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The Financial Secretary, Mr Antony Leung, has in his 2003-04 Budget released today (March 5) unveiled a series of expenditure-cutting and revenue-raising measures to restore fiscal balance by 2006-07 and boost economic activity in Hong Kong.
Delivering his second Budget, Mr Leung said he had a clear task to properly manage the Government's revenue and expenditure, as well as propose measures to develop the economy and improve people's livelihood.
"Economic growth is the key to solving the problem of fiscal deficit. Failure to find a decisive solution will in turn stifle economic development," he said.
"We believe that the package of measures announced this afternoon will enable us to restore balance in our public finances over the medium term, thereby eliminating a factor that may lead to a financial crisis. Investors' confidence in Hong Kong will also be enhanced.
"In view of the current economic environment in Hong Kong, we also need to avoid aggravating the problem of deflation and dampening consumer sentiment. In order to strike a balance, I will adopt clear targets, a practical pace and a step-by-step approach to implementation in proposing revenue-raising and expenditure-cutting measures."
The proposals would reduce operating expenditure to $200 billion by 2006-07, a cut of $20 billion from that originally forecast last year, as well as raise an extra $20 billion revenue by 2006-07. The revenue-raising measures announced today would raise $14 billion. The balance of $6 billion would be raised by measures to be proposed as appropriate over the next three years.
Cost-cutting measures include:
* A 10% reduction in civil service establishment; freeze in recruitment of civil servants; and implementation of the second round of the Voluntary Retirement Scheme;
* A civil service pay cut, to be carried out in two phases, which on full implementation will save $7 billion a year in civil service expenses and subsidies to subvented organisations;
* A reduction of social security payments to save $1.71 billion a year, with those savings being used to offset an expected increase in social security payments in the next few years.
The Government estimates that the operating expenditure will decrease from $213.6 billion in 2003-04, to $212.2 billion in 2004-05, $203.4 billion for 2005-06, and $200 billion as targeted for 2006-07.
The Government's total recurrent expenditure for 2003-04 will be $207 billion, an increase of 1% over the original estimate of $204.9 billion for 2002-03, with 23.8% for Education, 15.8% for Social Welfare, 15.4% for Health, 15.1% for Support, and 12.1% for Security.
"In preparing the future allocation of expenditure, consideration will be given to the community's priorities," Mr Leung said.
With GDP growing by 2.3% in real terms in 2002, Hong Kong's economy is on an upward trend. Deflation persisted with the GDP deflator dropping by 2.7%. Fiscal deficit is estimated to reach a record of $70 billion by 31 March 2003, some 5.5% of GDP.
To carry out the plan revealed by the Chief Executive in his Policy Address in January, Mr Leung announced a package of specific measures to develop Hong Kong's economy and improve people's livelihood.
The measures will uphold the principle of 'big market, small government' in the HKSARG's philosophy of governance; build Hong Kong into a regional metropolis; develop human resources and infrastructure; enhance the core industries of financial services, logistics, tourism, producer and professional services; and increase employment opportunities.
Under the package of measures, the Government would draw up a list of infrastructure projects worth $2.5 billion for private sector participation on a trial basis. The Government would also set up a $1 billion fund to award matching grants to universities that secure private donations for purposes other than the construction of campus buildings.
An extra $200 million over the next five years have been earmarked to promote the investment advantages of the Greater Pearl River Delta and attract more foreign investment to Hong Kong.
An additional non-recurrent fund of $270 million will also be provided to expand re-employment training programmes for 12,000 middle-aged persons, provide attachment training for 2,000 university graduates, and extend 3,600 temporary jobs.
Mr Leung announced a package of measures that would raise revenue by $14 billion.
The proposals include reverting the marginal tax rates and bands as well as basic and married person's allowances to their pre 1998-99 concession levels, and increase the standard rate (up 1% to 16% by two phases in two years) under salaries tax; increase corporate profits tax (up 1.5% to 17.5%), property tax (up 1% to 16% to be implemented in two phases in two years), duty on exotic horse racing bets(up 1% to 20%), air passenger departure tax (up $40 to $120), and adjustments to the first registration tax with greater impact on expensive private cars.
Additional revenue will also come from a proposed boundary facilities improvement tax, duty on football betting and the sale or securitisation of $112 billion worth of Government assets over the next five years. The moratorium on government fees and charges would be lifted after the end of March.
To promote the further development of education and financial services, Mr Leung proposed a number of tax concessions. They include enhancing existing tax concessions for charitable donations and income from qualified debt instruments, as well as profits tax exemptions for offshore funds, and waiver for fixed stamp duty for Hong Kong-domiciled unit trusts. In support of the recently-announced population policy, an increase in the tax allowance for the third to ninth child in a family has also been announced.
The duty concession for ultra low sulphur diesel will also be extended for another year until the end of March 2004 at a cost of $1 billion.
"We are fully aware that salaries tax increases will have a direct impact on the public, but my proposals should have limited impact on lower to middle income taxpayers," Mr Leung said.
"Hong Kong has a simple profits tax system with consistently low tax rates and many concessions. The proposed rates are still lower than those in neighbouring economies, and the 18.5% rate we had in the 1980s. Our competitive edge will not be affected by the revision in profits tax rates.
"I believe that the proposed measures strike a fair and reasonable balance that is consistent with the overall interest of the community."
Mr Leung said the Government considered it necessary in the long term to introduce a Goods and Services Tax to secure a stable source of revenue. However, in view of the present economic situation, such a tax would not be introduced for the time being.
The full implementation of the fiscal and cost-cutting measures, coupled with the predicted growth of the economy at a trend nominal rate of 3% per annum in real terms, will see the Government achieving its three fiscal targets of restoring balance in the Operating and Consolidated Accounts and reducing public expenditure to 20% of GDP or below by 2006-07.
The Government forecasts an operating deficit of $53.4 billion for 2003-04. The operating deficits will gradually decline, falling to $0.5 billion in 2006-07.
The Government also estimates that a consolidated deficit of $67.9 billion will occur in 2003-04. The consolidated deficit will decrease over the next two years and will register a surplus of $8.1 billion in 2006-07.
Public expenditure will be 18.4% of GDP by 2006-07.
"As a member of the community, I am well aware of the impact of the revenue-raising and expenditure-cutting measures. However, as Financial Secretary, I know very well that a persistent fiscal deficit will undermine our financial stability. The proposals I put forward today may have short-term impact, but will prevent larger, long-term problems.
"Hong Kong people have conquered one mountain after another and this time is no exception. Our nation is destined to become a world economic power. Hong Kong is its most cosmopolitan city and a world city for the region. We can see clearly what is in store for us. Through perseverance, we will have a bright future."
End/Wednesday, March 5, 2003
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