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LCQ7: Relationship between economic growth and public finance

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Following is a question by the Hon Yeung Sum and a written reply by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, in the Legislative Council today (January 15):

Question:

Regarding the relationship between economic growth and public finance, will the Government inform this Council:

(a) given that the Government forecast in March last year a 1% annual economic growth rate (in terms of real gross domestic product) for 2002, and subsequently revised the rate to 2% at the end of November last year, of the implications of such revision on the following items of public finance:

(i) the revenue on recurrent account for the current financial year;

(ii) the deficit on recurrent account for the current financial year; and

(iii) the 2002-2006 medium range forecast of public revenue and expenditure; and

(b) whether it has assessed the impact on economic growth of a 1% reduction (on a cash basis) in the current budget expenditure; if so, of the results of the assessment?

Reply:

Madam President,

(a) (i) Although in November 2002 we raised our forecast for real GDP growth from 1% to 2% for the calendar year 2002, we at the same time lowered our forecast for the GDP deflator from -1.5% to -2.5%. As a result, our November 2002 forecast for the GDP in 2002 remains at -0.5% in nominal terms, the same as our forecast in March 2002. Therefore, to the extent that our recurrent revenue is affected by GDP growth in nominal terms, our November 2002 forecast has not provided a different basis for assessing our recurrent revenue for 2002-03. The Financial Secretary will present his revised estimate for the recurrent revenue for 2002-03 in his coming Budget.

(ii) Similarly, our November 2002 forecasts for the GDP for the calendar year 2002 on its own have not provided a different basis for assessing our operating balance for 2002-03. The Financial Secretary will present his revised estimate for our operating balance for 2002-03 in his coming Budget.

(iii) We are working on the next annual Medium Range Forecast. The Financial Secretary will present this Forecast in his coming Budget.

(b) With consumers' propensity to save and leakage to imports rendering a diluting or else offsetting effect, an increase in public sector expenditure on a GDP basis on the whole would only render a limited short-term boost to GDP. Our estimate is that for every dollar of increase in public sector expenditure, it would lift GDP by around half of a dollar in the year of incidence. Conversely, for every dollar of decrease in public sector expenditure, it would reduce GDP by around half of a dollar in the year of incidence. Converting the latter result into percentage terms, a 1% decrease in public sector expenditure on a GDP basis would reduce GDP by 0.07 of a percentage point in the year of incidence.

End/Wednesday, January 15, 2003

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