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Following is the speech (English only) by the Financial Secretary, Mr Antony Leung, at the Hong Kong Business Community Luncheon (March 14):
Ladies and gentlemen,
Thank you Chris for those kind remarks. If anyone wants to throw a few knives, you'd better be quick. A skinny guy like me cannot hold too many knives on my chest, or my back.
I would like to thank the joint chambers for providing me with this opportunity to make my first post-budget speech to such a distinguished audience. I'm delighted to see so many of you here today. It's not really surprising as my maiden budget have been the subject of some pretty thorough analysis and comment from all quarters. Indeed, this is one of those occasions when you would probably prefer me to take questions first and forget about the speech. But I won't be tempted. I'll shoot first and hope there are some of you still sitting upright at the end.
First of all, I want to thank all those who have commented positively on the Budget. It is the result of many months' hard work not only by me, but indeed by a whole team of colleagues. I am equally grateful to those who have criticised on it. As an open Government we welcome suggestions, debates and criticisms. They help us to formulate policies that address the needs of the community and ensure we take into account different perspectives in the process.
In the past few days, a number of questions have arisen over what is perceived as a 'hole' in how I will achieve the target of bringing public spending under control and winding it back to 20 per cent of GDP or below if certain assumptions are not met. Another issue that has gained some attention is my definition of the government's role in the economy as one of a 'proactive market enabler'. And I will come back to those a little later.
First, I would like to underline the direction in which I see Hong Kong's economy moving in the months and years ahead. That direction is moving up the value-added chain; it is the central theme of my budget. If we achieve this, we will be able to offset our relatively high cost structure. While there are four economic sectors that we see as the future growth engines - financial services, logistics, tourism and producer and professional services - we need to concentrate on the basic essentials that not only make these sectors thrive, but add value to the economy as a whole. In today's highly competitive global village, these essentials are - quality, speed and creativity. This is what the customer wants.
Indeed, these are embodied in the core values of what makes Hong Kong a world city. So, we're not trying to reinvent the wheel, we are just trying to make it spin better. If we can focus on these three areas, all businesses in Hong Kong will benefit by moving up the value-added chain. This is a message you will hear me repeating often.
In this process, we have to ensure that we have quality manpower, and this is where our education reforms and further importation of talents come in. We also have to capitalise on the opportunities in our hinterland, the Mainland. After all, we are a hub for the region and our relationship with the Mainland is central to that. At present, it's a bit like a Goretex boundary - Hong Kong people and money can flow into the Mainland quite freely, but it's not the case the other way around. That's why we are working hard to improve what I call the five flows across the boundary: people, cargo, capital, information and services. Such improvements will bring benefits to both Hong Kong and the Mainland. The key here is to do it in such a way that we protect our separate customs territory and the other separate systems we have in Hong Kong. That's what 'One Country, Two Systems' is all about.
I would now like to turn to the fiscal side of the budget, if only because it brings me back to the two issues I raised at the outset. The first of these is to address the questions I know you will be firing at me on how we overcome the structural deficit and reduce expenditure, particularly if my assumptions in the budget calculations don't materialise.
In reading the budget comment and analysis, it seems that many people have concentrated on the savings from an assumed civil service pay cut, and the additional revenues to be raised from the proposed boundary facilities improvement tax and tobacco and wine duties, all of which amount in a full year to only 7.4 billion dollars. They have tended to overlook the fact that we will be saving a much bigger sum through controlling the growth of public sector expenditure. I have set a target to reduce the share of public expenditure as a percentage of GDP from 23 per cent in 2002-03 to 20 per cent or below over the medium term. This 3 per cent difference amounts to some 37 billion dollars even in today's terms. Add this sum to the likelihood of between 10 and 15 billion dollars return from fiscal reserves, an assumed return of around 5 per cent per annum, and we could almost wipe out the deficit. The remaining gap of about 9 billion dollars could be closed by squeezing public expenditure just a little bit more or raising additional revenue. As the gap is less than 4 per cent of total public expenditure it should be quite achievable.
So, my main message to you this afternoon is that controlling the growth in public expenditure and reducing its share by the equivalent of 3 per cent of GDP is a very powerful weapon in our fiscal armoury. To a large extent, it will address the deficit problem as well as giving more room for the private sector to grow. As we all know the private sector has a greater capacity to foster creativity, provide economic impetus and create employment opportunities much more efficiently and cost effectively than the government. I think we would all agree that big government squeezes out the space for the private sector to breathe. That's why reducing the public sector to 20 per cent of GDP is so important.
How do we go about this? As you know, in the medium term we will be holding the growth in public expenditure to half the predicted 3 per cent real growth. We have also made two assumptions. The first is the reduction in civil service salaries by 4.75 per cent; and the second is the government will be made a lot more efficient.
I should emphasise that the assumed pay cut, and I repeat, it is an assumed pay cut, has no relationship whatsoever with the performance of the civil service. I hope that the community will not confuse the debate on fiscal management with the competency of the civil service. Ever since I joined the family of civil servants ten months ago, I have thoroughly enjoyed working with my colleagues and have received excellent support from them. Believe me, the absolute majority of civil servants are very competent, dedicated and committed to serving the community. The civil service continues to be a cornerstone to the stability and prosperity of Hong Kong and we rightly should command the respect of the community.
No doubt in view of the latest fiscal situation, and the evolving aspirations of the community, Government has to change the way it used to work. We have to do more with less. Actually most colleagues and representatives of the civil service unions I have met are also eager to work together towards this goal, as they are equally frustrated by the bureaucratic system that has built up through the years.
This afternoon, Donald will explain in the Legislative Council how we intend to streamline procedures and enhance the efficiency of the Government. I am not going to repeat what he will say in detail here. I will just sum up what I see the Government doing in my version of the 3Rs - re-prioritise the various things we do; re-organise the government structure; and re-engineer the processes. I am quite confident that if we do this, we can produce resources to meet the needs of the new initiatives and at the same time reduce the size of the Government.
And if the economy does not grow at the predicted rate, I would either have to raise revenue or reduce expenditure further. The 3 per cent real growth as well as the 3.4 per cent nominal growth are very much in line with the market consensus. If anything, I have erred on the side of caution as they are considerably lower than the forecasts by many private sector economists and international organisations.
Let me now turn to my second point and answer those who have criticised me for allegedly moving Hong Kong away from our long-standing free market philosophy. A philosophy once described by one of our most respected Financial Secretaries, the late Sir Philip Haddon-Cave, as 'positive non-intervention'.
Let me say this, I am one of the staunchest supporters you will ever find in the operation of a free and open market. Indeed, I have spent all but 10 months of my working life in the market place. But this does not mean that Government should be passive and distance itself from the economy. You may be aware that Sir Philip himself had also said that his philosophy on "non-interventionism" was qualified by the inclusion of the adjective "positive", which meant "that the government, when faced with an interventionist proposal does not simply respond that such a proposal must, by definition, be incorrect. Quite the contrary."
I see the government as a proactive market enabler, a description that I believe is more accurate than anything said previously and reflects what the government has been doing for many decades. I will not pick winners. I will leave the market to market players. I have no intention of allowing bureaucrats to second guess business people, but if some see it otherwise, I'm more than happy to debate it with them. My starting point is this: I am trying to promote the free market and proof of that is my budget - a blueprint for shrinking public sector expenditure down to 20 per cent of GDP or below; and reducing the bureaucratic and regulatory burden on the private sector in the process of downsizing the public sector.
I make no apologies for describing the government's role as a proactive market enabler. If any misconception has arisen, it may be due to my up-front reference that the government does need to consider taking proactive measures to secure projects beneficial to Hong Kong's economy as a whole when the private sector is not ready to invest in them. That does not mean we will be going around blindly picking up projects that will be a continuing drain on public finances.
I believe the best example of what I am talking about is the construction of the mass transit railway system. If the government had not taken up this project in the 1970s - and I might add it was done during Sir Philip's time as Financial Secretary - then I would hate to think of the chaos on our streets today. And in the process the MTRC has become an extremely successful public company. Hong Kong Disneyland is another such project that will bring significant returns to the economy.
And can I pose the question, what would Hong Kong be today if we didn't invest in education? Also, unless the government has a view on the direction of the economy, we can't really provide the kind of manpower we need. The world is changing from an industrial economy to a knowledge-based one, if we don't change the curriculum and change the way we educate our young people we will fail - and fail miserably. So that's why I believe the government should have a view of the macro economic development of Hong Kong and provide the necessary support.
Ladies and gentlemen, I hope I haven't outstayed my welcome. I certainly didn't want to make another budget speech, rather to use this opportunity to respond to some of the issues that have been raised during the past week and to drive home three messages - Hong Kong must focus on high value-added economic activities for its future development; we must control growth in public expenditure and reduce its share by the equivalent of 3 per cent of GDP; and we are not wavering from our commitment to free and open markets. I trust I have done that, although in the process I may have prompted many more questions. So, please fire away.
Thank you.
End/Thursday, March 14, 2002
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