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The Task Force on Review of Public Finances, headed by the Secretary for the Treasury, Miss Denise Yue, has found that Hong Kong is facing a structural fiscal problem.
Speaking at a press conference today (February 21), Miss Yue said that in March 2001, the Government forecast five consecutive years of operating deficits. In the face of this fiscal situation which has been unprecedented in more than half a century, the Task Force has set out to project what the situation would be like if the current revenue and expenditure policies were to remain unchanged.
Outlining the budgetary trends in the past ten fiscal years, Miss Yue said that for the economy as a whole, 1997-98 was a watershed in the sense that from 1991 to 1997 Hong Kong recorded relatively high and stable economic growth rates as against distinctly lower and more volatile economic growth rates from 1998 to 2001. The former period was characterised by an upsurge of the asset markets whereas the latter period was affected by a double-blow stemming from the Asian financial crisis in 1998 and from the global economic downturn in 2001.
"For the period 1991-92 to 2001-02, government revenue experienced similar fluctuations as the economy. On the operating side, the account was mostly in surplus before 1998-99. Since then, it went into deficits annually. The recurrent deficit in 2001-02 is estimated to reach 4.0% of GDP.
"In the same period of 1991-92 to 2001-02, the capital account was mostly in deficit except for the three fiscal years of 1997-98, 1999-2000 and 2000-01.
"Taking the operating and capital accounts together, Hong Kong recorded four years of consolidated fiscal deficits since 1991-92. Expressed as a share of GDP, the deficit recorded was 0.3% for 1995-96, 1.8% for 1998-99, 0.6% for 2000-01 and an estimated 5.2% for 2001-02," Miss Yue said.
The Task Force has identified several changes in the economy likely to have affected, or may affect, government revenue and expenditure in a fundamental way.
On the revenue side, the changes include:
* the consolidation of the property market. This has directly reduced the revenue yields from land premium, stamp duties on property transaction, and profits tax;
* the increasing reliance on investment income from the fiscal reserves as a source of revenue. This implies that repeated budget surpluses will be required if the share of investment income vis-a-vis government revenue and government expenditure is to be maintained;
* the outreach of the Hong Kong economy to the Mainland and elsewhere. This may conceivably adversely affect tax revenue due to the territorial source tax principle practised in Hong Kong (namely only Hong Kong-sourced profits and salaries are liable to tax).
On the expenditure side, the changes include:
* the higher price movements in government expenditure than those in the general economy. This has resulted in the growth of government expenditure exceeding that of the economy in money (or nominal) terms;
* the ageing of the Hong Kong population. The primary effect of this is there will be an increasing demand for social security payments; and
* the conscious counter-cyclical fiscal measures adopted by the Government in recent years in the face of the economic downturn. This cyclical phenomenon would be turned into a structural one if redress measures are not taken when the economy recovers.
Using a model to project the state of government finances two decades into the future, the Task Force has found that the current revenue and expenditure policies are not sustainable.
"Under a steady economic growth scenario, the Government would be facing a consolidated deficit of $42 billion in 2002-03, being 3.4% of GDP. The consolidated deficit would rise to $114 billion by 2011-12 (5.7% of GDP) and to $365 billion (11.2% of GDP) by the end of the projection period in 2021-22," Miss Yue said.
"Hong Kong's estimated substantial fiscal reserve balance of some $369 billion would be fully used up by 2008-09. Thereafter, Hong Kong would go into fiscal debts.
"Under a higher or lower economic growth scenario, the projected fiscal position would respectively improve or deteriorate somewhat. But the broad directions remain unchanged. In a higher economic growth scenario, the Government would still go into substantial fiscal deficits year after year. And the accumulated fiscal reserves would still be fully used up in 2008-09," she said.
Miss Yue cautioned that the reliability of a model projecting developments 20 years from today is necessarily constrained. However, it is a useful tool to identify directions in assessing fiscal sustainability.
"Clearly, the directions indicate that continuation of the current revenue and expenditure policies is not an option. As already mentioned by both the Chief Executive and the Financial Secretary, the Government will tackle the fiscal problem in a serious manner. Fiscal sustainability is of paramount importance to the economic well-being of Hong Kong," Miss Yue said.
On the expenditure side, the Task Force has recommended that the first priority is to control the growth of government expenditure. It has concluded that growth of government expenditure in money (or nominal terms) should be aligned to the trend nominal growth of the economy. This discipline should be applied in addition to the existing budgetary guideline of aligning the growth of government expenditure in real terms to the trend real growth of the economy.
The significance of aligning the growth of government expenditure in money terms to that of the economy has been highlighted by the recent years of deflation, where prices in the general economy have adjusted downwards but not those in the government expenditure.
On the revenue side, the Task Force has recommended that the Government should consider the views of the public as well as the recommendations of the Advisory Committee on New Broad-based Taxes, which has been set up to advise on what new broad-based taxes would be suitable for Hong Kong.
Report of the Task Force on Review of Public Finances has been uploaded on the Finance Bureau website http://www.info.gov.hk/fb.
End/Thursday, February 21, 2002
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