LC: Appropriation Bill 2002

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Following is the speech by the Financial Secretary, Mr Antony Leung, in concluding the Debate on the Second Reading of the Appropriation Bill 2002 in the Legislative Council today (April 17):

Madam President,

Introduction

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During last week's Budget Debate in this Council, I heard many useful views from Honourable Members. Business and community organisations, the public and the media have also expressed their opinions in various fora, and many of them are most insightful. I would like to begin my concluding speech on the Budget by expressing my heartfelt thanks to all concerned for their contributions .

The media and a number of institutions have conducted public opinion polls on the Budget. I was very encouraged to see these surveys indicating a high level of support in the community for my maiden Budget.

The Chief Secretary for Administration and other Secretaries have already replied to points made by Members on a number of issues. I will focus on several topics relating to public finance and set the record straight on the role of the Government in the economy. Before that, let me first discuss the purpose of the Budget.

The main functions of the Budget are to lay down clear and practicable medium-term fiscal objectives, and propose government expenditure and revenue measures for the coming year. In this, it differs significantly from the Policy Address, which is the main forum for the Chief Executive to announce his policy objectives. Bureau Secretaries will then devise specific measures to implement such policy objectives and announce these to the public. The Budget provides the framework to achieve such objectives in financial terms through its revenue and expenditure proposals. The Budget Debate is one opportunity which Members have to raise questions about different policy areas. There are other occasions, such as meetings of Legislative Council Panels, for members to discuss specific issues with the Administration. The Budget need not therefore dwell on such matters.

Public Finances

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Controlling the Growth of Government Expenditure

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In my Budget Speech, I set three targets for public finances in the medium term, i.e. by 2006-07 -

* restore balance in the Consolidated Account;

* attain a balanced Operating Account; and

* reduce public expenditure to 20% of GDP or below.

To achieve these three targets, I will contain annual growth of government expenditure from 2003-04 to 2006-07 at an average of 1.5% in real terms, or 1% in money terms, lower than the forecast economic growth rate for the same period.

I am encouraged that, as evidenced by last week's Budget Debate and various comments in the media, the community is broadly in support of these three targets. Of course, some take a different view. They claim that the Government should not attach such importance to fiscal balance or the public expenditure share of GDP. I respect different viewpoints, but I believe that the setting of these three medium-term targets is in Hong Kong's overall interests.

There has been criticism in some quarters that the Budget has only set targets for controlling expenditure, and has not proposed specific measures to achieve them, thereby calling into question our will and ability to deliver. In other quarters, there is worry that, in the process, the Government will cut back on public services and its commitments to the community.

I have not underestimated the challenge of controlling government expenditure. As Members will appreciate, we have a long-established, rigorous and effective mechanism for the management of public finances. Once the targets have been set, Bureau Secretaries will implement the Chief Executive's policy objectives in their respective areas within preset expenditure limits. It is far more effective for policy bureaux and departments to set priorities, streamline organisation, simplify procedures and utilise market forces than for centrally-planned measures to be imposed. We will further examine how best to give bureaux and departments greater flexibility and more room for manoeuvre, while ensuring the appropriate use of resources.

Some have mistakenly equated control of growth in expenditure to expenditure reduction. I have to point out that government expenditure will continue to grow both in real and in money terms in the years ahead, although the rate of growth is lower than the forecast trend growth rate of the economy for the same period. We need to keep abreast of the times and adapt public services to ever-changing circumstances. We have to strike a proper balance between the prudent management of public finances and the needs of the community.

Basis for Controlling Expenditure Growth

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In order to reach my objective of keeping government small, I made it clear in my Budget Speech that I would strive to control the growth of government expenditure not only in real terms but also in money terms. Many economists and analysts have supported this approach and consider it to be the right one for the management of public finances.

I also highlighted the phenomenon that price changes in government expenditure are greater than those in the economy as a whole. This departure from past practice has caused some Members to query whether or not we had in the past disclosed financial information of this nature. I can confirm that in previous years such information was made available in full in Budget-related documents. Only the form of presentation has now changed.

Containing the Size of the Public Sector

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I firmly believe that the market is more effective than the Government in providing economic impetus, creating employment and allocating resources. If a disproportionate amount of the community's resources is consumed by the public sector, this will hinder private sector development and, in the long run, undermine Hong Kong's competitiveness. A robust economy provides the best conditions for us to tackle the problem of our public finances. I have therefore set a target for public expenditure to be reduced to 20% of GDP or below in the medium term. I am nonetheless aware of a body of opinion which, while accepting that the Government should contain public expenditure as a share of GDP, claims that such an absolute target is unnecessary.

There is no magic in the target of 20% of GDP or below. But public expenditure will reach 23% of GDP this year, a far higher share than in the 1980s and 1990s. I consider it necessary to set a clear and attainable target for the medium term in order to allow the market to develop further. Once this target has been met, we will consider the need or otherwise for a fresh one.

Fiscal Reserves

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I also proposed to maintain the fiscal reserves just at a level roughly equivalent to 12 months of government expenditure, to meet operating and contingency requirements. I am glad that most of the community support this proposal. Others, however, have taken the view that the Government should not be too miserly but should use more of our fiscal reserves to increase government expenditure. I do not agree with this. The reserves do not belong to the Government. They are the valuable assets of the community of Hong Kong. The Government is responsible for the optimal use of such assets.

Increasing Government Revenue

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The Secretary for the Treasury has just introduced two bills to implement the Budget's revenue-raising proposals to increase the duty rate on wine and reduce the quantities of duty-free tobacco and still wine that local residents may bring back to Hong Kong. We consider that the proposal to increase duty on wine will not hamper tourism development.

I have also proposed the Boundary Facilities Improvement Tax. There has been some criticism that this will hinder the flow of people between Hong Kong and the Mainland. On the contrary, the Government actively promotes the flows of people, goods, capital, information and services between the two places in many different ways, the investment of substantial resources to improve the boundary facilities being one. Introduction of the Boundary Facilities Improvement Tax at a reasonable rate will help relieve our financial burden in this respect.

There have been suggestions that, once the Boundary Facilities Improvement Tax is introduced, the Kowloon-Canton Railway Corporation should reduce its fares for the Sheung Shui to Lo Wu section. The Corporation is a separate entity required to operate on commercial principles with the autonomy to set its own fares. Its income is not government revenue. We should not confuse the two.

As shown by public opinion surveys conducted by various institutions, the majority of respondents support the introduction of the Boundary Facilities Improvement Tax in 2003-04. We are considering the detailed implementation of the tax, including arrangements for exemption, and will proceed to draft legislation for introduction into this Council in the current financial year.

Some have suggested that I have tried to draw a veil over possible tax increases in future, in order to gain public support for the Budget. In fact, I made it very clear in my Budget Speech that, apart from the specific measures announced to control the growth of government expenditure and raise additional revenues, we will still need to increase recurrent revenue or control recurrent expenditure by a further $9 billion, if we are to achieve the target of restoring fiscal balance by 2006-07.

Economic Growth Forecast

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In my Budget Speech, I forecast a 3% real trend growth in GDP and a 0.4% trend growth in the GDP deflator annually over the medium term up to 2006. These forecasts are regarded as too optimistic by some commentators, who predict that, should they not eventuate, we may not be able to meet the three medium-term targets on schedule. Yet these forecasts have been made after detailed study of a copious amount of data and other factors. Compared with forecasts in the market, ours are conservative.

In preparing the Budget for 2003-04, the Government will review the medium-term forecast of the trend growth rates of GDP and the GDP deflator, in line with established practice. But there will be no change to the targets of balancing the Consolidated and Operating Accounts or reducing public expenditure to 20% of GDP or below by 2006-07.

Civil Service Pay

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The Chief Secretary for Administration has this afternoon explained the Government's stance on civil service pay adjustment. Let me reiterate a few key messages -

* first, the 4.75% cut in civil service pay is only an assumption made purely for financial planning purposes;

* second, civil service pay adjustment has nothing to do with the ability or work ethic of civil servants. I am sure there is no confusion between the two. After working in the Government for nearly a year now, I know the vast majority of civil servants to be hard-working, committed to serving the community and doing a very good job. To maintain the stability of Hong Kong, it is essential to have the civil service on an even keel. I hope that the community can give full recognition to the contribution that our civil servants make to society; and

* third, I hope that in any discussions on civil service pay adjustment, both the public and my civil service colleagues will adopt a rational and pragmatic approach, with the overall interests of the community at heart.

Direction of Economic Development

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Some feel that the Budget has not dealt adequately or in sufficient detail with the direction of our economy. I disagree. In my Budget Speech, I have already outlined clearly the direction of Hong Kong's economic development. As a highly externally-oriented and well-developed economy, Hong Kong cannot rely on one or two sectors alone to give impetus to our overall economic development. I consider it imperative to focus on those areas in which we enjoy a competitive advantage and to reinforce Hong Kong's positioning as Asia's centre for financial services, logistics, tourism, and producer and professional services. We are moving up the value chain. Our new drive comes from leveraging on our hinterland, particularly the opportunities brought about by rapid growth in the Mainland economy.

We must deepen and widen economic integration with the Mainland, in particular the Pearl River Delta. Of course, Hong Kong will, in the process, remain a separate customs territory, maintain its character as a cosmopolitan city and continue to have close trade and economic ties with other places around the world.

Let me emphasise the institutional strengths that Hong Kong enjoys. These include "One Country, Two Systems", the rule of law, a level playing field, clean government, the free flow of information, a simple and low tax regime, and efficient and effective market-regulatory systems. Such strengths, added to a favourable geographic location and a talented workforce, have endowed Hong Kong with every advantage in developing high-value-added activities, and provide impetus to our overall economic development.

Role of the Government in the Economy

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My belief that the Government should have a clear vision of the direction of economic development and be a proactive market enabler has raised some eyebrows, and there has been surmise that I am bending the Hong Kong economy into a paradigm of central planning. This is purely a misconception. Quite the contrary, I will do my utmost to ensure that the Government upholds the principles of a free market and fair competition and does not pick winners.

The global economy is changing rapidly, and we need to keep close tabs on the situation. The Government should provide strong policy and resource support to upgrade our hardware and software, in particular to nurture and attract human resources and to develop markets. This is especially important for economies such as Hong Kong with limited resources and a relatively small domestic market.

In fact I have already set out in the Budget Speech various measures to create a market-enabling environment -

* first, in order to reduce the Government's consumption of resources in the community and give the market further room for development, I have set a target to reduce the share of public expenditure in the economy from the current 23% of GDP to 20% or below in the medium term;

* second, in proposing measures to address fiscal deficits, my strategy is to rely mainly on expenditure control and, as far as possible, to avoid tax increases or the introduction of new taxes, thus keeping our government small and our environment business-friendly and underpinned by a simple and low tax regime; and

* third, I have said that we would use market forces and strengthen our co-operation with the private sector to provide better and more efficient services to the public in various ways. I have also stated that the Government needs to enhance its efficiency and productivity while promoting market development through reprioritisation, reorganisation and process re-engineering.

Creating Employment Opportunities

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Another related issue is the part the Government plays in encouraging employment. The Secretary for Education and Manpower has responded to Members' observations on employment. I would like to add a few remarks at the conceptual level. There are three ways in which the Government can create employment opportunities directly or indirectly -

* first, the Government can, through the implementation of appropriate policies, create an environment that enables

development of the market, thereby encouraging employment. Examples include our current study to establish a common platform to facilitate data exchange in the logistics industry, our efforts to streamline procedures for the issuance of financial products, our approach to the Central People's Government to abolish the quota system for the Hong Kong Group Tour Scheme, and, not least, holding the Arts and Crafts Fair in Tsim Sha Tsui on holidays;

* second, the Government can, through the allocation of resources, encourage the market to create employment opportunities; and

* last, government departments can provide direct employment opportunities.

Generally speaking, it is more effective to allow the market to create employment opportunities.

Concluding Remarks

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Madam President, there are many who say that, in the last six months or so, Hong Kong has changed. Confronted by challenges as our economy restructures, we are all striving to find a way out. In this process, we have learnt to be humble and to devote greater care to our families and others around us.

In concluding my Budget Speech, I quoted some song lyrics. I still find one of the lines - "Side by side we overcome ills" - has great depth of meaning. We are proud of Hong Kong's past, Hong Kong's history, but now we have a greater responsibility to create opportunities for the generation to come.

Some have suggested that we should now be singing "Shall We Talk". I fully agree. Members and I should talk to the community at large, and discuss how best to overcome the challenges we face.

I am not a good singer, but I am an attentive listener, happy enough to accompany and clap along. The heat of debate reflects the strength of our feelings; the sparks that fly up symbolise Hong Kong's vitality; the different voices evoke the vibrancy of our city. That has always been Hong Kong's style. I look forward with anticipation to working together with Members of this Council to open up a new era for our economy. Let's talk and act.

End/Wednesday, April 17, 2002

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