LC: Appropriation Bill 2001

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Following is the speech by the Financial Secretary, Mr Donald Tsang, in concluding the Debate on the Second Reading of the Appropriation Bill 2001 in the Legislative Council today (April 4):

Madam President,

Introduction

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I would like to thank Members of this Council, the representatives of various business and community organisations, the media and the public for their comments on my Budget for 2001-02. The views offered have been many and varied, but the aspirations are identical: all look for continuous economic growth for Hong Kong and an improvement in our standard of living. My objectives are no different. I must ensure that public finances remain healthy and can sustain Hong Kong's continuous prosperity and stability.

2. Many have noted that this Budget contains neither shocks nor sweeteners. The more complimentary have called it prudent, steady, cautious and balanced. The less appreciative have labelled it as dull, overly conservative, short on initiative and evasive. I was fascinated by the observation that the Budget is a good measure of Donald Tsang as a person.

3. With years of experience in the public service, I have realised that our society places a high value on prudence and stability. These are all important when it comes to the management of public finances. We must be straightforward with both feet firmly planted on the ground. There is no room for extravagance or rashness. A good budget must reflect the economic, financial and social aspirations of the community. As our economy has returned to normal growth, the budget should contain no surprises. Our budgetary principles should be well-established and unwavering. Our strategies for economic development should not change from year to year. Otherwise Hong Kong could lose direction.

Making the most of constraints

4. The preparation of the Budget for this year was not an easy task. The key, I believe, is to do the right thing at the right time. Had our public finances yielded tens of billions of dollars in overall and operating surpluses as they did in 1996-97 and 1997-98, I would not have hesitated to return some of the accumulated wealth to the community. Alternatively, had the economy been in dire straits, as it was in 1998-99, I would naturally have resorted to deficit-budgeting as a stimulus. Or if the beginnings of economic recovery were only just becoming apparent, I would have been content with a "do nothing" approach.

5. But our choices this year are not so straightforward. Uncertainty is a key word in the forecast for our economy, in the livelihood of our people and in our fiscal fortunes. I must also observe the long-held fiscal disciplines that are defined in the Basic Law. One consequence is that we cannot rush to head off the years of successive operating deficits through hefty increases in taxes or reductions in expenditure. That would stifle economic growth and impair the community's living standards. Nor, on the flip side, can we offer major tax concessions or allow expenditure to grow higher in order to boost personal popularity or to concede to never ending political demands. To do so would be most unwise. It would also be most irresponsible at a time when our fiscal balances are challenged. As the economy returns to normal, I can see no reason to deploy further fiscal stimulus, nor should I turn a blind eye to our operating deficits.

6. The current circumstances have dictated I should steer a prudent course. On the expenditure side, I have stayed within the expenditure guidelines. My revenue proposals are for modest adjustments to seven taxes and charges to foster development and increase revenue. The increases involved will not stifle economic growth nor hurt people's livelihood.

7. Perhaps because my revenue proposals are so mild some people have dismissed them as negligible and not essential. I can't subscribe to this. In trying to meet the needs of the community and improve our financial position we have very little room to manoeuvre. Precisely because of this, each and every proposal, whether on the revenue side or the expenditure side, has significance and contributes to our efforts to achieve fiscal balance. In drawing together the Budget, we have not looked for "big bangs". Our responsibility is rather to propose what is appropriate and reasonable. It would be a failure on our part to hold back such proposals simply because the sums involved are not huge.

8. Some Members have criticised the revenue proposals on the basis that they would harm people's livelihood. I am a little disappointed with this reasoning. I understand that the well-being of our community is close to Members' hearts, just as it is to ours. But the term "livelihood" appears to have taken on a wider and wider meaning in recent years. One example is the protracted debate between the Administration and this Council on the level of certain fees and charges, whose existence is scarcely known to most of the community, let alone capable of having any impact on their daily lives.

9. Another example is the increase I am proposing in certain taxes and charges. I cannot agree with some Members that alcohol or even cigarettes come into the category of daily necessities. Nor can I agree with the proposition that duty increases in liquor and tobacco will target the grassroots. Regular driving licences are due for renewal only once every 10 years. Increases in vehicle licence fees will cost the owners of private cars from a few hundred dollars to slightly over a thousand dollars more over the course of a year. It stretches credibility to regard such fees as daily living expenses. On-street parking meter charges could come into that category for some drivers. But will it help them if they are unable to find a parking space to meet their short-term needs because, relative to off-street car parks, meter charges are too low? The Air Passenger Departure Tax is levied only on passengers who depart Hong Kong on business or for leisure by air. This has nothing to do with livelihood. The tourism industry finds the proposed increase generally acceptable. I ask Members to examine my expenditure and revenue proposals in their entirety and with objectivity.

The Budget Addresses the Needs of the Community

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10. Some have criticised the earmarked real growth in government expenditure for 2001-02 as being overly conservative. I do not deny having charted a cautious course on expenditure and in the Budget Speech I have explained my reasons. Let me emphasise, yet again, that we must address the problem of successive years of operating deficits. In overall terms, we may be able to achieve broadly-balanced budgets over the next four years. But this is only because in the overall budget figures we also count non-recurrent revenues, such as from land sales and the MTR privatisation. If we look at recurrent revenue and expenditure alone, we can see our operating accounts continuing to pile up deficits. In 2001-02 we expect an operating deficit in excess of $16 billion. So, there may be a structural problem with our public finances. More important, the Government has been consuming more and more economic resources in recent years. This is reflected in our expenditure as a percentage of GDP which is now at an all-time high. As many economists and analysts have rightly pointed out, for a market-led economy like Hong Kong, big government would hamper economic growth and they have strongly urged us to rein in expenditure.

11. But it is simply untrue to claim that the Government is miserly and is lacking compassion for the grassroots or the disadvantaged. We are determined to encourage sustained economic growth because this is in the best interests of the whole community. For 2001-02, we have budgeted for an increase in expenditure of $26.6 billion, representing a real growth rate of 10.8 per cent when compared to the revised estimates for 2000-01. To cite a few examples, we will spend $2.7 billion more a year on social welfare and $1.3 billion more a year on medical and health services. These are substantial increases that will benefit the community. We have also earmarked sufficient funds to implement the series of measures announced by the Chief Executive in his 2000 Policy Address to improve the community's well-being. If we did not care about the disadvantaged, would we have proposed in the Budget additional expenditure initiatives to help the disabled, the youth at risk and those with a low standard of education? As an additional commitment, I have also said that starting in 2002-03 we plan to increase government expenditure by 4 per cent a year in real terms in line with the trend GDP growth rate. Despite the many obstacles, we have done our best to address the community's needs.

12. I know many owners of property with negative equity have been disappointed that the Budget contains no specific measures for mortgage relief. Some consider the Government is not sympathetic to the plight of the people. But it is an inescapable fact in the management of public finances that sympathy is a poor substitute for principle. Any asset, be it property, stock or mutual fund can fall as well as rise in value. All investors have to accept this and be ready to take the associated risk when making a purchase. Expecting the Government to make good any loss in asset value amounts to asking the Government to take that risk on behalf of individual investors. Not only would that be totally unfair to others in the community, but it would set a bad precedent as well, placing an unmanageable burden on our public finances. The implications are far-reaching and we cannot afford - literally - to be imprudent.

13. Over the past six months, we have also taken various steps to work towards a more stable property market by minimising government interference in this sector of the economy. Our supply of land and public housing has become more transparent; we offer land for sale on the basis of market demand; and we have abolished property sale restrictions that are no longer necessary. Our firm objective is to lower investment risks by neutralising the unhealthy volatilities that previously plagued the property market due to imbalances between supply and demand. We believe that with recent signs of stabilisation in the market, lower interest rates and a steady improvement in the economy, the financial situation of the middle-income group will gradually take a turn for the better.

14. But we are not oblivious to the situation facing people in the middle-income group. In the course of budget consultations, we heard suggestions to increase salaries tax and profits tax and to reduce various allowances in line with deflation. There were also suggestions for Government to levy a tax on employers of foreign domestic helpers. After careful consideration, we decided not to pursue any of those suggestions, primarily because we wished to avoid putting more financial pressure on the middle-income group.

Making Proper Use of the Fiscal Reserves

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15. I realise that some Members and individuals in the community will still find it difficult to accept what I have just said. In their eyes, the Government with its huge accumulated fiscal reserves can afford to be more generous in its budgeting. It is a matter of individual judgement whether or not $430 billion is an excessive amount to retain in the fiscal reserves. If they are not used, they may certainly appear to be too large. But if we had to run down the reserves to meet urgent needs, we would probably find that we needed to accumulate more. In the absence of any universal standard, we need to instil a sense of discipline in the accumulation and disbursement of our fiscal reserves. It is precisely for this reason that I specified guidelines for the upper and lower limits of these reserves in my 1998-99 Budget Speech.

16. Before 1997, our fiscal reserves did not include the balance in the Land Fund. Some people have remarked that as we were able to cope with fiscal reserves of only $180 billion in those days, we should be able to manage today with a similar level. The weakness of this argument lies in its assumption of no changes in the international economic arena since those days. Such an assumption is unrealistic. The world economy today is totally different from that prior to 1997. With increasing globalisation, we are faced with greater and more frequent volatility in external markets. If we were to resort to outmoded standards in managing our public finances, we would fall behind and our domestic economy and the livelihood of our people would suffer.

17. Some have commented that the Government not only holds $400 billion or so in the fiscal reserves, but more than $500 billion in assets with the Exchange Fund. There seems to be some confusion here between fiscal and foreign reserves, so I will try to clarify the point. Our fiscal reserves are placed with the Exchange Fund as deposits. Together with the monetary base (Note) and accumulated surplus of the Exchange Fund, these deposits are then invested in assets, primarily in foreign currency. The foreign currency assets constitute Hong Kong's foreign reserves. But we should remember that under the Exchange Fund Ordinance, the primary purpose of the Exchange Fund is to maintain stability in the Hong Kong dollar exchange rate and Hong Kong's currency and monetary systems. The Government cannot, in normal circumstances, use the assets of the Exchange Fund itself to meet its operational needs, or bring relief to the community or stimulate the economy. If necessary, the Government can of course exercise its right to withdraw its own deposits, namely the fiscal reserves, from the Exchange Fund for financial purposes. This would lead to a corresponding decline in the volume of assets in the Exchange Fund, currently amounting to some $1,000 billion. It is not only factually incorrect, but also dangerous to confuse the fiscal reserves with the assets of the Exchange Fund or with foreign reserves. This would send the wrong signal to investors that the Government was freely using assets that should have been used to stabilise the Hong Kong dollar and the monetary system. The consequences of this could be very serious indeed.

18. Other people have questioned the need to keep Hong Kong's foreign reserves at their present level, suggesting that the Government should withdraw part of its fiscal reserves from the Exchange Fund to stimulate the economy and improve people's livelihood. Past experience has shown that it is definitely in the interests of Hong Kong for us to accumulate sizeable foreign reserves. Our monetary policy is built on a currency board system. Conceptually, the system requires the monetary base to be backed up only by a corresponding amount in foreign currency. But given the volatility of international finance, it is necessary to hold reserves well in excess of the size of the monetary base if we are to withstand challenges posed by speculators in the market. It was precisely because we wanted to strengthen the Exchange Fund that we chose originally to place our fiscal reserves with the Fund. A strong Exchange Fund helps to increase investors' confidence in Hong Kong's monetary system.

19. Just think back to the extraordinary events in 1998 when I had to use a huge amount of reserves in only 11 trading days to make incursions into the stock and futures markets. The incident vividly demonstrates that in extraordinary circumstances the demand on the reserves can be huge. In fact, the challenge we faced in 1998 was relatively small compared to the crisis that hit our neighbours in the Asian region. During that time, Korea used up almost all of its foreign reserves of over HK$230 billion. Thailand actually exhausted its foreign reserves of nearly HK$290 billion and had to call on the International Monetary Fund for assistance. I believe, prior to 1998, no one could have imagined that foreign reserves as sizeable as these would be insufficient defences against a challenge from international funds.

20. Let me also point out that the management and use of the Exchange Fund is, by law, subject to stringent regulation. It is also monitored by the Exchange Fund Advisory Committee which includes representatives of the three note-issuing banks and other outside experts. The Director of Audit also scrutinises the Fund's annual accounts. These arrangements ensure that the management of the Fund is direct, professional, transparent and free from political influence. I believe the mechanism is appropriate and in no way inferior to the checks and balances that exist in managing Government's own finances. Indeed, economies around the world have all emphasised the need for professional, independent monetary management systems. They are only too well aware that any political interference, be it from the legislature or the executive, would affect investors' confidence in the stability of the systems. In my Budget Speech, I mentioned the need to improve Hong Kong's monetary management system, precisely because I would like to ensure that the HKMA continues to manage the Exchange Fund and to carry out its other duties with a high degree of professionalism, fairness and transparency, and without political interference.

21. Let me now respond to the comments on the size of the fiscal reserves. In my 1998 Budget Speech I set the upper and lower limits to our fiscal reserves in recognition of several factors. Specifically, we need sufficient fiscal reserves to meet seasonal and cyclical deficits in our accounts without having to borrow. We need to allow for flexible deployment of fiscal measures to address the needs of the community during economic downturns, and to provide additional cover for exchange rate stability. Currently, there are no internationally accepted standards for what is the right level of fiscal reserves. In 1998, drawing on our experience in public finance I made the best judgement I could on the appropriate level for Hong Kong in the light of the prevailing economic and fiscal conditions. I still consider the 1998 guidelines reasonable, but we in the Government, including myself, the Financial Secretary-designate and colleagues in the Finance Bureau would be happy to listen to and examine specific proposals from Members and the rest of the community. But such proposals must always take into account the factors which I have outlined and avoid the need for us to borrow.

22. In the meantime, I must stress that the Government's concern is not only with the size of the fiscal reserves, but also with successive years of operating deficits in our accounts. In our present financial position, it would be unwise to rely on our fiscal reserves rather than raising revenue to fund additional expenditure items. Nor do our fiscal reserves lie idle. On the contrary, we have been making good use of them to earn investment income, one of the Government's major sources of revenue. And the money is being spent for the benefit of the community. Taking 2000-01 as an example, we expect income of $23.3 billion from the investment of our fiscal reserves. This income accounts for some 10 per cent of the government revenue, and helps to finance our expenditure. Accordingly, drawing down the fiscal reserves would aggravate the problem of operating deficits on both the expenditure and revenue sides. First, we would be spending more without raising new money. Second, we would be reducing our assets that earn investment income and weakening our revenue flow.

23. We must take a comprehensive look at our fiscal position and bear in mind the need for financial discipline. We must realise that international credit rating agencies and investors look not only at the size of our fiscal reserves and the volume of assets in the Exchange Fund, but also to see whether the Government is making appropriate use of these assets in meeting various demands.

Human Capital

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24. Let me now turn to the scheme on admission of Mainland professionals. A while ago, the Secretary for Education and Manpower responded to Members' comments on our proposals. I simply wish to reiterate that the scheme is vital if Hong Kong is to remain competitive and if we are to sustain economic growth. Without an adequate supply of manpower in the market, businessmen would think twice before they set up their businesses here and may even move their investments or operations out of Hong Kong. This would dampen or prevent economic growth and would be against the interests of all, including local professionals and graduates.

25. The admission of outside professionals is a common practice around the world. And for Hong Kong, the admission of Mainland professionals is nothing new. In proposing to revive the scheme, we have already taken a conservative approach. We have decided to bring in these professionals only to address shortfalls in the labour market. We have also proposed that the scheme should apply only to specific disciplines. We have built in these restrictions despite the fact that the arrangements are not entirely in line with the free flow of professionals advocated by many economies and the less restrictive approach we have adopted in admitting foreign professionals. We should avoid putting too many controls over the scheme, as this would undermine its effectiveness and would leave investors with a negative impression of Hong Kong as a protectionist society.

26. I understand that Members and the public generally support or see no objection to the scheme in principle, but are concerned with how it is to be administered. And, I thank Members for having made many useful comments on this during the Budget debate and at meetings of the Security and Manpower Panels. We will consider these comments carefully when we draw up the administrative details. We will ensure that the scheme will not affect the job opportunities and conditions of service for local professionals and graduates. We will also guard against abuse.

27. Of course, I agree entirely with Members that bringing in professionals from outside is only a supplementary measure to address the acute shortage of professionals in certain sectors in Hong Kong. Concurrently we must train and groom our own people. For many years, education has accounted for the largest portion of government expenditure, amounting to some 22 per cent in 2001-02. Recurrent expenditure alone has increased by $3 billion over the revised estimates for 2000-01, representing a real increase of 5.5 per cent. This is itself over the forecast GDP growth rate for 2001. We are well aware that education is a long-term investment and that it takes time to see the results of training. We will continue to invest additional resources in education, and at the same time ensure maximum cost-effectiveness in the deployment of those resources.

28. In this connection, I would like to pay tribute to our local universities which have successfully reduced costs without compromising quality over the past three years. In the face of criticisms from some quarters that we are cutting university funding, let me repeat that upgrading the quality and quantity of tertiary education remains a key policy objective of the Government. We have not cut university funding outside the guidelines as agreed with the tertiary sector. On the contrary, we have proposed to let universities keep a larger amount of reserves to give them more flexibility in the deployment of resources to meet educational needs. While the SAR Government will not reduce its commitment towards tertiary education, our universities may wish to follow a worldwide trend among top universities in tapping non-government resources for expanding their student admission or other academic programmes. This is also consistent with the recommendation of the Education Commission.

29. According to figures released last month, our unemployment rate has risen by 0.2 percentage points to stand at 4.5 per cent. This slight increase, coupled with our announcement on admission of Mainland professionals, has once again raised public concerns over unemployment in Hong Kong. We believe the latest figure reflects the usual market situation following the Lunar New Year. We also believe one single figure cannot be taken to reflect a general deterioration in unemployment. That said, however, the Task Force on Employment will continue to monitor the situation closely. It will actively encourage training in the labour market and, if necessary, further expand measures to promote employment. With the admission of Mainland professionals scheme in place, we believe businesses will develop and more job opportunities will be created in the local labour market. We will review the scheme on a regular basis to ensure that our objectives in introducing it are met.

30. While on the subject of human resources, I should mention that another priority is to protect the interests of our labour force and to ensure that employees can give their best under reasonable conditions of service. The Secretary for Education and Manpower has already announced that the Government will implement a series of measures to improve the arrangements for letting government contracts. These measures should help to improve service standards and encourage contractors to offer their employees remuneration packages that are reasonable and in line with market rates. I believe this particular government decision will set a good example for the private sector and promote the introduction of a management culture that emphasises employees' benefits.

Stressing the Need for a Prudent and Responsible Budget

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31. The volatility in stock markets around the world last month underlined the uncertainties in the global economy. The slowdown in the US economy is affecting our external trade, with exports of goods in January and February this year registering a growth of only 4.2 per cent in nominal terms, far below the double-digit growth for last year. The markets are becoming so sensitive these days that even the slightest speculation over the US economic outlook led to a drop in the Hang Sang Index of over 1,000 points in little over a week. I believe Members are aware that some economic analysts have adjusted downwards their forecasts of Hong Kong's economic growth in 2001 after taking into account the prevailing uncertainties in the market. As our present forecast of a 4 per cent GDP growth rate for the year has already factored in the slow-down in the US, we believe this forecast should remain valid for the time being. We will review the situation as we release the economic report for the first quarter of 2001 which will be towards the end of next month. And we must be prepared for further volatilities in the global economy, as they can deal a blow to our performance in 2001.

32. Having considered the state of the economy and our financial position in the short to medium term, I have decided to err on the side of caution in drawing up the 2001-02 Budget. I consider this a responsible move. Some have said that I have chosen a minimalist approach just to play safe during my last few months as Financial Secretary. I do not think this is the case. Indeed, if I had really wanted to leave a good name for myself, I would have been distributing largesse in my final budget, not insisting on being prudent.

Concluding Remarks

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33. Having gone through a painful economic recession, I hope we, as a community, can bounce back to focus on Hong Kong's future directions. And in line with the Budget's theme, 'hone our strengths and strive to excel' in the interests of Hong Kong. We must all work together if we are to capture successfully the opportunities arising from China's accession to the World Trade Organisation, to upgrade our human capital and to advance our position as an international financial and high-value-added services centre. In the process, the Government will also work closely with the private sector.

34. Madam President, I have served as Financial Secretary for the past six years, so it is only natural that I have developed a special affinity for the job. Although I feel much honoured to be called the "God of Wealth" while holding the post of Financial Secretary, I am not, and never can be, that omnipotent hero in Chinese legend. I have had to face the limitations of real life and, on occasions, I have disappointed many. There were times when I was knocked off the godly pedestal and condemned as a "crying wolf", as well as being rebuked and forcibly "re-educated" by Members during many a budget debate. Then there have been the opportunities to appear more human and even to be described as the hero who saved Hong Kong's market only to be brought back to earth to be censured as the miser of all time. Looking back on all the praise and criticism, achievements and faults, I believe, as the Chinese saying goes: "You can never please all, but you must always be loyal to your conscience".

35. Finally, let me take this opportunity to express my deepest gratitude to Members of this Council and to the Hong Kong community for their co-operation and support for the past six years. In my new position I will continue to give of my best to serve the interests of Hong Kong. Thank you.

(Note): The monetary base include currency in circulation, the aggregate balance of the banking system in Hong Kong, and Exchange Fund Bills and Notes.

End/Wednesday, April 4, 2001

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e Debate on the Second Reading of the Appropriation Bill 2001 in the Legislative Council today (April 4):