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Following is the transcript (English only) of the question and answer session given by the Financial Secretary, Mr Antony Leung, at the Hong Kong Business Community Luncheon today (March 14):

Question: Antony, well, we think your budget was a good one and we all supported you. Last week there was an article in the Asian Wall Street Journal about your background, about the budget. Could you share with us your view on that?

FS: Thank you, Jeffrey. As I said in my remarks, I believe that the phrase "proactive market enabling" is probably a more appropriate way and a more accurate way to describe what a government should do. But as I said in the budget in my earlier remarks, I believe in the free market. However, in the globalized world there are a number of things that a government must do to enable the market, such as providing the institutional framework. The rule of law, itself, is very important. Making sure that the regulatory environment is conducive to the free market is also very important, and that includes reviewing our system and our regulations from time to time to make sure that they are in line with the developments of the market. We are kind of too often looking at a lot of these regulations as if they are sacred. But with the accumulation of regulations, even though each of them may make a lot of sense, when you add them up together the market itself may not be working as efficiently as it should, and the government should proactively review these.

I mentioned education before. We all know that when the entire world is changing from an industrial economy to a knowledge economy, the curriculum, the intake, the opportunity for our people to receive higher education, must change. What works for an industrial economy may not work for a knowledge economy and the government must be proactive about this. Also, we pride ourselves to be the freest economy in the world but I believe the government has the role - and this is a proper role for the government - to gain further market access in our external markets through all kinds of means: bilateral, multilateral ways of enhancing market access for our industries and so on and so forth. So I believe that just by adopting the term "proactive market enabling" is not turning away from the free market. Quite the contrary, it is to enable the free market to work better. And as I said, the best proof is that I aim to trim the size of the public sector from 23% of GDP down to 20%, and that is allowing more room for the free market to work.

Question: Financial Secretary, in our initial reaction to the budget we did welcome your expression of interest in cutting back government spending, reducing government programmes etc, but we also questioned the fact that there were no specifics in the budget itself on where you could cut back. We have also looked at where the government is spending at the moment and it seems that community pressures are for greater spending, whether it is on infrastructural expenditure or whether it is in areas like welfare, health, education. Can you give us any further idea where you can see specific cutbacks in any of those sorts of areas and beyond the 4.75% general civil service pay-cut that you are talking about?

FS: Thank you. I believe this is an extremely important question, and really, thank you for raising it because I have heard from many quarters and I have seen some commentaries from the media on this particular point.

Firstly, the method of financial control in the Hong Kong Government is actually very effective. Right now, no new initiatives can be launched without the explicit approval of Denise (Miss Denise Yue, Secretary for the Treasury) from the Finance Bureau. So, if you envisage that in the next five years, having set a target of growing government expenditure at 1.5% real, we would be handing out financial envelopes to the various Secretaries, and we'll tell them that they have to live within this envelope and nobody can exceed that. So, as far as the ability to control the expenditure, I have confidence.

Now, the question that you raise is an interesting one. Why didn't I indicate in the budget speech a few more specifics about where we should be cutting? But rather, I only indicated some broad directions such as re-prioritizing the various policy initiatives, re-engineering the process, reorganizing the government, maybe with the help of the private sector, through processes such as outsourcing, corporatization and privatization. Now, the reason for such kind of brevity is in a way intentional. Maybe we all have been too used to what I call a very prescriptive way of telling the government departments what to do, and this is what the public has been expecting from a budget speech. But I thought that that may not be the best way to manage the government.

You all are in the private sector. The way that you manage large organizations, I am sure is not that prescriptive. I believe what you usually do would be the following - when you have multiple departments in multiple geographies - would be to set targets, set targets on indicators that would measure the performance and you give them a package of resources, and you tell those department heads and say: "Look, I would like you to achieve these targets within these resource limits; think about how you can do it." And then, chances are it will be done.

Likewise, what I am really doing is exactly that, I am setting financial limits. Obviously, the policy initiatives, the overall political agenda, would be set by the Chief Executive and the cabinet. But then how to achieve those policy initiatives will be, hopefully, decided by the policy secretaries working together with his or her staff. I believe that, in particular with the introduction of principal officials that are politically accountable, these principal officials will have their own agendas, working together with the Chief Executive. But in the past, since every time they want to do something they would turn to Denise and ask for additional resources, in the past people did not really have to think about re-prioritizing, I mean just keep adding initiatives. But now, if we say, "Look, you have a cash limit and you are free to do whatever under the cash limit", then I am quite sure the policy secretaries will think about what are the things that they really want to do, but in so doing, what are the things that they would not do, and how to do it much cheaper, more efficiently and effectively.

So, in short, I am really leaving a lot of room to our colleagues so that they can exercise their creativity and exercise their ability and their responsibility in really doing more with less. And I believe that that is actually much more effective than if I prescribed what exactly to cut, what exactly you should not do, in the budget. Because there is no way that CH (Mr Tung Chee Hwa, Chief Executive), Donald (Mr Donald Tsang, Chief Secretary for Administration), myself, together with Denise, can figure out everything that is happening in the government, what should be done and what should not be done.

Question: Recently, the US President proposed putting a duty on steel imports into the US, which is giving everybody else the excuse to break the WTO Agreement. But in Hong Kong, we still have one very narrow avenue, which is the close economic partnership. And in your opinion, how receptive is our Chinese counterpart on this proposal and is there a time on the horizon that we can look forward to, so in case there should be some retaliatory action from China on WTO agendas, we can have these shortcuts to go into China?

FS: David, as you know and as we have said many, many times before, discussion on something like a free trade agreement is a very complex process on a very complex issue. So all I can assure you of is that we are working our best, trying our best to discuss with the Mainland, hopefully with some early success, but I can't really predict with certainty how long it will take and also to what extent we can reach agreement. But we will try our best.

Question: It is so easy, as leaders of the private sector, for us to stand here and say, "Antony, go get them; rejuvenate Hong Kong, restructure the government and lead us to our salvation". Hong Kong was built as the capital of capitalism based on the initiatives of people, various people throughout the economy and throughout the community, and we want to put our weight and our spirit behind what you are doing. Antony, can I ask that we invite you to also tell us what can we do as leaders of the private sector to help in this process?

FS: Thank you. And, really, thank you for your support. As you said, really, Hong Kong is built by the market. The government is just playing a supporting role and now I am defining it as an enabling role - enabling all of you so that you can do the best. I am sure you are not asking me how you in your industry can do better, because I am sure you can figure it out much better than we can. However, there are quite a number of areas that you, working together with the government, can make Hong Kong better.

Firstly, really, is helping the entire community to regain the sense of confidence, to regain the sense of direction. Because, after all, I think in the last four years or so to a certain extent, because of the burst of the bubble, because of the deflationary environment, we have lost a bit of that. And we can do that by asking our people to really walk the extra mile, to do the three things that I have highlighted in the budget speech, and that is to excel through getting close to the customer and really working on those three areas that I have pinpointed, and that is creativity, speed, as well as quality. To a certain extent that contrasts a little bit with some of the teachings that we received from our parents. Our parents sometimes would say that you really have to see how you can get things done the quickest way, but that may not be, should I say, the way that will achieve the most quality, just kind of sneak by. So, if we can ask our people to focus on quality, speed and creativity, and tell them that through this you can add value and then collectively we can actually prosper again, then I think it will be a very good start.

Another area that you can help - and you are really helping yourselves not the government - is by helping our people in education. And by education I mean not just initial education, but lifelong education. Allow your staff to enroll into various kinds of courses, organize all kinds of training for them, give them time off, encourage them to go through lifelong education. Because in Hong Kong, what we have is a bit of a mismatch; a mismatch between the direction that we want to go, which is a knowledge economy, and the skill base of our people. As you know, less than 20% of our people have degrees, and close to half of them have only received Form Three or below education. That is a mismatch, and that explains why the Chief Executive has been investing in education in the last four years. We have increased our spending in education by 46% in the last four years but still we have a lot of catch-up work to do. And it is not just, as I said, in initial education, it really is in lifelong education. So all of you, as employers, can actually contribute by helping our employees, by helping our people to really pursue lifelong education. I think these are the two areas that you can really help Hong Kong.

Question: Business community feels the size of the government is too large presently. They think the size of the government should be cut down and made smaller by way of voluntary retirement or early retirement or any other means. Are you planning to do anything on that?

FS: Well, as I said, we intend to see the size of public sector expenditure shrinking to 20% or below and that already is the best way to control the growth of the government, because after all, in the public sector more than 60% of our expenditure is related to people. Usually, when we talk about the size of the government it can be represented either in the percentage of public sector expenditure as a percentage of GDP, as well as in the numbers. Now, as far as controlling the number of civil servants is concerned, in the past few years we have done quite a bit; we have actually saved 18,000 jobs and we will continue to do more. However, our goal is not so much as to cut people, our goal is really to cut work because there is a lot of work that may not be productive. And as I said, the bureaucracy has grown throughout the last decades so that all of these bureaucracies generate a lot of work but is actually not helping you. It may be hindering you.

So, instead of talking about cutting people, the way that I look at it is how can we cut work, through reorganization, through re-engineering and also re-prioritizing some of the things that we do. If the work is reduced, then we have to think about whether we have too many people or we can take on new initiatives. And believe me, in Hong Kong, because of the changing times, there will be new requirements. And so, instead of just keep adding, now we are thinking about, really, how do we do more with less. But my first priority is to cut work.

Question: Financial Secretary, in your budget speech you said you want to improve liquidity in the financial markets. There is one simple way in which you can do that and that is by cutting stamp duty. So do you have any plans to do this?

FS: I believe if stamp duty is the only way, or should I say if it can result in a sure increase in liquidity, I would not hesitate to do it. However, I believe that it may be a hindrance but I am not sure whether it is the major one. So, right now what we are focusing on is to see how we can attract more investors, more institutions as well as more issuers to come to Hong Kong. And that explains why we have been working with our hinterland, which is the fastest growing economy in the world, to convince them that besides sending the best issuers to our market, really to get some of the investors to come to this market. After all, in our market we have some of the best companies in the Mainland and in Asia listed here. It would be right, and not wrong, to allow some of the residents in the Mainland to invest in these companies and that is the area that we are really focusing on.

Now, obviously, there are other areas that we are working on - improving the corporate governance, including the financial infrastructure, including settlement and clearing - then at the right point of time we will think about whether we will do anything to the stamp duty side. As I said, I mean I would not be resisting this one if we know that by so doing we can increase the liquidity. However, as you know, we are also faced with a fairly large budget deficit and in the short term we need the money.

Question: I can't let you get away without mentioning anything about taxes. Your comments so far recognize that you have a structural deficit and your comments on sort of getting over this problem are aimed at reducing government expenditure - you talk about 37 billion - and getting revenue from the reserves. And it begs the question whether you are actually happy with the nature of our tax system, whether you see it as adequate going forward, whether its volatility is acceptable to you, and whether, of course, you really are still considering GST?

FS: I believe it can boil down to just one question: Are you, and when are you going to impose GST? Well, thank you for that question. Currently, we have problems with our tax system. The tax base is too narrow, undoubtedly. I mean after all, you, all of you, belong to, really, the elite group in Hong Kong, those people that are paying the standard rate of 15% income tax. And as you know, there are less than 10,000 in Hong Kong and here we already have one-tenth. I am sure you and I belonging to that bracket think there is a problem. However, in introducing major reforms like this, especially we all recognize that a consumption tax is not quite progressive. If anything, it is rather regressive. The best time and maybe the only time to do it is when the economy is good and when the distribution of wealth is not a major issue in the economy. Right now, as you know, unemployment is still rising and we have a fairly uneven distribution of wealth in Hong Kong. That is why the Chief Executive and I have repeatedly said in the past months that this is not the right time to introduce the GST. Whether we are going to do it, when we are going to do it, we have to look at the developments in the economy. My wish is that through the collective work that we all do, that the Hong Kong economy will restructure to truly become the region's financial hub, the tourist hub as well as the logistic hub, and obviously providing professional services throughout Asia, that we become Asia's world city. Then everybody is happy and by then, I am sure, we have a lot more room to manoeuvre.

End/Thursday, March 14, 2002

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