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    Following is the speech (translation) by the Financial Secretary, Mr Henry Tang, in concluding the debate on the Second Reading of the Appropriation Bill 2005 in the Legislative Council today (April 27):

Madam President,

Introduction

    I would like to extend my heartfelt thanks to Honourable Members for the valuable views expressed on the 2005-06 Budget.  The key theme of this year's Budget is the promotion of social stability and economic development, which aims to lay a solid foundation for consolidating our current economic recovery and promoting further growth.  In keeping with this, the Budget has highlighted several practical measures: first, building on our strengths in such fields as financial services, tourism and logistics so as to enhance our overall competitiveness; and second, promoting an equitable and sustainable society, to help strengthen the stability of our community and improve the quality of life.  In line with Article 107 of the Basic Law, I shall continue to keep expenditure within the limits of revenue and strive to achieve a fiscal balance, avoid deficits and keep the budget commensurate with the growth rate of the Gross Domestic Product (GDP).

2. This year's Budget has generated considerable debate in the community.  I am very well aware that our economy is still faced with many challenges, and some people may have yet to enjoy the fruits of economic recovery.  My aim is therefore to promote economic development and so enable more people to share in those benefits.  I will also ensure the proper functioning of the Commission on Poverty so that the vulnerable groups in our society can obtain the assistance they need.

Economic Development

3. Hong Kong's experience demonstrates that "Market Leads, Government Facilitates" is the key to our success.  We should strive to give fuller play to this principle.  With the private sector's shrewd sense of market conditions, the Government's role should be to break down barriers, streamline procedures, and formulate and rationalise related market policies.  In formulating Phases I and II of the Closer Economic Partnership Arrangement (CEPA), for example, the views of the affected sectors were given due weight, and enabled the SAR and Central Governments to discuss and improve upon the respective policies.

4. The Government is not a magician.  It cannot revive the economy simply by waving a magic wand.  It is, however, incumbent on the Government to make forward-looking policy decisions to ensure Hong Kong's economy continues to prosper.  A good example of this is the liberalisation of the telecommunications market some years ago.  This Budget has also proposed some far-reaching initiatives which will be of great benefit to Hong Kong's future economic development and will require the Government to take the lead.  These initiatives include promoting our Renminbi (RMB) business, fostering further development and expansion of CEPA, abolishing estate duty, and appointing an independent committee to review existing competition policy and the Competition Policy Advisory Group's composition, terms of reference and operations.  There are also some initiatives which, albeit smaller in scale and less eye-catching, can provide direct and short-term assistance to small and medium enterprises (SMEs) and their employees.  These include provision of funding to SMEs, allocation of substantial resources to promote tourism and improve building safety, extension of more than 10 000 temporary jobs in the public sector, and review and simplification of the regulatory framework and licensing procedures.

5. If it is to develop, an economy needs to position itself strategically.  Hong Kong is the premier international financial centre for the Mainland, and the direct contribution of the financial services industry to our economy is as high as 13 per cent of GDP.  That is why the development of this particular industry has been given a good deal of attention in this year's Budget.  The regulatory system, infrastructure and professional talent of our financial services sector are up to international standards and well-placed to complement the Mainland's growing demand for financial services.  This explains why the vast majority of Mainland enterprises that have listed outside the Mainland are quoted on our stock exchange.  Of those listed in Hong Kong and other overseas markets, over 70 per cent of the trading is conducted in Hong Kong.

6. To cement Hong Kong's position as the premier international capital formation centre and platform for worldwide investment for the Mainland, as well as Asia's leading wealth management centre, the Government should, on the principle of "Market Leads, Government Facilitates", introduce policy initiatives to facilitate such development.  This will not only provide impetus for the sustained development of Hong Kong, but also contribute to the Mainland's comprehensive efforts to build a society in which everyone can enjoy a reasonable standard of living.

7. To this end, this year's Budget has prescribed measures and directions which are important and development-oriented.  Last September, I suggested that we should develop our RMB business in three strategic directions: first, explore the diversification of the RMB assets and liabilities of Hong Kong banks - and particularly on the liability side, diversification to non-residents and non-individuals of deposits now restricted to resident individuals; second, explore the provision of appropriate RMB banking services for trade and other current account transactions between Hong Kong and the Mainland; and third, explore the feasibility of establishing a RMB debt issuance mechanism in Hong Kong.  The further development of RMB business in Hong Kong, of course, needs to be compatible with the process of financial liberalisation in the Mainland.  Apart from reinforcing our RMB business, another strategic measure proposed is the abolition of estate duty, which I will elaborate upon later.

8. Hong Kong, with its many unique strengths and its special relationship with the Mainland, stands to benefit from the unprecedented opportunities brought by the rapidly-expanding Mainland market.  The implementation of CEPA opens up new horizons for the development of Hong Kong and the Mainland.  The Government will keep up its efforts to further economic cooperation between Hong Kong and the Mainland and give full play to this mutually beneficial partnership.

Revenue

9. It has been no easy task to prepare this year's Budget because we have had to address various demands and expectations which are not easily reconcilable.  The speeches by Members in last week's Budget Debate have reflected such divergence of views.  For example, some Members were of the opinion that the Government should reduce tax while others thought the opposite.  Some suggested an increase in government expenditure whereas others considered that efforts to contain expenditure should continue.

10. On the revenue front, as our economy gradually picks up after several years in the doldrums, some citizens are looking to the Government to grant tax concessions.  This is perfectly understandable.  On the other hand, the majority of our citizens are of the view that the Government should not substantially reduce taxes or increase expenditure because our economy is still recovering and is very sensitive to external uncertainties, and as we are still faced with the problem of deficits.  In order to consolidate our economic recovery, they consider that we should continue to manage our public finances prudently, stringently contain government expenditure, and keep it within the limits of revenues.

11. Suspending the second phase of salaries tax adjustments would cost the Government up to $3.3 billion a year.  I would like to remind Members that the Operating Account is still in the red.  I hope Members and the public will nevertheless understand that the Government is determined to maintain a low and simple tax regime, and that the decision not to propose a reduction in salaries tax this year was made in the light of prevailing circumstances.  Once the economic recovery takes stronger root, I will consider reducing salaries tax to relieve the burden of the public further.

12. The Government's decision to maintain the existing salaries tax rate and abolish estate duty are entirely different in nature.  Reduction of salaries tax is simply a tax concession, and the main consideration for this would be the Government's fiscal position and the financial burden on citizens.  On the other hand, abolition of estate duty is aimed mainly at attracting or retaining capital to promote the development of Hong Kong's financial services industry.  This is expected to bring significant economic benefits to the community.  In other words, abolition of estate duty is not only a general tax concession, but also a long-term strategic investment in the economy of Hong Kong.

13. Comments have been made to the effect that abolition of estate duty is a measure that "robs the poor to help the rich".  I beg to differ because the abolition is not targeted at the rich.  In fact, experience shows that the majority of the dutiable cases involve assets with an estate value, after exemptions, below $20 million.  This suggests that those who will stand to benefit are mostly SMEs and the middle class rather than the rich.  

14. Abolition of estate duty will remove a major obstacle to the further development of our asset management business.  As a result, and together with the economic development in the Mainland and elsewhere in Asia, the total assets in Hong Kong's fund management business may double, to more than $5,000 billion within the next five years.  In addition, expanded asset management business will bring additional job opportunities to Hong Kong and facilitate the development of other related industries, benefiting not only asset owners but also many other citizens.

15. Mr David Eldon, Chairman of the Hongkong and Shanghai Banking Corporation, has also pointed out that to enable Hong Kong "to further develop its capabilities as an asset management centre in Asia, a region where the bulk of the world's savings are now taking place, a much advocated and accepted fact is to eliminate estate taxes, and let the industry flourish."  Mr Charles Lee, Chairman of Hong Kong Exchanges and Clearing Limited, also pointed out that if Hong Kong were to abolish estate duty, more people would very likely choose to retain their capital in Hong Kong and more overseas capital would be attracted to make use of the asset management services here, and that this would be greatly beneficial to the development of Hong Kong's capital markets.  Mrs Kathryn Shih, CEO, UBS Hong Kong and its Asia-Pacific Head of Wealth Management opined that, "the removal of the tax will increase the attractiveness of Hong Kong stocks and properties to global investors, and also promote the use of Hong Kong companies as investment vehicles in the region and Hong Kong bank accounts as repositories for financial assets."

16. The options before us are either to focus our attention on the question of generating short-term tax revenue and on which group of people will benefit more, or to plan strategically to strengthen Hong Kong's position as a financial centre.  To me, the answer is abundantly clear.  In the midst of globalisation, we must forge ahead or we will lag behind.  We should be far-sighted and dare to make early reforms that can build on our strengths.  I therefore hope that Members will put aside any preconceptions and support the abolition of estate duty.

Helping the Poor

17. In this Budget, little mention was made of our initiatives to help the poor.  I want, however, to emphasise that this does not mean we attach no importance to this issue.  As this year's Policy Address had put forth a series of initiatives to alleviate poverty, there was no need to repeat them in the Budget.  Both the Policy Address and the Budget are important government policy documents and they are complementary.

18. This Budget is by no means intended to "rob the poor".  Rather, it has offered them considerable support.  We have already made adequate provision to implement the initiatives to help the poor laid down in this year's Policy Address, such as allocation of additional resources to provide assistance to the younger generation of needy families, and relaxation of the eligibility criteria for the Portable Comprehensive Social Security Assistance Scheme.  I myself am heading up the newly established Commission on Poverty.  As I pointed out just now, there are various economic and job-creating measures in this Budget, which will help provide employment opportunities for the grass roots.

19. Although government revenue will decrease as a result of the proposed tax concessions and the abolition of estate duty in furtherance of the financial services industry's development, the Government has not reduced its expenditure on helping the poor.  In fact, in the 2005-06 Budget, while estimated total operating expenditure is reduced, Social Welfare is one of the few areas with an increased provision for recurrent expenditure, amounting to $34.3 billion, an increase of 2.8 per cent in real terms over that for 2004-05.  Given that there is a significant increase in real terms in expenditure on Social Welfare while most other government expenditure has been contained, how can one turn a blind eye to this and say that the Government is "robbing the poor"?

Eliminating the Fiscal Deficit

20. To solve the structural deficit problem, the Government will first continue to cut down on expenditure.  As operating expenditure has dropped for the first time in 50 years, our efforts have clearly begun to bear fruit, and our financial position is gradually improving.  The latest figures show that, discounting proceeds from bond issuances, the Consolidated Account for 2004-05 recorded a deficit of $4 billion, a decrease of $9.4 billion compared with the revised deficit of $13.4 billion forecast in the Budget.  This is because government spending was $7.5 billion lower than the revised estimates, whereas revenue was $1.9 billion higher than expected.

21. I still recall that the deficits in 2001-02 and 2002-03 were each over $60 billion.  As a result, it was necessary to propose a series of measures in the 2002-03 and 2003-04 Budgets to raise revenue and cut down on expenditure.  The patience and commitment of the community has paid off as the deficit has gradually declined.  Decline, however, does not equal elimination.  We should never forget the painful experience of being beset by serious deficits not so long ago.  We must stay alert to the challenges ahead.  I believe that the community is generally supportive of the Government's determination to continue its efforts to contain expenditure.  With the objective of eliminating the deficit as quickly as possible, we will continue to maintain fiscal discipline and exercise fiscal prudence.

22. As a result of containing our expenditure, the deficit has fallen and the Government has been able to release resources for additional commitments in major policy areas.  For example, the provisions for recurrent expenditure on social welfare, tourism and education have all registered growth in real terms in this year's Budget.  We will continue to uphold the principle of "small government" because, in the long run, this will help relieve people's tax burden and leave wealth with them.  The Government will, however, not reduce expenditure rashly with no regard for the actual needs of citizens.  We will continue to allocate resources where they are required and review government expenditure in response to the needs of the community.

23. Although our financial position has been improving gradually, we are still faced with the problem of a narrow tax base.  At present, about one in three people in employment has to pay tax and most of the revenue from salaries tax comes from the minority of taxpayers.  The problems arising from our narrow tax base are abundantly clear.  The purpose of studying the introduction of a Goods and Services Tax (GST) is to prepare for broadening our tax base so as to secure a steadier source of revenue and reduce our reliance on more volatile sources.  We should take advantage of the economic recovery to consider ways to improve the situation so as to lessen the impact of any economic downturn on public finances in future.

24. The implementation of GST will have far-reaching consequences for our tax regime and the Government's financial health, and I appreciate Members' concern over its introduction.  In view of this, the Government will publish a consultation paper on the subject later this year to seek the public's views.  We will confirm the exact timing of this exercise after consulting the new Chief Executive.

25. It has been suggested that part of the investment income of the Exchange Fund should be transferred to the Government's revenue account to ease our deficit.  In view of the unpredictability of the international monetary environment, we must maintain adequate levels of foreign reserves to ensure the stability of the Hong Kong dollar and preserve both local and overseas confidence in our currency.  Moreover, the investment income of the Exchange Fund is volatile and unpredictable and is therefore not a stable source of income.  For example, the investment income in 2004 was only about half that for 2003.  In view of this, I consider it unnecessary to contemplate making such transfer arrangements at present.

Concluding Remarks

26. Madam President, both in preparing for this year's Budget and following its announcement, I have heard the views of various sectors of the community through different channels, such as public fora, radio programmes, the Budget website and meetings of this Council.  I am most grateful for their active participation.

27. In order to address the needs of different parts of the community, the Budget has to be a holistic document, balancing a series of conflicting demands and interests.  As a result, some of the views expressed by Members have been incorporated into it, while others have not.  I hope, however, that Members will not reject the entire Budget and vote against it simply because they are not satisfied with one particular issue.  Should they do so, it will be a case of "throwing the baby out with the bathwater".

28. Hong Kong's economy experienced a broader-based recovery last year, moving out of the doldrums that had beset us since the Asian financial crisis.  At the same time, our country's economy is doing better and better, while the global political, economic and financial landscapes are undergoing rapid change.  In the face of these opportunities and challenges, I firmly believe that, with the concerted efforts and perseverance of the people of Hong Kong, our economy can break new ground.  I appeal to Members to support this Budget in order to lay a sturdier foundation for Hong Kong's development.

29. Thank you, Madam President.

Ends/Wednesday, April 27, 2005

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