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Following is a question by the Hon Frederick Fung and a written reply by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, in the Legislative Council today (November 15):
Question:
Some research institutes have pointed out that under its financial management principles, the Government tends to make conservative estimates of its revenue and over-estimate its future expenditure, resulting in great discrepancies between its budgetary estimates and the actual amounts of revenue and expenditure in many years. Moreover, Article 107 of the Basic Law provides that "The Hong Kong Special Administrative Region shall follow the principle of keeping the expenditure within the limits of revenues in drawing up its budget, and strive to achieve a fiscal balance, avoid deficits and keep the budget commensurate with the growth rate of its gross domestic product". In this connection, will the Government inform this Council :
(a) whether it has reviewed its existing financial management principles and accounting system to avoid the recurrence of large erroneous discrepancies between the budgetary estimates and the actual amounts of revenue and expenditure; if so, of the results of the review; if not, the reasons for that;
(b) of the estimated amounts of revenue and expenditure for the year 2006-2007 according to the latest figures, and how the difference between these amounts compares to the previous estimated surplus of $600 million; if the discrepancy is relatively large, the reasons for that; and
(c) whether it has assessed if the surplus resources were not effectively used due to the under-estimation of revenue in the past, and whether expenditure was wrongly cut in the past as the expenditure was projected on the basis of the under-estimated revenue, so that sufficient resources have not been provided to meet the needs of the public; whether it has studied if the above-mentioned arrangement violates the principle of "keeping the expenditure within the limits of revenues" enshrined in the Basic Law; if it has, of the results?
Reply:
Madam President,
(1) In preparing the estimates, we adhere to the principles of managing the public finances prudently and keeping expenditure within the limits of revenues, and take into account various factors including social needs, service quality, price changes, economic development and the overall financial position of the Government. In order to derive a reasonable forecast, we examine all the revenue and expenditure items in the most objective and professional way. Moreover, differences between the estimates and the actual figures may occur every year. There are two main reasons for this.
First, the estimates involve a vast array of complex data including more than 200 revenue items, and a large number of expenditure items under 80 expenditure heads and eight purpose-specific funds (e.g. the Capital Works Reserve Fund and the Loan Fund). Therefore, we need to start compiling the estimates towards the end of the preceding year. For example, the compilation work of the 2006-07 Budget, which was announced on February 22, 2006, started in November/December 2005. It was compiled based on the information available at that time. As such, it is understandable that there were differences between the forecast revenue/expenditure and the actual figures.
Second, many government revenue and expenditure items are subject to external factors. There are difficulties in making accurate forecast of these revenue items, which account for a substantial share of the total government revenue. For example, salaries tax, personal assessment and profits tax together account for about 45% of the total government revenue. These taxes are highly sensitive to economic fluctuations, which are beyond the control of the Government. Besides, investment income and property-related income (e.g. land premium, property tax, rates, government rents and stamp duties on property transactions) accounting for a total of about 30% of the government revenue, tend to fluctuate with economic cycles. On expenditure side, certain expenditure items, e.g. construction projects and large-scale computer systems may straddle several years. During the periods of procurement or construction, it is inevitable that differences between the actual expenditure and the provisions will occur as a result of price changes and delay which are beyond Government's control.
We will continue to review the budgetary criteria and issue guidelines to all policy bureaux and departments to ensure that the estimates are compiled as realistic as possible.
(2) Bureaux and departments have started to prepare the revised estimates for 2006-07 and the estimates for 2007-08. The Financial Secretary will announce the 2007-08 Budget on February 28, 2007 as well as the revised estimates for 2006-07.
(3) To maintain a sustainable fiscal system, we will continue to adhere to the principles of managing the public finances prudently and keeping expenditure within the limits of revenues and spend only when necessary. The government accounts had registered operating deficits for seven consecutive years between 1998-99 and 2004-05, and consolidated deficits were recorded in five of these years. The accumulated deficit over the period was $190.3 billion. Despite the financial difficulties, there has been considerable growth in Government's spending on Social Welfare, Education and Health. During the period from 1998-99 to 2004-05, the recurrent expenditure on Social Welfare has increased by $7 billion, and that on Education and Health by $3.5 billion and $1.4 billion respectively. Furthermore, to use the limited resources more effectively in meeting the needs of the community, Government has introduced various measures to rein in government expenditure. These include reduction in the civil service establishment, adjustments to civil service pay, reprioritisation of service provision, structural reorganisation and streamlining of procedures.
Ends/Wednesday, November 15, 2006
Issued at HKT 12:47
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