; recast strategies; and redraft key sections of the Budget Speech.

Which brings me to the continuing debate about taxation. There are some that say we have missed a golden opportunity to bring in much-needed reform now. However, new tax arrangements are something that cannot be introduced overnight, hence our decision to set up an internal task force and an independent committee of experts to review the situation. This does not mean that I am stepping back from the need to broaden our tax base. It is simply a question of how best to do it. Coupled with this is the extent to which e-commerce will erode our profits tax base. Determining that will be even more difficult.

I personally believe that we have to do something, especially when 60% of the population does not pay any salaries tax and with the major burden falling on less than one fifth of the work force. As a community, we have to ask ourselves whether such a system is fair. We have to ask ourselves, for example, whether the wider community would be willing to shoulder some of that burden through a salaries tax which covers a greater net; or whether costs could be recovered through a broadly-based consumption tax, a VAT or the user-pays principle. Finding the answer to these questions - which have serious political and social implications as well as important economic consequences - will not be easy. And we always have to be mindful of those who, through no fault of their own, cannot afford to contribute anything.

By airing my personal views, I certainly don't want to give you the impression that I'm trying to influence the work of the task force or the independent committee. We have a long way to go and whatever is decided may take an extra year or two to implement. But we must get moving otherwise the momentum will be lost. And I'm sure both the task force and the committee will look forward to receiving the considered views of Hong Kong's chambers of commerce, and other organisations on the way forward.

But whatever we do, please accept my assurance that Hong Kong is a low tax territory. That has been defined in our Basic Law. So whatever we do, Hong Kong's tax system must be regionally and internationally competitive, it must be low and it must be simple.

Finally, I just want to touch briefly on another important aspect of the budget which may not have received as much attention as I think it deserved. And I'm referring to the range of initiatives we're taking to harness the forces of globalisation by improving competitiveness in the financial services sector and providing better services to business and international investors.

The initiatives include the development of a multi-currency capital market and clearing system, starting with a US dollar denominated market, which hopefully will be fully operational by the end of the year. The system will enable a wide range of financial transactions conducted in US dollars to be settled in Hong Kong, many of them in real time. This will make us the leading investment window in Asia and reinforce our monetary stability.

We are making greater efforts to expand the regional debt market, continuing with our reforms of the banking sector and introducing new securities and futures legislation to strengthen and enhance Hong Kong's regulatory regime.

We are also revamping the government's trade, industry and investment structure to advance our initiatives for promoting innovation and technology, attracting external direct investment and improving services to industry and commerce by making them even more business-friendly. The new Invest Hong Kong agency will adopt a more proactive strategy and specifically target areas where Hong Kong has a competitive edge. It will work closely with the TDC, our overseas economic and trade offices and other related organisations to maximise our investment environment.

As I said on budget day - the advent of the new century invites us to seize the fresh opportunities that lie in store for us. Perhaps this is best summed up in a headline I saw in last week's edition of Newsweek magazine - "Hong Kong Gets Its Groove Back".

Thank you.

End/Monday, March 20, 2000

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