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Following is the speech (Translation) by the Financial Secretary, Mr Antony Leung, concluding the debate on the Second Reading of the Appropriation Bill 2003 at the Legislative Council today (April 9):

Madam President,

Introduction

Since I delivered the Budget on March 5, there has been a spate of significant events. While the war in Iraq was factored into the Budget, we could not anticipate the outbreak of atypical pneumonia.

2. Hong Kong is now mobilising manpower and resources to contain the spread of this disease as quickly as possible, to restore public confidence in Hong Kong and that of the international community. The disease has dealt a serious blow to the community at large, and in particular to sectors such as tourism and others dependent on domestic consumption, including retail, catering and entertainment. It is difficult, at this stage, to predict with any accuracy the impact that atypical pneumonia will have on our economy. But, one thing is certain : this year, Hong Kong will not be able to attain its earlier forecast of 3% GDP growth. We will announce the updated economic forecasts as soon as they are available.

3. The Government understands that the general public and businesses are facing added hardships. On April 7, I met with Members of this Council representing various political parties and listened to their views. We will consider Members' suggestions seriously. Preparations are also underway for the day when the disease has been brought under control so we can launch a series of measures to revitalise our economy.

Removing the Obstacle to Economic Recovery

4. Apart from tackling the immediate problem, to ensure long-term, steady and healthy economic development we also need to eliminate the fiscal deficit in the medium term. Our consolidated deficit for 2002-03 represented 5.5% of GDP. Excluding investment income from the fiscal reserves, the operating deficit for the year was 5.3%. By any standards, the deficit has reached a dangerous level. As I pointed out in the Budget, if the fiscal deficit problem is not solved, this might lead to an outflow of capital, push up interest rates and even trigger a financial crisis. This is not overstating the case. In October last year, the one-year forward HK/US dollars telegraphic transfer rate rose from 50 to 370 pips. The sharp rise reflected market worries about the worsening SAR fiscal deficit problem, and these worries increased the risks of the Hong Kong Dollar being dumped and the linked exchange rate coming under attack. Interest rate rises will increase the cost of loans, business operating costs, as well as the public's burden, and affect economic growth.

5. Some Members of this Council have asked whether it is practical to set 2006-07 as the target date for a solution to the deficit problem. Elimination of the fiscal deficit is the Government's medium-term task over a five-year period. In my maiden Budget Speech last year, I set three targets for our public finances, namely, to restore balance in both the Operating Account and the Consolidated Account, and to reduce public expenditure to 20% of GDP or below by 2006-07. Over the past year, the Government has started to eliminate the deficit by implementing phased expenditure-cutting plans. We are not aiming to solve the deficit problem in one go. Instead, we need to set medium-term targets and introduce practical measures to tackle this increasingly serious problem.

6. I fully understand that revenue-raising and expenditure-cutting measures are bound to impact on the community, on business and on staff in the public sector. To permit the deficit to persist, however, will certainly harm the development of Hong Kong. At the end of the day, we believe it is a responsible and pragmatic approach to draw up specific proposals to achieve fiscal balance over the medium term, with phased implementation of major proposals minimising their impact on the public and the economy. I believe that the Budget proposals have struck the right balance, and the market is generally in support of the Government's medium-term measures for deficit elimination. The Government will follow the principle of prudent management of public finances and the broad direction towards elimination of the fiscal deficit, and will keep this under review in light of prevailing developments and their impact on the community.

7. Since the atypical pneumonia problem will impede economic growth, and consequently reduce government revenue, we will keep a close watch on the situation and assess its impact.

Cutting Public Expenditure

8. Some Members have criticised the Government for doing too little to cut public expenditure since estimated operating expenditure for 2003-04 is $213.6 billion, which seems to be an increase over the 2002-03 figure. Some have accused the Government of juggling the figures by setting the targeted cut in operating expenditure to $200 billion from the original forecast of $220 billion in 2006-07, rather than taking the estimate for 2002-03 as the basis. In contrast to the pace of revenue-raising, they claim the speed of expenditure cuts is too slow.

9. Regarding the first point, the increase in operating expenditure for 2003-04 is due to the provision of $3.3 billion to launch the second phase of the Voluntary Retirement Scheme and $1.5 billion to implement measures to boost the economy and to increase employment opportunities. Excluding these items, operating expenditure of $208.7 billion for 2003-04 is lower than the original estimate for 2002-03.

10. Regarding the second point, there is no denying that, in comparison to cost-saving measures initiated in the private sector, those of the Government take a longer time to implement and show results. This is because reductions in Government manpower and resources invariably affect services delivered to the community, and the Government must therefore conduct consultations and assessments on how to avoid or minimise any adverse impact. For instance, to optimise the use of resources, the Immigration Department proposed a reorganisation of its regional offices, including closure of certain less cost-effective marriage registries and births and deaths registries. This required the Government to amend the relevant subsidiary legislation and to consult those in the community affected by the closures to work out suitable arrangements so that the remaining offices could meet public demand for the services concerned. After months of preparation, the Immigration Department will now close 11 regional offices in phases between May and September this year. The savings are estimated to be $39 million per annum.

11. In addition, some of the works projects that have already started, or are scheduled to begin, will give rise to additional operating expenditure upon completion. For example, the Road T7 project in Ma On Shan, when completed in 2004-05, will incur additional annual operating expenditure of $30 million, including maintenance and lighting. If we did not decide to cut expenditure further this year, the Government's operating expenditure would certainly reach $220 billion by 2006-07. But we have already decided to intensify the pace of expenditure cuts and reduce the Government's operating expenditure to $200 billion by 2006-07. The $20 billion represents an actual saving and is not fiddling with figures. Furthermore, since certain items of government expenditure, including civil service pensions and expenditure on social security, will continue to increase in the coming years, departments will need to realise expenditure cuts in excess of 9% to bring about an overall saving of this level in 2006-07. Because the economic and social situation can suddenly change, we will monitor developments closely and be flexible with government expenditure, as necessary, to ensure that our society operates effectively.

12. Salaries are the largest items of public expenditure. The Government and civil service unions have reached an agreement that civil service pay should be restored to its levels as at 30 June 1997. The Government has also set a target to reduce civil service establishment by 10% by 2006-07. We will work hard to achieve this target. We are also introducing public sector reforms and implementing the 3R1M principle, i.e. to reprioritise the provision of services, reorganise the structure of government departments, reengineer procedures and make full use of the market, so as to optimise the use of precious social resources and to reduce waste. The Chief Secretary for Administration has this afternoon given an account of the progress of work and planning in this area.

13. Starting from this year, in a bid to enhance management of and accountability for public resources, and to give the public a better understanding of the Government's financial position, the Government will prepare an additional set of government accounts on an accrual basis. In November this year we will publish the first set of accrual-based Consolidated Accounts, together with departmental service cost statements. These statements will show the full costs of departments and bureaux in the provision of services, including costs of services provided by other departments. Such statements could provide useful indicators of service costs and help improve the use of resources.

Raising Revenue

14. Besides cutting public sector expenditure and making better use of resources, the Government needs to generate more revenue to address the structural problem in our public finances.

15. Some members consider it unfair for the Government to target its revenue-raising measures at the middle class. I must stress that every effort has been made in the Budget to strike the right balance, and the measures proposed are not targeting any particular sector of society.

16. As pointed out in my Budget Speech, services provided by the Government have increased substantially over the past decade. Essential community services such as education and medical services are mainly subsidised by public expenditure. For instance:

* Nine years of free education are provided by the Government;

* 86% of senior secondary education is subsidised by the Government;

* Free maternal and child health care services are provided by the Government;

* The proportion of subsidies provided by the Government for various kinds of public medical services ranges from 82% to 97%;

* The Government provides 680 000 low-cost public housing units for 30% of households in Hong Kong; and

* Expenditure on social welfare has increased from $7.3 billion in 1992-93 to $32.6 billion in 2002-03, representing an annual average growth of 16% over the past decade. In 2002-03, expenditure on social welfare accounted for 11.9% of total public expenditure.

17. Meanwhile, our tax base has narrowed further as a result of the relief measures taken by the Government in accordance with its counter-cyclical fiscal policies over the past few years. In the assessment year of 2002-03, among the 3 million or so working population, only 1.2 million people are subject to salaries tax. And among these taxpayers, only 13 000 are subject to the standard rate. Some 8% of taxpayers bear about 60% of our salaries tax burden. Tax increase proposals are always unpopular. However, we need revenue to meet expenditure incurred for the provision of public services to meet the community's wishes.

18. In proposing revenue measures in the Budget, I have considered their affordability for the community and the business sector, and I have tried to lessen the impact of these measures with a two-pronged approach. First, the effective tax rates after adjustment remain low. For salaries tax of different income groups the lowest rate for taxpayers is 1.2%, rising gradually to a maximum of 16%. The average effective tax rate for over 800 000 taxpayers with annual incomes between $100,000 and $300,000 is a mere 2.3%, and the amount of tax payable per month is only $350. As for profits tax, the 17.5% tax rate after adjustment is still lower than those in neighbouring areas, thus maintaining Hong Kong's advantage as a low and simple tax jurisdiction. This proposal is generally acceptable to businesses. We would like to thank the business sector for its support. Second, most of the increases that affect people's livelihood will be implemented in phases. These include the adjustments of the marginal tax rates, tax bands and standard tax rates of salaries tax, and the increase in property tax.

19. Some Members have pointed out that after the Budget proposals have been fully implemented, the Government will obtain $6.8 billion from the adjustment of salaries tax, almost double the revenue arising from the increase in profits tax. They feel that it is unfair for individual taxpayers to shoulder a greater part of the responsibility for raising revenue. I think that making comparisons in this manner is not appropriate. In fact, the Government's direct tax revenue from profits tax has all along been far greater than that from salaries tax. Moreover, it is proposed that salaries tax revert only to its level prior to the 1998-99 concessions, whereas the increase in profits tax is far greater than the adjustment made in that year. From this perspective, businesses will bear a greater share of responsibility for raising revenue.

20. As proposed in the Budget, apart from the additional revenue of $14 billion, another $6 billion will need to be raised over the next few years. Many Members and citizens have thus expressed concern over the likelihood of further tax increases in the coming years. To address their worries, I would like to point out that since the adjustment of fees and charges has not yet been reflected in the Government revenue estimates in the Budget, the revenue generated by any such adjustments will contribute to the remaining $6 billion and thus help relieve the pressure for further taxation. But this does not mean that the Government will adjust all fees and charges. We are well aware of the present economic situation. In considering adjustments to fees and charges that affect people's livelihood, we will be careful to take account of their impact on the public and the economy.

21. In the face of our structural revenue problem, some Members have called on the Government to consider broadening the tax base by introducing a Goods and Services Tax. I agree with this proposal. I have stated clearly in the Budget that the Government sees the need to introduce such a tax in the long term, but it is inappropriate to do so in the near future given our present economic situation. We will study the technical details to prepare for its future implementation.

22. The majority of commentators are in favour of the Government selling or securitising its assets to increase capital revenue. Nevertheless, some Members believe that in the present economic climate, market response might not be favourable and it will be difficult for the Government to meet its revenue-raising target. When and how to sell these assets will depend on the market situation. For

now, we remain confident that the target of raising $21 billion in 2003-04 can be achieved.

Revitalising the Economy

23. There have been comments that the Budget has not dealt adequately with the need to revitalise our economy. I disagree. In January, the Chief Executive devoted a large portion of his Policy Address to the theme of "Capitalising on our advantages, revitalising our economy". Directors of Bureaux followed up with a series of briefings on the details of specific areas of work under their portfolios. It is on the basis of the Policy Address that one quarter of the Budget covers the key measures proposed, such as promoting the principle of "big market, small government", developing human resources and infrastructure, building Hong Kong into a regional metropolis, enhancing core industries, and increasing employment opportunities. The Budget also earmarks a provision of $1.5 billion for the development of specific projects.

24. The proposals in the Budget for revitalising our economy aim at consolidating and building on our existing strengths, which are in line with the Government's role in economic development. The economic role of the Government is always to provide a favourable environment, i.e. the so-called software and hardware, for economic activities to develop and compete on an open, level playing field. The Government also endeavours, by working at the government-to-government level, to break down barriers that stifle economic activities. Apart from the provision of infrastructure such as transportation and information networks, the maintenance of a stable currency system and the prudent management of public finances by the Government are also important infrastructural supports for commercial activities.

25. Therefore, the Budget has put forward proposals on how to further enhance the framework for, and competitiveness of, our core industries, namely, financial services, logistics, tourism, and producer and professional services. The Government's job is not to lead the market, but instead to enable its development. Enterprises should continue to provide the impetus that shapes the market. In fact, we have not slackened in our efforts to sharpen the edge of Hong Kong in a variety of policy areas.

26. To cope with the increased flows of people and goods, the Government is undertaking a number of projects to upgrade our infrastructure. We attach great importance to its development. The Budget has earmarked an annual provision of about $29 billion for infrastructure works over the next five years.

27. We strongly believe that the measures to revitalise our economy as set out in the Budget accord with the favourable positioning of Hong Kong as well as the opportunities that are emerging for us. They are down-to-earth and practicable. However, since Hong Kong is now beset by atypical pneumonia, we need extraordinary initiatives to reinvigorate our economy. As I have mentioned at the outset, preparations are now underway.

Concerted Efforts to Tide over our Difficulties

28. Madam President, Hong Kong is facing unprecedented challenges, and now is the time for our society to bring into full play its characteristics of mutual assistance and demonstrate solidarity and affection. In the battle against atypical pneumonia, our health care staff have spared no effort to save lives with their professionalism and dedication to duty. They deserve our greatest respect and thanks. Other frontline supporting staff have also discharged their duties to keep our society operating effectively. Despite changes in daily life, members of the public still demonstrate their noble qualities by showing understanding, care and tolerance for each other. If the Government and the citizens are of one mind, it is certain that Hong Kong can soon win this battle against the disease, revive the economy and tide over our difficulties.

29. Restoring the health of our public finances is also an essential element of maintaining stable development. Hence, I appeal to Members to support the Appropriation Bill 2003.

End/Wednesday, April 9, 2003

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