Following is the speech by the Financial Secretary, Mr Henry Tang, at the Joint Business Community Luncheon today (March 8): (English only)

Distinguished guests, ladies and gentlemen,

I am delighted to be here for this annual post-Budget lunch with the business community. What I would like to do today is to elaborate further on my thoughts in drawing up the Budget, and to focus on those issues that are of most concern to the local and international business community.

Philosophy

Over the years, my consistent policy objectives have been to revitalise the economy, promote employment, and to improve people's livelihood.  In pursuing these objectives I have strictly adhered to a number of principles that I believe are crucial for the well being of our people, as well as the long-term interests of Hong Kong.  
 
First, as a staunch supporter of the free market, I have upheld the principle of "market leads, government facilitates".  I believe that development should be market led and that the Government should provide an optimal environment for business to flourish. This includes keeping our government small, and the evidence of this is that we have contained public spending to below 20 per cent of GDP - at the moment it is actually 16.7 per cent. We also facilitate business by putting in place an excellent regulatory regime and legal system.  We ensure that our infrastructure is world class. We work hard to ensure the free and efficient flow of people, goods, capital and information. And we endeavour to attract the best and the brightest to work and live here, and to reward people for their hard work, innovation and creativity.  
 
Second, as the custodian of taxpayers' money, I have observed the principle of prudently managing public finances. This means keeping expenditure within revenue limits, and ensuring the efficient and appropriate use of resources. After some rather hefty Budget deficits, we were able to restore fiscal balance in 2005-06 - three years ahead of schedule. I am keenly aware that a healthy public purse does have a positive impact on investor confidence and the sustainable development of our economy.  

Third, on tax policy, I have endeavoured to maintain our simple and low tax regime in line with the guidelines of affordability, leaving wealth with the community where resources permit, and making adjustments, where necessary, to enhance our long-term competitiveness.

We might be tempted to take these guiding principles for granted. But, they are a cornerstone of our economic policy and do help to make Hong Kong one of the region's most preferred business locations.    

This Budget

Now, let me turn to this Budget. Given our strong financial position, I proposed a series of measures to leave wealth with the community and to help the disadvantaged. The economic recovery has also given us more room to contemplate our future development. In the important documents issued by this Administration during the past few months, namely, the Policy Address and the Report on the Economic Summit on "China's 11th Five-Year Plan and the Development of Hong Kong", we have already discussed at length measures to enhance Hong Kong's competitiveness.  I have therefore chosen to focus, in this Budget, on our key strategies for future economic development.
 
I believe that our ability to undergo continuous economic restructuring is, and will continue to be, a key element underpinning Hong Kong's competitiveness. This should, as far as possible, complement the economic development of the Mainland, and create a mutually beneficial economic partnership. To retain our share of the highly competitive international market, Hong Kong must keep moving towards high value-added production, and a knowledge-based economy. The Government will continue to create a favourable environment for maintaining Hong Kong's edge as an international financial, trading and logistics centre, a prime destination for tourists, and a place for businesses alike, whether you are large, small or medium, to prosper.

Improving Business Environment

There have been some who have said that the business community was left out of this Budget. I disagree. Creating an environment conducive to business development is a continuous process, and one has to look beyond a single Budget to gain an overall view.

Over the past few years, much has been done to improve the business environment in Hong Kong. In particular, efforts to develop a closer economic relationship with the Mainland have made us a unique two-way platform for business between the Mainland and the rest of the world.  CEPA has opened up considerable opportunities for our goods and services. By the end of January, more than $7 billion worth of Hong Kong products had been exported to the Mainland tariff free. And, more than 1 700 Hong Kong Service Supplier certificates had been issued, which has given Hong Kong businesses preferential access in 27 service sectors in the Mainland. Between 2004 and 2006, over $5 billion in capital investment was generated and almost 36 000 new job opportunities created in Hong Kong as a result of CEPA. So, business has benefited.  

Our economic hinterland has also expanded as a result of the Government's initiative to strengthen co-operation with the Pan-PRD provinces. The launch and further expansion of the Individual Visit Scheme and personal RMB business have also helped boost spending by Mainland visitors to Hong Kong - so the retail, catering and tourism sectors have all benefited.  

We have supported our SMEs to develop design and branding capabilities.  By the end of January, almost 130 000 applications had been approved under the various SME funding schemes, involving nearly $10 billion in grants or guarantees.  Over 48 000 SMEs have benefited directly from the schemes. We launched a $250 million DesignSmart Initiative in my first Budget to foster design and innovation in our industries. We have earmarked an extra $100 million over five years for the Hong Kong Design Centre to assist our trades and industries to develop designs and brands. And in this Budget I earmarked a further $300 million to promote the film industry in Hong Kong. So, SMEs and the creative industries have benefited.

To encourage research in innovation and technology, we set up a $5 billion Innovation and Technology Fund. So far, the Fund has provided funding support to some 900 projects. Last year we allocated another $2.6 billion to set up five R&D centres. In addition, in this Budget, I announced that we intend to relax restrictions on the Small Entrepreneur Research Assistance Programme and the University-Industry Collaboration Programme under the Fund to provide a further impetus to the development of applied scientific research by local companies. So, the innovation and technology sectors have benefited.  

We all know that quality human capital is crucial for businesses to meet the challenges of the 21st century. Apart from investing heavily in education and training, we have been providing support to local tertiary institutions, including the provision of additional hostel places, to attract more students from outside Hong Kong to study and, upon graduation, stay here to work. This initiative was launched last year in my Budget. Through the implementation of various talent admission schemes, more than 27 000 professionals from the Mainland and around the world came to Hong Kong last year to pursue careers here. This injection of new blood and talent will help Hong Kong become an even more competitive and vibrant economy. So, the professional services sectors have benefited.  

By abolishing estate duty and exempting offshore funds from profits tax, we benefit from a further inflow and accumulation of funds in Hong Kong. These funds are then invested in various sectors. The Capital Investment Entrant Scheme, which was implemented several years ago, has so far brought into Hong Kong $7.6 billion worth of capital investment. So, the financial services and real estate sectors have benefited. We will certainly continue to press ahead with the work of removing barriers and encouraging fair competition. In the past few years, we have completed over 120 business facilitation studies and adopted more than 500 recommendations. This benefits all business sectors.

Hong Kong's is unquestionably one of the most competitive places in the world in which to invest and do business. The World Investment Report 2006, released by the United Nations, found that Hong Kong was the second largest FDI recipient in Asia after the Mainland. In 2005, Hong Kong ranked 6th in the world in FDI inflows. As a percentage of GDP, Hong Kong has the highest level of inward FDI amongst the major economies in the world. The number of companies with regional operations here reached an all-time high in 2006 - we are now home to more than 3 800 companies with regional headquarters or regional offices in Hong Kong - that's 50 per cent more than in 1997.    

There is also no doubt that the business sector has benefited from Hong Kong's recent and robust economic performance, which has averaged 7.6 per cent over the past three years - well above the trend growth rate.  Consumption and investment spending has increased substantially since I took office in 2003.  A general increase in corporate profits and record high employment would also tend to suggest that companies aren't doing too badly at the moment.  My proposal to waive rates for half a year will directly benefit nearly all businesses. Our salaries tax concessions and rates rebates are also expected to have a positive impact on local consumer sentiment. And the reduction in alcohol duties will benefit the catering and tourism industries, as well as the wholesale and retail alcoholic beverage trade. Once again, business and our community benefit.    

As I mentioned earlier, I know some are unhappy that no changes to corporate profits tax have been proposed in this Budget. I believe that our simple and low tax regime is still highly competitive not just regionally, but globally. And I also believe that Hong Kong's favourable business environment extends well beyond our advantageous taxation system. Many from the business community have also suggested revisions to the current profits tax arrangements for corporate losses. After careful consideration, I still feel that the introduction of group loss relief and loss carry-back arrangements are not necessarily part and parcel of a competitive tax regime. Rather, I feel they would invite abuse and require anti-avoidance legislation that would inevitably complicate our low and simple tax system. Having said that, and as a general principle, we will continue to keep our profits tax regime under review.  

Broadening the Tax Base

Many in the business community have echoed our calls to broaden the tax base to ensure sustainable public finances in the long run. I couldn't agree more! Our narrow tax base, coupled with unstable revenue sources and an ageing population, is a structural problem that will put increasing pressure on public finances in the medium to long term. This is also a concern expressed often by major credit rating agencies and indeed by the International Monetary Fund. To encourage discussion on this issue, we launched a public consultation on tax reform last July to explore the best way of broadening our tax base. As you all know, our preferred option was a Goods and Services Tax (GST). But the community, including the business sector, could not reach a consensus on the introduction of a GST. However, there is widespread supports for the Government to continue discussions on other options to broaden our tax base. We have an open mind on this, and would very much like to receive more views before the consultation closes at the end of March.  

While discussions on how to broaden the tax base and stabilise government income continue, I am delighted that the community supports my decision to increase the return and predictability of fiscal reserves invested in the Exchange Fund.  


Concluding Remarks

Ladies and gentlemen, I do hope that this year's Budget has struck the right balance between promoting economic development, improving people's livelihood and supporting the long-term development of Hong Kong.  Looking forward, there is no doubt that Hong Kong's economic integration with the Mainland is pivotal to our future development. Global economic growth has become less dependent on American spending. Many economies, including that of the Mainland, are seeing stronger domestic demand.  So, businesses will no doubt be developing their own strategies to continue competing successfully in the globalised market. As far as the Government is concerned, we will continue to work hard to sharpen our edge in having the Mainland as our hinterland, and strengthen our role in furthering economic development in the Mainland. We will continue to look out to the rest of the world, to encourage investment in Hong Kong.  And we will continue to hone the institutional software that is needed to ensure our competitiveness on the global stage. The rest is up to you.

Thank you very much. I will be happy to take questions.

Ends/Thursday, March 8, 2007
Issued at HKT 15:29

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