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Following is the speech by the Financial Secretary, Mr Henry Tang, concluding the Debate on the Second Reading of the Appropriation Bill 2004 in the Legislative Council today (April 28):

Madam President,

Introduction

I would like to express my heartfelt thanks to Honourable Members for the many valuable views they have expressed on my Maiden Budget. The themes of this year's Budget are "promoting people-based governance, giving our community a respite, revitalising the economy and improving people's livelihood". On public finances, the expenditure cuts that I have proposed are moderate and are not uniform across all policy bureaux, and the fiscal deficit is being tackled in a pragmatic and measured manner. On the economic front, I put great emphasis on "grasping our opportunities and constantly renewing our strengths" so as to lay a solid foundation for our long-term economic growth by capitalising on the advantages brought by our closer economic ties with the Mainland and reinforcing Hong Kong's unique strengths. I hope that through revitalising the economy, we can promote employment and improve people's livelihood. Various sectors of the community have generally endorsed the broad principles and directions set out in the Budget. I am deeply grateful to them.

The Chief Secretary for Administration and other Principal Officials have already responded to points raised on a number of issues. I will focus on several topics relating to our economy and public finances.

Economic Development

I have stated that the guiding principle for our economic policies should be "Market leads, Government facilitates". Many support this principle but some others criticise it as being too vague and generalised. Some Members have called on the Government to increase its intervention and others have suggested that we should have detailed planning for the future development of our economy. I believe that the Government should adhere to the principle of a free market economy and keep its role to a minimum. Intervention is required only when the market fails. The role of the Government should also be to create the best possible environment for business, to facilitate the market's operation and to promote its development.

As I mentioned in my Budget Speech, the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) is the best embodiment of the "Market leads, Government facilitates" principle. Some Members are concerned that our requests for the signing of CEPA and the introduction of other measures for economic co-operation with the Mainland might give the impression that we are "asking for big gifts" from the Central People's Government (CPG). I must reiterate that CEPA is the first free trade arrangement signed between our motherland and Hong Kong. It is an economically symbiotic arrangement that generates "win-win" opportunities. Opening up of markets is never a "zero-sum game" as trade liberalisation benefits both exporting and importing ends. As Premier Wen Jiabao remarked on his visit to Hong Kong last year, rather than CEPA, the real gift from the CPG to Hong Kong is the CPG's unwavering commitment to implementing "One Country, Two Systems".

Hong Kong has been contributing to the opening-up and economic advancement of our nation and, at the same time, has been able to share the fruits of the Mainland's economic development. This is the advantage on which Hong Kong can capitalise under "One Country, Two Systems". Two days ago, I met Vice President Zeng Qinghong in Shanghai. He again reaffirmed the contributions made by Hong Kong to the economic development of our motherland. He also said that the development of the Mainland and that of Hong Kong were mutually beneficial and would create "win-win" opportunities, and that Hong Kong would continue to play an active role in the future economic development of our nation.

Since CEPA came into operation in January this year, over 770 CEPA certificates of origin have been issued, with the value of products enjoying preferential treatment exceeding $300 million. The Trade and Industry Department (TID) has also approved more than 220 applications for Certificate of Hong Kong Service Suppliers. I will not repeat here the economic benefits Hong Kong reaps under CEPA. Many Members have already stressed in their speeches the importance of making further inroads into the Mainland market under the framework of this Arrangement. The SAR Government fully agrees with these views. We have been trying our utmost to promote the best use of CEPA as an open platform, and to continually expand the liberalisation measures under CEPA. The TID has already received more than 160 applications to extend the range of products that may enjoy zero-tariff treatment, covering over 300 tariff codes. Upon verification, the TID will forward the relevant applications to the Ministry of Commerce and enter into discussion with the Mainland to enable such goods to be imported tariff-free into the Mainland under CEPA with effect from 1 January next year. As for trade in services, the Government will continue to strengthen the liberalisation measures under CEPA through various means. The Government announced early this week the arrangements relating to the opening up to Hong Kong of the qualifying examinations and practices of patent agents in the Mainland. This is the result of the further liberalisation of professional services under CEPA. The Government will actively seek an early start of consultation covering the whole service industry.

"Market leads" does not mean that the Government should be passive and do nothing. As I have pointed out in my Budget Speech, the Government seeks to safeguard and promote Hong Kong's commercial and trade interests. If the need arises, the Government will, on its own initiative, step in and play an active role. An example of this is our success in securing the return of Hong Kong exhibitors to the BASELWORLD, a jewellery and watch fair in Switzerland. In April last year, because of the outbreak of SARS, companies from Hong Kong and some other Asian countries were barred by the relevant authorities from exhibiting at the fair. Following intervention by the SAR Government at the senior level and through the efforts of the Hong Kong Trade Development Council (TDC), an agreement was signed between the TDC and the BASELWORLD organiser in September last year. Under the agreement, Hong Kong exhibitors were allowed to return to the Basel venue and exhibit at a prime location in a new exhibition hall. The agreement also granted them more favourable terms, guaranteeing that they could exhibit at the main BASELWORLD exhibition venue and at steady fees for the next six years. I attended this year's exhibition in Basel two weeks ago in order to show support for our exhibitors. I was very pleased that we had the largest Hong Kong delegation on record, with 333 Hong Kong companies exhibiting at the Hong Kong Pavilion. Many representatives from the industry told me how very satisfied they were with the arrangements. It was indeed a great success for our exhibitors, with a huge number of people visiting the Hong Kong Pavilion and the large number of orders secured.

Some Members have proposed developing the frontier closed area into a new economic zone. The area is strategically located adjacent to Shenzhen. Yet, it is hilly and part of it has ecological and conservation value. These, coupled with the presence of traditional villages and the shortage of infrastructural facilities, have limited the development potential of the area. Within the frontier closed area, the Lok Ma Chau Loop is a location with greater development potential. We and the Shenzhen Government will explore ways to make full use of this site on a reciprocal basis. In studying the future development potential of the area, we will consider the views of various sectors very carefully. With due regard to cost effectiveness and the best interests of all parties concerned, we will develop a proposal that can be of benefit to the economic development of both Hong Kong and the Greater Pearl River Delta, that makes full use of the geographical advantages of the area, and that minimises the impact on the ecological habitat.

As for enhancing the quality of our financial market, we have drawn up a series of improvement measures. These include giving statutory backing to certain fundamental listing requirements, and extending the scope of market misconduct to cover breaches of these requirements for a stronger deterrent effect. We have also proposed to empower the Securities and Futures Commission to impose sanctions on directors and corporate officers directly for breaches of statutory listing requirements. We believe that such measures, which address the root of the existing problems in our financial market, can help enhance its quality and are in line with its development. We will introduce into the Legislative Council a Securities and Futures (Amendment) Bill early next year to implement the above measures.

Many Members and citizens are concerned about the employment situation. This is also a subject of great concern to the Government. Tackling the structural unemployment problem is a major long-term challenge for us as Hong Kong undergoes economic restructuring. Realistically the problem cannot be solved within a short period of time. The Government will nevertheless continue to tackle it in a serious and proactive manner. We will enhance our co-operation with the labour sector and explore ways to ease the problem of skill mismatch. The Secretary for Economic Development and Labour has just spoken on the Government's specific measures to improve the unemployment problem of Hong Kong. In the long run, creation of jobs should be market-led. However, the Government will provide all the necessary support and encourage enterprises to create more employment opportunities by promoting investment and facilitating business.

Target of Eliminating Fiscal Deficit and Expenditure-cutting Measures

According to the latest figures, the provisional fiscal deficit for 2003-04 stands at $40.1 billion, a decrease of $8.9 billion over the revised deficit of $49 billion forecast in the Budget. This is because government expenditure is $5.4 billion lower than departments' revised estimates of expenditure, reflecting that their concerted efforts to reduce expenditure have achieved some results. On the other hand, revenue is $3.5 billion higher than expected. The main items that have generated more revenue include profits tax, salaries tax, stamp duty and land premium.

Though the fiscal deficit for 2003-04 is lower than expected, we must not treat the problem lightly as this deficit is still equivalent to 3.3 per cent of GDP. We have experienced consolidated deficits for four consecutive years and the Operating Account has been running a deficit for six consecutive years. Tackling the fiscal deficit admits of no delay. The difficulty lies in the need, in restoring fiscal balance, to take into account the affordability of the public.

It is indeed not easy to strike a proper balance between reducing the fiscal deficit and safeguarding people's livelihood. I heard many mutually exclusive views in the course of preparing the Budget and during the public discussions that followed. Some criticised us for doing too little to cut public expenditure. Others, however, commented that the expenditure cuts are too drastic and are worried that public services will be affected as a result. Some Members have also requested that the timeline for achieving fiscal balance be deferred by one year. This reflects the fact that various sectors of the community have different expectations.

In order to address such different expectations, I have set in my Budget Speech a specific objective, which is to restore fiscal balance in the Operating and Consolidated Accounts by 2008-09. As far as expenditure is concerned, I have laid down guidelines for the Government's annual operating expenditure, with a view to achieving the target of reducing operating expenditure to $200 billion by 2008-09. Since Budget Day, the majority view of the community has been that this year's Budget is a sound and pragmatic one. It appears that we have generally struck the right balance.

The Government will first put its own house in order by managing its finances prudently in accordance with the principle of "cutting down on expenditure before raising revenue". Departments are making every effort to streamline their structures and re-engineer procedures so as to achieve the objective of doing more with less.

In common with Members of this Council and the general public, the Government is deeply concerned with wasteful use of public money in departments. We attach great importance to the Director of Audit's reports and will certainly follow up their recommendations for improvement in a bid to avoid wasting resources.

Some Members are worried that the reduction of expenditure will affect our education and social welfare services. I must reiterate that the Government will not waver in its commitment to invest in education and provide for the disadvantaged. The recurrent expenditure on education is estimated to be $49.2 billion for this year, which is comparable to last year's original estimates. The education budget accounts for the largest proportion of government expenditure. This clearly demonstrates the importance we attach to education. To tackle the fiscal deficit problem, we need the commitment and support of all sectors of the community. Many people understand that the education sector also needs to make its contribution in this respect and I am very appreciative of this. I must stress that, in taking forward the cost-saving measures, the Secretary for Education and Manpower will weigh the pros and cons, try his best to balance the needs of various parties and ensure the most effective use of resources. We do not want to see the quality of education being compromised as a result of the move to achieve savings.

We are also very concerned about the plight of the poor and the disadvantaged. The Secretary for Health, Welfare and Food has just spoken of the assistance provided by the Government to the vulnerable. Despite the current tight fiscal position, the Government has earmarked an additional $200 million on a one-off basis for promoting the development of a tripartite social partnership comprising the Government, the business community and the welfare sector, and for encouraging corporations to take part in helping the disadvantaged. This shows the importance that the Government attaches to social welfare. I hope that this initiative can motivate various sectors of the community to take up a share of social responsibility and work together to care for the needs of the disadvantaged.

Revenue

Some have felt that the Budget may be too optimistic in its economic forecasts for the next five years and have criticised the Government for being over-reliant on economic recovery to generate additional revenue. Others, however, are of the view that the Budget is overly conservative in its revenue forecasts. Our forecasts of 6 per cent GDP growth in real terms for 2004 and the 3.8 per cent GDP trend growth rate over the medium term are the best assessments and estimates possible and are based on reliable economic data. While welcoming the Budget after it was announced, the International Monetary Fund considers that our medium-term economic forecasts are somewhat conservative. As an open economy, Hong Kong is of course vulnerable to external factors. Each year, I will review Hong Kong's economic development and financial position and put forward necessary operating revenue proposals at the appropriate time.

Last year, this Council passed a number of specific proposals to raise revenue and relieve the pressure on our fiscal deficit. As our economy has just started to recover, I believe that we should give the community a respite so as to create favourable conditions for a sustained economic recovery. Therefore, I have decided to put forth no new proposals for further increases in salaries tax, profits tax or any other taxes. Some have criticised this approach as being too passive and insufficiently proactive. Having taken all factors into account, I consider that this approach is a pragmatic one as it can give the people and the enterprises a respite while laying the foundation for the long-term development and growth of our economy. In fact, the decision has been widely accepted by the public.

A number of Members have proposed that we shelve the second phase of salaries tax adjustments endorsed by this Council last year. Such a suggestion, if implemented, would cost the Government $3.3 billion a year, thus further increasing the Operating Account deficit. As a result, the Government might need to raise other taxes in order to achieve the target of restoring balance in the Operating Account by 2008-09. Given our tight fiscal position and the current persistent deficits, there is really no room for any tax reduction. In fact, outside this Chamber, I have not noticed any loud calls for shelving the second phase of salaries tax adjustments. This clearly shows that the public understand the urgency of cutting the fiscal deficit and are willing to share the responsibility for this.

The Goods and Services Tax (GST) is the subject that has generated the most extensive debate on the Budget. The Government is considering introducing GST not only to broaden the tax base and provide a more stable source of revenue, but also to open up a new revenue stream to finance the existing structural deficit. This proposal is based on the report submitted by the Advisory Committee on New and Broad-based Taxes upon its completion of a comprehensive review of our tax system. A number of opinion surveys on the Budget indicate that at present over 30% of the citizens are in favour of introducing GST, and one even shows that over half of the young people surveyed consider it advisable to introduce such a tax. This reflects that members of the community are considering this subject from a modern viewpoint and in a pragmatic manner.

Drawing on the experience of other places and having regard to our actual circumstances, an internal committee set up by the Government is studying how best to implement a GST in Hong Kong. The Committee will also take fully into account the impact of this tax on low-income families. It will submit a report to me at the end of this year. We will launch a consultation on the tax next year at the earliest. I hope that various sectors of the community will then have an informed and rational debate on this subject and reach a consensus on the way forward.

Another subject that has also attracted public attention is the proposed Personalised Vehicle Registration Marks Scheme. This innovative scheme has been generally well-received by many members of the public. Some quarters of the community are concerned about the possible impact of the scheme on law enforcement, as there will be a greater variety of combinations of vehicle registration marks. But the fact is that similar schemes have been introduced and are functioning smoothly in a number of other places such as the United States, Australia, New Zealand and the United Kingdom. In conceiving this scheme, we have consulted the Police Force and the Transport Department (TD) fully to ensure that its implementation will not jeopardise road safety or increase the burden on the law enforcement agencies. Some people have expressed concern that proceeds from the auctioning of special vehicle registration marks will be reduced upon the introduction of the new scheme, thus indirectly reducing the resources available to social welfare organisations. I would like to point out that combinations of personal vehicle registration marks under the scheme will differ greatly from those under the existing arrangements. The scheme and the existing arrangements would therefore appeal to different vehicle owners and are not a "zero-sum game". At a recent TD auction of special vehicle registration marks, we still saw very intense bidding for special registration marks. The Government will introduce the relevant legislation into this Council as soon as possible with a view to putting this scheme into effect around the end of this year or early next year.

As regards the proposal to issue government bonds, I am glad that it is generally supported by Members and various sectors of the community. We have invited a number of shortlisted banks to submit detailed proposals next month in connection with the proposed issuance of up to $20 billion of government bonds. We also intend to move a motion in mid-May to seek this Council's approval of the concerned resolution to authorise such borrowings under the Loans Ordinance. If the resolution is passed by Members and market conditions are favourable, we aim to launch the offer of these bonds before mid-July. In a related development, the offering of $6 billion worth of securitisation bonds backed by future revenues from government-owned toll tunnels and bridges was launched on 19 April 2004. The subscription and placing arrangements are scheduled for completion in less than two weeks' time with a view to listing the bonds on the Stock Exchange on 10 May 2004.

Apart from providing greater flexibility in the management of our liquidity and funding infrastructure projects, the issuance of government bonds offers investors another option. Institutional investors are no strangers to bonds but the general public do not know much about this investment vehicle. The issuance of government bonds will therefore help enhance the community's understanding of bonds, thereby deepening our bond market. I have mentioned in my Budget Speech that quality bonds are an investment option that can provide a steady and higher return. In saying that, I am comparing bonds with interests on bank deposits. It will be a completely different story if one is speculating in bonds. Members of the public should pay attention to the impact of interest rate changes on bond prices. If interest rates rise, bond prices will fall. After all, risks exist in any form of investment. Investors must assess their position before making any investment decision.

An amendment bill to effect capital restructuring of the Airport Authority was introduced into this Council on 24 March 2004. The first bills committee meeting will be held in early May and we are hopeful that, before the end of the current legislative session, we can obtain the necessary approvals from this Council for the Authority to return $6 billion in equity to the Government.

Concluding Remarks

Madam President, in preparing the Budget, I have consulted the community widely and talked with members of the public on many occasions, hoping to listen to views from as many sectors of the community as possible. I am glad to learn that many Members have given recognition to my work in this respect. Business and community organisations, the public and the media have also expressed their support for the Budget in various fora. This is most encouraging. I have repeatedly emphasised that our discussions and decisions on public policies must be carried out in an open and transparent manner so as to engender a spirit of informed, rational and constructive debate, during which a consensus can be reached. I hope to follow out this spirit and work with all sectors of the community in creating a prosperous, vibrant and caring society.

Ends/Wednesday, April 28, 2004

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