********************************************
Commitment
Future Challenges
50. Although our economic performance at the moment is encouraging, many challenges lie ahead. While formulating our economic development and fiscal policies, we should be alert to all such challenges and address them with the best interests of our community at heart. This is the Government's commitment to the people of Hong Kong. In the near future, we face the potential risks of an avian influenza epidemic and volatility in the global financial markets. For the longer term, we have to deal with the following:
* to meet the challenges of a knowledge-based economy, the quality of our human resources needs to be constantly upgraded, and at a quicker pace. This improvement in quality should include education, training and the fostering of cultural awareness, which will require huge resources;
* the restructuring of the economy and mismatch of labour will continue to bring employment pressures to bear on low-skilled workers and widen the income gap;
* the ageing population will give rise to a series of problems, including greater demand for elderly care services. As the ratio of working to total population will gradually decrease, we need to be prepared and continually upgrade our productivity and competitiveness; and
* environmental problems will affect public health and the quality of life and impede the sustained development of Hong Kong as a cosmopolitan city.
These are only a few examples of the challenges that will put government finances under pressure.
51. On the macroeconomic front, I am concerned as to how much further the unemployment rate can drop from its present level of 5.2 per cent and whether the ageing population will push up Hong Kong's natural unemployment rate. Our economic recovery has led to higher prices and a rebound in property rentals. The CCPI rose by 1.1 per cent last year. Inflation has once again emerged as an issue to watch.
52. All these challenges will impact on our public finances. Over the past few years, we have implemented vigorous measures to contain expenditure. There is consequently limited scope for further cuts. Many of our revenue items are heavily dependent on the performance of our economy. In times of economic downturn, the risk of budget deficits will re-emerge. The Government's tax base is also too narrow: for example, only one third of the working population pays salaries tax. We also have to accept that land premiums and investment income, as volatile as they may be, are very important to our finances.
53. The more advanced and affluent a society becomes, the higher are the public's expectations of its government. We will inevitably need to increase government expenditure substantially, if we are to meet all of our community's demands. We will need revenues to finance such expenditure, although maintaining a low-tax regime is the wish of the majority. I am also of the firm belief that leaving wealth with the people is a key driving force for economic development. The biggest challenge in managing public finances is to keep taxes low while at the same time satisfying the needs of the community.
54. My fiscal targets are to keep our accounts in balance and the share of public expenditure in GDP at 20 per cent or below over the next few years. For 2006-07, public expenditure is forecast at around 18 per cent of GDP, lower than most other developed economies. Hong Kong is an externally-oriented economy and thus highly susceptible to outside shocks. As our economy is also subject to cyclical fluctuations, there is all the more reason for us to provide against a rainy day when the economy is strong, or else we will have too little room to introduce relief measures for our community during a downturn. We need to maintain the share of public expenditure in GDP at a low level in order to secure the health of our public finances.
55. We would naturally have preferred to provide more welfare to our citizens. We would have liked to develop more parks, piazzas, open space and cultural and heritage sites. But where is the money for all these going to come from? In line with our belief in small government and given our limited resources, we must manage our finances prudently. On the welfare front, we provide the community with a basic safety net and aim to build a just and caring society. However, we cannot compare ourselves with welfare states as our community does not accept their high tax regimes. Maintaining the share of public expenditure in GDP at 20 per cent or below, I believe, strikes a proper balance between keeping taxation low and enhancing government services. Following the principle of "Big Market, Small Government" helps to maintain our low-tax regime and requires us to spend within our means. This is the approach that best serves the long-term interests of Hong Kong.
56. We shall continue to maintain a strict fiscal discipline and ensure the effective use of resources. The Government will keep expenditure within the limits of revenues, strive to achieve a fiscal balance, avoid deficits, and keep the budget commensurate with the growth rate of GDP.
Estimates of Expenditure
57. The Government has given firm undertakings to the community to improve people's livelihood by investing in education, helping disadvantaged groups, safeguarding public health, protecting people's lives and property, and investing in infrastructure. We estimate that total government expenditure for 2006-07 will be $245.6 billion. Expenditure on Education, Social Welfare, Health and Security will account for over 60 per cent of this. In view of our improved fiscal position, I have maintained each Bureau's operating expenditure allocation generally no lower than for last year.
58. There is a widespread view in our community that education is an investment. I share this view. We will spend $56.5 billion on Education in 2006-07. For every university graduate who has passed through our education system, the Government's total investment exceeds $1 million. We are injecting a further $1.1 billion in total into the Language Fund this year and in the coming year, with a view to raising students' linguistic proficiency. Expenditure on Social Welfare will amount to $36.2 billion, of which $24.5 billion will be spent under the CSSA and Social Security Allowance Schemes. We will exempt non-government welfare organisations from the additional expenditure-reduction measures that we originally planned to help restore fiscal balance. Health expenditure will exceed $32 billion. We will convert the Hospital Authority's one-off grant of $650 million last year to recurrent funding from now on; we will also provide additional recurrent funds rising by some $300 million per annum over the next three years so as to strengthen the Authority's financial position and allow it to cope better with service requirements.
59. We attach great importance to the prevention and control of infectious diseases. We have invested large amounts in, inter alia, enhancing the training of healthcare workers and stepping up the provision of infectious disease isolation facilities. We have in place the Preparedness Plan for Influenza Pandemic which has been developed in accordance with World Health Organisation guidelines. In order to protect public health and in view of the recent threats of avian influenza, we have tightened surveillance and have enacted legislation banning backyard poultry keeping. We will continue our efforts to prevent the outbreak of avian influenza and have begun stockpiling antivirals. In the case of outbreaks, all necessary resources will be made available.
60. Over the next five years, the Government will earmark $29 billion a year on average for infrastructure projects. We estimate that about 14 000 new construction jobs will be created in the coming year. We will speed up delivery of the outstanding projects of the former Municipal Councils and other minor works projects. We will, as soon as possible, commence the major projects under planning, such as the North Lantau Highway Connection to the Hong Kong-Zhuhai-Macao Bridge and the Central Government Complex and LegCo Building at Tamar. These will create more construction employment opportunities and ensure that public works expenditure remains stable over the next few years. Meanwhile, the community is engaged in discussing the plans for other large-scale projects, including Kai Tak Development and the Central-Wan Chai Bypass.
61. Madam President, increasing investment in infrastructure will not only promote economic development and bring more job opportunities, but also make our living environment more pleasant and enhance our competitiveness. We have a number of large infrastructure projects under planning, and we hope to start the works more quickly. Since our fiscal position has improved, we now have the opportunity and resources available to proceed. I hope that in a spirit of co-operation, and with the objective of building Hong Kong, we can reach an early consensus on these projects. In line with our principle of investing where required, I am in support of pushing ahead with infrastructure development and am prepared, if necessary, to increase the estimate of expenditure for this.
62. By March 2007, we will have been able to reduce the civil service establishment from some 198 000 at the beginning of 2000 to about 160 000, as scheduled. Subject to operational requirements, we will retain existing temporary jobs in the public sector for a further year.
(To be continued)
Ends/Wednesday, February 22, 2006
Issued at HKT 11:47
NNNN
