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Following is the speech by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at the Canadian Certified General Accountants Association of Hong Kong Annual Dinner today (November 16):

Raymond, Michel, distinguished guests, ladies and gentlemen,

Preamble

I am delighted to join the Annual Dinner cum Awards Ceremony tonight, and to congratulate the Canadian Certified General Accountants Association of Hong Kong on its achievements over the past 12 months. With more than 55,000 members and students throughout the world, the CGA-Canada is reputable for its professional advice on accounting, taxation and public financial policy matters. For many years, the Association has provided constructive commentaries on government finances and budget.

2. I like Canada a lot, otherwise I would not have lived there for 6 years. Hong Kong and Canada have much in common and a long history of working together. Both being open economies, Hong Kong and Canada are naturally concerned about the outlook of the global economy which has experienced great uncertainty with terrorist attacks and recent signs of a slowdown in the United States. In the midst of such challenges, sound monetary and fiscal policy frameworks help reduce uncertainty and bolster confidence. Canada has come a long way to bring down the national debt levels and to turn the federal budget from a deficit to a surplus. With persistent efforts of the Canadian government and its people, fiscal consolidation and fiscal discipline were exercised with successful results in less than a decade. Hong Kong has a lot to learn from this experience. In particular, we need spending prudence from our colleagues in all Government bureaux and departments, and tolerance and support from the whole community to Government's policies, in order to steer through our present fiscal crisis.

3. Throughout the years, Hong Kong people and Government believe in and rely on the market. The Government strives for balanced budgets, and we had been very successful, until 1998. Our external environment changed drastically in 1998, and this happened at the same time as the re-structuring of our own economy. As a result, we saw fiscal deficits in three of the past four years in 1998-99, 2000-01 and 2001-02. The deficits for 2001-02 reached 5% of our GDP. And for 2002-03, our Budget in March 2002 forecast that the consolidated deficit would be $45.2 billion or 3.6% of GDP. For the first five months to end-September this year we already saw a record deficit of $70.8 billion. And as you know, the Government has just announced its decision to stop all scheduled land auctions and call off the two remaining land auctions in this financial year. Some people are wondering whether the deficit will turn out to be more than our forecast in March 2002.

4. That is a serious problem. What is our solution ?

A structural deficit

5. The Hon Eric Li has pointed out, and I think accurately, in his Letter to Hong Kong broadcast on Radio Hong Kong the other day, that the deficit problem we face is structural rather than cyclical, and that it needs immediate redress.

6. Indeed, back in the 2000-01 Budget, the former Financial Secretary already pointed out the need to address the phenomenon of operating deficits that first arose in 1998. He then commissioned a Task Force to determine whether the deficit problems were cyclical or structural in nature and to examine the viability of our existing tax regime. He also set up an independent advisory committee to consider what form of broad-based taxes may be suitable for introduction in Hong Kong.

7. The Task Force and the advisory committee submitted their reports to the FS early this year. In particular, the Task Force's conclusion is that Hong Kong is facing an on-going and persistent fiscal problem. It further concludes that decisive actions are needed to restore fiscal sustainability. To restore fiscal sustainability over the coming years, the Task Force considers that the Government should accord priority to controlling the growth of government expenditure. We knew the problem, and we are determined to tackle it.

How to combat the problem

8. Our 2002 Budget outlines our plan for restoring fiscal balance. We are determined to solve the problem step by step, by 2006-07, through a three-way approach.

9. First, to revive the economy : Our economy has shown some positive indications, notably with external trade and inbound tourism rendering much impetus to activity growth so far this year. However, much work still needs to be done, and is in hand. We will continue to provide an enabling environment to boost revival of the local economy and to stabilise the property market. We will continue to look at ways of strengthening Hong Kong's competitiveness to maintain Hong Kong's role as the preferred business hub in Asia.

10. The second part of our strategy is to control public expenditure : Small government continues to be our philosophy. To uphold a small government, we need to reduce expenditure growth to an average 1% in money terms between 2003-04 and 2006-07, below the forecast trend economic growth. To implement this expenditure control, we have asked Bureaux to achieve savings of 1.8% in operating expenditure for 2003-04, and an additional indicative 1% each year from 2004-05 to 2006-07. We may revise these targets if circumstances so dictate. To achieve these savings and at the same time maintain the quality of our public services, we expect that government bureaux and departments will need to practise "3R plus 1M", that is, Re-prioritising, Re-engineering, Re-organising and using Market forces in the provision of services. Through such measures, Bureau Directors can redeploy resources to contain expenditure and release money to meet additional needs.

11. We are also reforming our financial management system to provide more flexibility and incentives for government bureaux and departments to manage resources in a more effective and efficient manner. For example, under the Operating Expenditure envelopes, Bureau Directors have greater autonomy in re-deploying resources across departmental silos. This should enable the Directors to maximise the use of resources within the envelopes.

12. The third part of our approach to the deficit problem is to raise revenues : Even by implementing the most stringent cost control measures, we will still need to raise additional revenue. The 2002 Budget says that we will introduce a Boundary Facilities Improvement Tax in 2003-04 to help finance the improvement of land crossing facilities. We expect this tax will generate annual revenue of approximately $1 billion. We are also looking at other options to raise revenue.

13. During the past two weeks, the Financial Secretary and myself have been meeting members of the Legislative Council to listen to their views on the coming Budget. Legislators and other members of the public have suggested various revenue-raising measures. We shall study them carefully before coming to a view on them. I would like to emphasise that at this stage, we are collecting views and proposals for the 2003-04 Budget. We have not made any decisions yet.

Closing remarks

14. Hong Kong people are renowned for their resilience in face of challenges. We have come a long way through hardships and turbulences. I am impressed to see members of our community taking a pragmatic view of the situation and preparing to accord priorities to the good of the society and our future generations. This is true Hong Kong spirit ! Through reducing growth of government expenditure and in parallel raising revenue in the coming years, I am confident that we will achieve our targets set for 2006-07 of restoring fiscal balance and reducing public expenditure to 20% of GDP or below.

15. In closing, I would like to leave you with a saying from the American Senator Phil Gramm, who devoted his career to the Clinton government on attaining a balanced budget : "Balancing the budget is like going to heaven. Everyone is interested, but no one wants to do what we have to do to get there." I would add that it is human nature to want more but not to pay more. We meet today at a time of global turbulence : A time when character is tested, perseverance is tried and values reaffirmed. We are confident and determined to solve the deficit problem, and are prepared to make difficult decisions. As the saying goes, no pain no gain. Our decisions may cause pain to some. To attain our targets, the community has to work together and share the pain. We certainly will take into account the situation of the underprivileged but we need support from you. Every one of us has to share the responsibilities.

16. I was told that accountants are the witch-doctors of the modern world and willing to turn their hands to any kind of magic. In this regard, your ideas to revive the economy and confidence and solve the deficit problem are welcomed. Thank you.

End/Saturday, November 16, 2002

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