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Following is the transcript of the "Letter to Hong Kong" delivered by the Financial Secretary, Mr Donald Tsang, on Radio Television Hong Kong this (March 18) morning:

It's nearly a fortnight since I presented my sixth and final Budget to the Legislative Council. It was perhaps the most difficult I have had to prepare.

Why do I say that?

First, let me rewind to late 1997, when Hong Kong was swept up in the Asian financial crisis. The powerful economic growth we had seen for many years suddenly evaporated. Hong Kong was plunged into its only recession in living memory. It was a traumatic time for many in the community. By the middle of 1999 the tide had turned, and last year our economy bounced back dramatically to register the highest growth for more than a decade.

I know statistics don't tell the whole story. I know there are people who are still suffering. I recognise there are some who have not yet fully benefited from the recovery.

For many, the past few years have been quite difficult. Wages have been frozen or even reduced. Some of our fellow citizens have lost their jobs. Household incomes have fallen. Family budgets have been stretched and people have had to cut back on their spending. The government's income has also fallen.

But things are getting better. This year, wages should start to pick up modestly. The unemployment level is edging down, and should continue to fall - although, it is still high by Hong Kong standards.

But I think it is well to remember that at the height of the economic setback when people were acutely worried about their future - and with good reason - we deliberately did not cut back on our spending. We pushed ahead with our plans to help the economy recover. And reduce the financial burden of our people and to help them ride out the storm.

During that difficult time we cut rates. We reduced tax burdens for most families. We introduced a $100,000 tax deduction for mortgage holders. We increased tax deductions for those people looking after sick or elderly relatives. In mid-1998 we took the unprecedented step of bringing out a mini-budget. All of these measures were taken to relieve the hardship of ordinary Hong Kong people facing an extraordinary and unexpected economic setback.

Although the economy has turned around, the Government finances are still not as healthy as they were before the crisis. Our day-to-day spending still exceeds our day-to-day income. I don't have to tell any Hong Kong householder what this means in real life.

In preparing this Budget I could not ignore any of these factors. I was also determined to follow the principles of sound financial management that have been the foundation of Hong Kong's great post-war success.

I had to strike a sensible balance between Government spending and Government income. Should we spend more and raise taxes to pay for extra spending? Or should we hold down expenditure and avoid tax increases altogether?

Holding down spending would deprive the less fortunate members of our community of the help they need. Raising taxes would strike hardest at middle-income earners who have seen their property values fall and, in some cases, drift into negative equity.

The economic recovery has taken root, but we need to let those roots spread and grow stronger. To help this happen I have chosen to take the middle ground with a deliberately conservative Budget.

Still, government spending will grow by two and a half per cent in real terms over the level planned a year ago. This will provide an extra $5 billion for day-to-day services. On top of this, an extra $ 2 billion will be available because of the determined efforts of my colleagues in the civil service to save money under the enhanced productivity programme. In all, we will have an extra $7 billion - no small sum - to introduce new services or to expand and improve existing ones.

More to the point, we are spending this extra money where it is needed most - to improve primary and secondary schooling. To provide better services for the elderly and the disabled. To help youths at risk of going astray. And - I want to emphasise this - to provide more training and retraining to equip our workforce with the knowledge and skills needed in the 21st century.

Of course, there is another side to the equation - we have to find the money to pay for most of this extra spending. To help us do this I have put forward only handful of modest increases in taxes and charges. I quite deliberately chose not to increase salaries or profits tax rates or reduce salaries tax allowances. The few increases I have proposed have been devised so they will not affect people's basic livelihood nor prejudice our economic growth.

In any community, there will always be demands to spend more on this or that, to cut taxes, or to increase tax deductions. And when they see a large pool of money in our fiscal reserves, some people will argue that we should forget about living within our means and use it to bridge the gap between our income and expenditure.

I beg to differ. Last year, the community earned more than $23 billion from the investment of our fiscal reserves. This income is used to help finance our spending plans for the coming year. If we dig into our reserves then obviously the amount of money we earn on them will decrease while our spending programmes will increase. And at the end of that slippery slope we would have no more reserves to invest. Or, God forbid, no more reserves on which to call if we ever had to face the same kind of financial crisis we did back in 1997 and 1998.

In that case, how could we pay our bills? How could we defend our currency if it came under attack? How, in the face of any future economic setback, could we maintain our spending plans and offer relief to the community by reducing taxes as we did in 1998?

A small, externally-orientated economy like ours does not exist in a vacuum. We cannot be complacent about the global economic outlook. The uncertainties of a slowing US economy and the continuing economic problems in Japan may have an impact on our nascent recovery.

Hong Kong has a hard earned reputation for prudent fiscal management. This would be lost if Budget deficits became the norm, and we drew on our reserves to meet any shortfalls. Investors would lose confidence. Fewer businesses would set up in Hong Kong and existing businesses would find it increasingly costly to raise the capital they needed to expand. Eventually, this could lead to rising unemployment and falling living standards for everyone.

Is it worth risking all this? Paying less taxes now or spending more today may sound attractive. But we would burden future generations with the bill for such actions. Is that fair? And what about our Basic Law obligation to balance our books?

I won't take easy options just because it is the popular thing to do. As Financial Secretary, I would be failing in my duty to you, the people of Hong Kong, if I did not think about the long-term future of our community. That is why my last Budget is one of balance.

End/Sunday, March 18, 2001

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