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The main features of the 2003-04 Budget include: --
A. HONG KONG ECONOMY
2002
* GDP grew by 2.3% in real terms in 2002 (as compared with 0.6% in 2001)
* Deflation continued in 2002. GDP deflator and the Composite Consumer Price Index fell by 2.7% and 3% respectively. The nominal rate of economic growth fell by 0.6%
2003-2007
* GDP for 2003 is forecast to grow by 3% in real term and GDP deflator to drop by 2%. Composite CPI is forecast to fall by 1.5%. The nominal rate of economic growth is forecast to be 1% in nominal terms.
* A trend GDP growth of 3% per annum in real terms is forecast for the medium term period 2003 to 2007. The trend rate of change in the GDP deflator is forecast to be 0% per annum and the trend growth rate of nominal GDP is 3%.
B. CAUSES OF PERSISTENT PROBLEM OF HUGE DEFICITS
* Cyclical economic adjustment which is reflected in the consolidation of the property market and the bursting of the bubble economy, resulting in substantial decreases in real estate - related revenues.
* On-going economic restructuring with the shifting outwards of our economic activities, resulting in a profound impact on the public finances under our territorial-based tax system.
* An ageing population leading to an increase in government expenditure on social welfare and health services.
* Evolution of government policies in providing improved services in both quality and quantity over the last decade, resulting in an increase in the share of public expenditure in the economy from 15.6% to 21.5% this year.
C. FINANCIAL POSITION
2002-03 Forecast Fiscal Outturn
* A forecast consolidated deficit of $70 billion, equivalent to 5.5% of GDP. This is $24.8 billion more than the original estimate.
* A forecast operating deficit of $53.0 billion, $3.6 billion more than the original estimate.
* Total government spending of $243.3 billion and revenue of $173.3 billion.
* Forecast fiscal reserves of $303.0 billion at end-March 2003, equivalent to 15 months of Government expenditure.
2003-04 Budget
* A forecast consolidated deficit of $67.9 billion, equivalent to 5.3% of GDP. This is $2.1 billion less than 2002-03.
* A forecast operating deficit of $53.4 billion, $0.4 billion more than 2002-03. Operating expenditure for 2003-04 has included provision of $3.3 billion on the extraordinary expenditure for implementing the second Voluntary Retirement (VR) Scheme.
* Forecast fiscal reserves of $239.1 billion at end-March 2004, equivalent to 11 months of government expenditure.
* Total government spending, including expenditure from the Capital Investment Fund, of $261.4 billion and government revenue of $193.5 billion after the proposed revenue measures and the planned sale or securitisation of assets of $21 billion.
Government expenditure and assumptions
* Total government expenditure will amount to $256.8 billion, 1% more than the original estimate for 2002-03. It is 6.4% more than the revised estimate for 2002-03, or 9% in real terms.
* Included in the expenditure is provision for proposals for setting up a $1 billion fund to award matching grants to universities which succeed in securing private donations for purposes other than the construction of campus buildings, non-recurrent funding of $0.27 billion to ease unemployment, and an additional funding of $0.2 billion over the coming five years for PRD-related promotional activities.
* Expenditure estimates assume a saving of $0.9 billion for the year from a 3% reduction in the salaries of the civil service and the salary-related portion of recurrent subventions on 1 January 2004. The estimates have also incorporated the downward adjustment to the standard payment rates of the Comprehensive Social Security Assistance and Social Security Allowance announced in February 2003.
* Recurrent expenditure on major policy area groups, i.e. education, health social welfare, security and capital expenditure on capital works are summarised at Appendix.
Revenue Raising Measures
* Proposed revenue raising measures will bring $6 billion in additional revenue for 2003-04, $13 billion for 2004-05, and $14 billion for 2005-06 onward -
Salaries Tax
* Revert tax rates and tax, bands to pre-1998-99 level i.e. increase incremental steps for marginal rates from 5% to 6% and the marginal tax rates to 2%, 8%, 14% and 20% reduce the bandwidth from $35,000 to $30,000, lower basic and married person's allowances from $108,000 to $100,000 and further $216,000 to $200,000 respectively.
* Reduce single parent allowance to $100,000.
* Increase standard rate from 15% to 16%.
* Implement the above adjustments in two equal phases in 2003-04 and 2004-05.
* Retain allowances for dependent grandparent, parent, brother or sister, disabled dependent and deduction for self-education expenses and other deduction.
* Increase allowance for 3rd to 9th child from $15,000 to $30,000.
* Remove exemption for holiday warrant and passage.
* It will generate about $6.8 billion additional revenue in a full year ($2.3 billion for 2003-04, $5.8 billion for 2004-05 and $6.8 billion from 2005-06).
Profits tax
* Increase rate for corporations from 16% to 17.5% in 2003-04.
* Increase rate for unincorporated businesses from 15% to 15.5% in 2003-04 and to 16% in 2004-05.
* Increase deemed profits rate for certain payments such as royalties received by non-residents from 10% to 30%.
* It will generate additional revenue of $3.5 billion in a full year ($1.8 billion for 2003-04, and $3.5 billion from 2004-05).
Property Tax
* Increase rate from 15% to 15.5% in 2003-04 and to 16% in 2004-05.
* It will generate additional revenue of $70 million in a full year ($30 million for 2003-04, $60 million for 2004-05 and $70 million from 2005-06).
Motor Vehicle First Registration Tax
* Abolish exemptions for air conditioners, audio equipment, anti-theft devices and distributors' warranties.
* Increase bandwidths and introduce a marginal tax system for private cars.
* Make suitable adjustments to the tax bands and tax rates. The adjustment in tax rates will be progressive.
* It will generate additional revenue of $700 million in a full year from 2003-04.
Air Passenger Departure Tax
* Increase rate from $80 to $120 per departure.
* It will generate additional revenue of $400 million in a full year ($160 million for 2003-04 and $400 million from 2005-06).
Betting Duty
* Increase rate for exotic horse racing bets from 19% to 20%.
* It will generate additional revenue $150 million in a full year ($100 million for 2003-04 and $150 million from 2004-05).
Boundary Facilities Improvement Tax
* We will introduce a bill to the Legislative Council for implementing the new tax in the second quarter of 2003.
* It will generate additional revenue of over $1 billion in a full year ($80 million for 2003-04 and $1 billion from 2004-05).
Duty on Football Betting
* An agreement has been reached with the Hongkong Jockey Club on a duty levy of 50% on gross profits.
* We will introduce a bill to the Legislative Council shortly to implement the duty.
* It will generate an additional annual revenue of $1.5 billion ($1 billion for 2003-04 and $1.5 billion from 2004-05).
Revenue Concessions
The proposed revenue concessions have minimal impact on government revenue -
* Raise ceiling for tax-exempted donations to approved charitable organisations from 10% of assessable income or profits to 25%. The proposal will cost the Government about $100 million in a full year.
* Amend the Inland Revenue Ordinance to exempt offshore funds from profits tax.
* Extend exemption from the fixed stamp duty of $5 to unit trust funds domiciled in Hong Kong.
* Reduce the eligible maturity period of qualified debt instruments from five to three years, and grant a 100% concessions on profits tax for qualified debt instruments with a maturity period of 7 years or more.
* Extend the concessionary duty rate of $1.11 per litre for ultra low sulphur diesel for another year to the end of March 2004. The proposal will cost $1 billion.
Medium-term strategy
* Our medium-term strategy remains to achieve the three fiscal targets for 2006-07 set in last year's budget :
-- attain a balanced Operating Account;
-- restore balance in the Consolidated Account; and
-- reduce public expenditure to 20% of GDP or below.
* We will achieve our targets through a three-pronged approach - boost the economy, cut expenditure and raise revenue.
* To achieve fiscal balance by 2006-07, we
-- estimate that between now and 2006-07 economic growth will bring about $30 billion in additional revenue.
-- aim to reduce operating expenditure from $213.6 billion for 2003-04 to $212.2 billion for 2004-05, $203.4 billion for 2005-06, and $200 billion as targeted for 2006-07. Expenditure for 2003-04 and 2004-05 has included provision for extraordinary expenditure of $8.8 billion for implementing the second VR Scheme.
-- aim to generate an additional $20 billion through raising revenue. Of this $14 billion are proposed in the 2003-04 Budget.
-- plan to sell or raise a total of $112 billion worth of assets between 2003-04 to 2007-08 to make up the shortage of capital revenue.
Controlling Expenditure
* We will control expenditure through 3R1M.
* We will reduce the establishment of the civil service by 10% to about 160,000 posts by 2006-07 by freezing recruitment to the civil service with effect from 1 April this year and the second VR scheme to be launched.
* We have assumed that the salaries of civil service and salary-related portion of subventions will be reduced by two equal instalments to the level in cash terms as at 30 June 1997 to take effect on 1 January 2004 and 1 January 2005. The Government would save about $7 billion in a year upon full implementation.
* We will continue to strive to "do more with less". Director of Administration together with Head of Efficiency Unit will co-ordinate the efforts of departments in using resources more cost-effectively and in avoiding waste.
* We have implemented the arrangement of planning of expenditure in nominal terms, in order to avoid the tendency for the price level of government expenditure to exceed the rise in the general price of the economy. With the implementation of the accountability system, we have provided each policy bureau an expenditure ceiling, i.e. the operating expenditure envelope. Directors of Bureaux now have greater flexibility to deploy resources and may retain for future use part of their savings achieved.
Medium Range Forecast 2003-04 to 2007-08
* After implementation of the expenditure and revenue measures set out in the 2003-04 Budget Speech plus the remaining $6 billion additional revenue to be raised in the next few years, we forecast declining consolidated deficits and operating deficits in the coming years 2003-04 to 2005-06 and a return to fiscal balance from 2006-07.
* Forecast fiscal reserves will fall but remain above nine months' Government expenditure.
* Our forecast fiscal position from 2003-04 to 2007-08 is as follows:
2003-04 2004-05 2005-06 2006-07 2007-08
$ bn $ bn $ bn $ bn $ bn
------- ------- ------- ------- -------
Operating (53.4) (37.4) (13.1) (0.5) 0.3
Surplus
/(Deficit)
Consolidated (67.9) (38.2) (15.8) 8.2 8.4
Surplus
/(Deficit)
As % of GDP 5.3% 2.9% 1.1% 0.6% 0.6%
Public 286.5 289.6 275.9 262.5 266.4
expenditure
As % of GDP 22.3% 21.8% 20.1% 18.4% 18.1%
Year-end 239.1 200.9 185.1 193.3 201.7
fiscal
reserves
As No. Of 11 9 9 10 10
months of government
expenditure
DEVELOPMENT AND PROSPECTS
* We are taking specific measures in five major areas to carry out the CE's plan to revive the economy and improve people's livelihood.
Big Market, Small Government
* We have set a target of reducing the growth of public expenditure from the current 22.3% to 20% of GDP or below by 2006-07 to ensure that the public sector will not be become a burden on the community.
* The Government will continue to support the market in policy making instead of direct participation. The introduction of a new housing policy to clarify the government's role in the property market is one such example.
* We will make the best use of resources through 3R 1M, i.e. reprioritization, reorganisation, reengineering and make full use of the market.
Building Hong Kong into a Regional Metropolis
* We will continue to facilitate the flow of people and goods. Major projects include the construction of the Shenzhen Western Corridor link to Shekou in the second half of 2003 and study on the feasibility of constructing a new vehicular bridge at Lok Ma Chau. We are also discussing with the Mainland the construction of a bridge lining Hong Kong, Macau and the western part of the Pearl River Delta (PRD) as well as a Guangzhou-Shenzhen-Hong Kong express railway.
* We will provide additional funding of $200 million over the coming five years for activities to promote investment into Greater PRD in collaboration with local businessmen.
* We have made progress in discussion with the Central Government on the Hong Kong/mainland Closer Economic Partnership.
Developing Human Resources and Infrastructure
Human resources
* A $1 billion fund will be set up to provide matching grants to universities which succeed in securing private donations.
* We will study the idea of attracting young people from outside Hong Kong to receive education here and how immigration and education policies may support the initiative.
Infrastructure
* To speed up project delivery and create more investment opportunities, we will introduce a list of infrastructure projects for private sector participation on a trial basis. The private sector may submit expressions of interest on 10 or so recreational and cultural facilities projects worth about $2.5 billion. The Government will then consider offering the projects through competitive bidding.
Enhancing Core Industries
Financial Services
* We strive to improve the corporate governance standard of listed companies. FSTB is coordinating efforts to implement the Corporate Governance Action Plan.
* Hong Kong is well positioned to become the bond and fund management centre in the region. HKMA has established advance settlement infrastructure for bond market development and is actively cooperating with central banks in the region to develop an Asian Bond Fund. We will also simplify the procedures for registration and issue of prospectuses for development of bonds and other products.
* In line with international regulatory trend, we are studying arrangements to turn the Office of the Commissioner of Insurance an independent agency.
Logistics
* The first berth of Container Terminal 9 as well as the site selection study for Container Terminal 10 will be completed later this year. We are taking forward the development of a logistics park on North Lantau and the Digital Trade and Transportation Network.
Tourism
* New tourist attractions are coming on stream. We will work together with the business sector to create new lighting effects on both sides of Victoria Harbour and expect to see results by the end of the year.
Producer and Professional Services
* The Government will continue to organize promotional activities in other provinces and cities, including the PRD, to develop business opportunities for the service industries of Hong Kong.
Increasing Employment Opportunities
* Additional non-recurrent fund of $270 million will be provided to expand re-employment training programme for 12 000 middle-aged, provide attachment training for 2000 university graduates, and extend 3600 temporary jobs. Employment assistance projects for CSSA recipients will be launched with $100 million allocation from the Lottery Fund.
BACKGROUND
The FS presented his 2003-04 Budget to the Legislative Council on 5 March 2003. In his Budget Speech, he forecast the fiscal outturn for 2002-03 and the fiscal position for the medium range period 2003-04 to 2007-08. He set out measures to solve the deficit problem. He also set out measures aimed at implementing our plan for economic development and improving people's livelihood.
2. We registered fiscal deficits in four out of the past five years (i.e. 1998-99, 2000-01, 2001-02 and 2002-03) and operating deficits in the past five years. According to the Medium Range Forecast in the 2003-04 Budget Speech we will continue to see fiscal deficits in the coming few years before returning to fiscal balance by 2006-07. The situation is the same for the operating deficits.
3. A return to fiscal balance at both the Consolidated Account and Operating Account levels by 2006-07 is after the following expenditure cut and revenue raising measures :
- reduce operating expenditure in the next few years to $200 billion by 2006-07.
- raise recurrent revenue by $20 billion over the period 2003-04 to 2006-07. Of this, $14 billion are proposed in the 2003-04 Budget.
- sell or securitise a total of $112 billion worth of assets in the next five years to make up the shortage of capital revenue.
4. In addition, we estimate that between now and 2006-07 economic growth will bring about $30 billion in additional revenue.
Appendix
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Recurrent Spending on Major Policy Area Groups and
Capital Expenditure in 2003-04
(1) Recurrent Expenditure
Recurrent government expenditure in 2003-04 will grow by $2.1 billion to $207.0 billion, or 1.0% over the original estimate for 2002-03.
Education:
* Recurrent spending on education amount to $49.3 billion, a decrease of 0.1% over the original estimate for 2002-03.
* Some of the key improvements are:
-- Additional resources to support curriculum reform, including addition of about 250 primary school teachers to serve as curriculum leaders for five years;
-- Handing over 977,000 applications for assistance under various student financial assistance schemes;
-- Opening about 40 more primary schools on whole-day basis;
-- Additional 12 schools joining the Direct Subsidy Scheme;
-- An additional 6,900 subsidised secondary 4 and 5 places.
Health:
* Recurrent spending on health amounts to $31.9 billion, a decrease of 1.7% over the original estimate for 2002-03. Some of the improvements are:
-- Increase in the intake of mental patients into an intensive rehabilitation and treatment programme;
-- Increase in the number of elderly suicide prevention teams to provide early assessment and treatment of elderly with depression and suicidal risk;
-- Setting up outreaching teams to promote psychosocial health among secondary school students;
-- Implementing a parenting programme.
Social Welfare:
* Recurrent spending on social welfare amounts to $32.8 billion, an increase of 2.0% over the original estimate for 2002-03.
* Some of these additional services include:
-- 60 additional foster care places for children;
-- An additional 2101 subsidised residential places, 120 day care centre places and expanding the enhanced home and community care services for elders;
-- An additional 250 residential places, 100 day places, 80 early education and training centre places, 80 special child care centre places and 300 supported employment places for the disabled;
-- 17 additional integrated children and youth services centres for young people;
-- 11 additional school social workers for new secondary schools and implementing the Understanding the Adolescent Project in all secondary schools.
Security:
* Recurrent spending on security amounts to $25.0 billion, an increase of 0.8% over the original estimate for 2002-03. Some of the improvements are:
-- 60 additional police officers for expansion of operational capability in Lok Ma Chau Border Crossing Point and strengthening operational front-line capability in new infrastructures;
-- 80 additional fire fighting and ambulance officers for strengthening the provision of emergency ambulance service and manning new fire stations and ambulance depots;
-- 199 additional staff in Immigration Department for implementing the replacement exercise for the issue of the smart identity card;
-- 32 additional staff in Immigration Department for implementing Phase II of the updated Information Systems Strategy;
-- 26 additional immigration officers for the remaining works of the expansion of kiosks and other facilities at Lok Ma Chau Border Crossing Point;
-- 20 additional staff in Immigration Department for the on-going support of the new Registration of Persons System;
-- 2 additional immigration officers for the continued implementation of Phase I of the updated Information Systems Strategy;
-- 23 additional staff in Customs and Excise Department for manning customs facilities at the Container Terminal No. 9.
(2) Capital Expenditure
Total government capital expenditure for 2003-04 will amount to $49.8 billion, a decrease of $0.9 billion or 1.8%, over the original estimate for 2002-03. Spending under the Capital Works Reserve Fund alone next year will reach $36.2 billion.
Expenditure on capital works (excluding land acquisition) is estimated to be $31.0 billion, an increase of 8.7% over the original estimate for 2002-03. From 2003-04 to 2007-08, expenditure on capital works projects will be on average about $29 billion per annum. Some new major public works projects to start in 2003-04 are:
* South East Kowloon development related works
* Central Government Complex, Legislative Council Complex, exhibition gallery and civic place at Tamar, Central
* Construction of additional primary, secondary and special schools
* Construction of cross-boundary facilities at Shenzhen Western Corridor and Huanggang
* Redevelopment of Caritas Medical Centre, phase 2
End/Wednesday, March 5, 2003
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