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Following is the speech (translated from Chinese) by the Financial Secretary, Mr John C Tsang, on Second Reading debate on the Appropriation Bill 2010 in the Legislative Council today (April 21):
Mr President,
Introduction
Since the announcement of the Budget, Honourable members and the public have expressed many valuable views on different occasions and through various channels, including the two-day debate last week. Members have raised 3 194 written questions, which is an all-time high. These reflect the close attention given to the Budget.
My colleagues have just responded in detail to the views on individual policy areas. I will now give a brief account of the latest economic situation and address from a "macro" perspective a number of issues of greater concern to the public.
Economic situation
Over the past few months, the external economic environment has continued to improve, with the pace of recovery in most Asian economies much more advanced than in Europe and the US. Economic growth in Mainland China is particularly impressive. Benefiting from the improvement in the external environment, the recovery of our economy is also gaining momentum. In the first two months of this year, total exports of goods have grown substantially by 23 per cent year-on-year. The total value of merchandise exports in recent months has almost returned to its level before the financial tsunami. Domestic demand has also strengthened further, reflecting a significant improvement in both consumer sentiment and business confidence compared with last year.
I am particularly pleased to see the continued improvement in the job market over the past few months. The unemployment rate has come down from its peak of 5.4 per cent last year to 4.4 per cent lately. Given the persistently high level of unemployment around the world, a drop of one percentage point in our unemployment rate is really a hard-won accomplishment. We will continue to implement measures for the continuation of this improving trend. Besides, improvement in the employment prospects is very important to boosting consumer confidence and is conducive to consolidating our economic recovery.
I remain cautiously optimistic about our economic prospects for this year. Judging from the latest situation, our economy will be quite buoyant in the first quarter and the recovery will be on a steady uptrend in the first half of the year. Unless there is a serious relapse in the external environment causing a significant reversal in the second half of the year, our economy should achieve the four to five per cent growth I forecast for the whole year.
However, we must remain highly vigilant against uncertainties in the external environment. We are still very much surrounded by uncertainties such as the pace of exit strategies of various countries, the unemployment situation in Europe and the US, the degree of restoration of the US financial system, the debt crisis in Europe and fluctuations in the foreign exchange market. Moreover, the European and the US economies may have undergone fundamental structural changes, leading to a continuing slowdown in consumption growth in the medium to long term. International trade may also be affected by the ever-rising protectionist sentiments resulting from persistently high unemployment rates in these countries. As such, we need to prepare for the future by tapping emerging markets with great potential and strengthening our economic ties with them. We have, together with the business sector, visited many emerging markets. In the past few months, I have also visited a number of countries in South East Asia. We will continue to step up our promotional efforts to develop more new markets for Hong Kong.
Recently, there have been many discussions in the market about the implications of Renminbi (RMB) appreciation for Hong Kong. Our state leaders have, on a number of occasions, reiterated that RMB appreciation cannot solve the trade deficit problem of the US. Indeed, keeping the exchange rate of RMB relatively stable is beneficial to China's economic development and global economic recovery. China will take forward reform in the RMB exchange rate regime in light of the evolving global economic situation and the development of the Mainland's domestic economy. I believe that the Central Government will continue to improve the RMB exchange rate formation mechanism in a proactive, controllable and progressive manner so as to avoid undue fluctuations.
As a matter of fact, RMB has appreciated by over 20 per cent against the US dollar in an orderly manner since mid-2005. While some companies in Hong Kong have been subjected to greater cost pressure, our economy as a whole has adjusted rather well to these changes. We were not significantly affected during the period. In addition, the strengthening of RMB will also help boost the Mainland visitors' spending in Hong Kong. That said, drastic appreciation of RMB may undermine our export competitiveness and push up inflation. I will continue to monitor the situation.
As pointed out in the Budget, I am deeply concerned about the impact of inflation on our low-income earners. While the average inflation rate for this year is expected to remain at a comparatively low level, a stronger momentum of global economic recovery and a further rise in food prices resulting from climate change and exchange rate movement may lead to a rise in inflation later this year. This will impose a heavier burden on some low-income earners and those who have yet to benefit from our economic recovery.
To relieve the citizens' burden, I have announced in the Budget a series of one-off measures. These include paying two months' rent for public housing tenants, providing an extra month of CSSA allowance, Old Age Allowance and Disability Allowance, reducing salaries tax and tax under personal assessment, waiving rates and business registration fees for the whole year, and providing an allowance to meet expenses for the new school year. This will cost about $20 billion. We will implement these measures as soon as possible and continue to closely monitor inflation.
Risk of a property bubble
Much debate about the Budget has focused on our measures to reduce the risk of forming a property bubble. Some people have voiced their support. They consider that the measures have struck a proper balance between reducing the risk of a bubble and avoiding undue fluctuations in the property market. But some other people think that these measures should be strengthened.
I have pointed out in the Budget that the "quantitative easing" policy adopted by many economies since the onset of the financial tsunami has increased global liquidity, resulting in a huge inflow of "hot money" into our financial system. Interest rates have also been kept at a low level that is rarely seen. On the other hand, the relatively low supply of residential flats in the past two years, coupled with the gradual recovery of our economy, has led some people to worry about under-supply. This is also a key factor that has fuelled the increase in property prices.
In other words, the rise in property prices since last year is largely attributable to an environment with an extremely low interest rate, abundant liquidity and a relatively low supply of flats coinciding together. This is an exceptionally "unusual" situation resulting from the financial tsunami. These short-term boosting factors will not last forever. As the global economy recovers, countries around the world will start exiting from their measures against the financial tsunami. Liquidity will be withdrawn and interest rates will reverse to a more normal level. When these short-term factors subside, it will pose downside risks to the property market.
I appeal to citizens and small investors who would like to buy a flat to carefully assess the impact of future interest rate hikes on their ability to repay their mortgages. The stress tests we have conducted indicate that if the interest rate were to rise by three percentage points and return to a more normal level, the monthly mortgage payment would surge by 30 per cent. Small investors should assess their own capabilities and present and future incomes, including the stability of their jobs, before making what is possibly the biggest investment decision of their lives.
Clear and stable public policies are instrumental to the healthy and stable development of the property market. To manage the risk of a property bubble caused by short-term boosting factors, what we should do is to direct our efforts to curb speculative activities, increase market transparency, prevent excessive borrowing resulting from low interest rates, and introduce improvement measures to increase the supply. What we should not do is to rashly make fundamental changes to our well-established long-term policies and the role of the Government in the property market, disregarding the risks posed by reversals in the short-term factors. Such rash changes would increase the risk of public policies causing undue fluctuations in the market.
Nevertheless, I appreciate the public concern over the drastic rise in property prices. We also recognise the need to reduce the risk of forming a property bubble to avoid impacting on the stability of the financial system and the recovery of the real economy. Therefore, we will closely monitor the property market and the overall economy, and introduce timely and appropriate measures in a highly flexible manner to ensure a stable and healthy development of the property market in this "unusual" situation.
Since the announcement of the Budget, the upward momentum in residential property prices in Hong Kong has tapered slightly in recent months. The rise in overall flat price slowed from 2.5 per cent in January this year to 1.1 per cent in both February and March. The cumulative increase for the first quarter is about five per cent. Property turnover fell from over 11 700 transactions in February to around 10 900 in March. The average turnover in the first quarter is 11 100 transactions a month, representing a surge of 20 per cent over that in the fourth quarter last year.
The debt-servicing ratio has climbed from 38 per cent in the fourth quarter of last year to the preliminary figure of 42 per cent in the first quarter of this year. This calculation is based on the ratio of mortgage payment to median household income for a 20-year mortgage for buying a flat with a saleable area of 45 square metres. While the figure is lower than the average of 53 per cent for the past 20 years (that is, from 1989 to 2008), this speedier rise is worrying. Small investors should pay particular attention to this.
Although the momentum in the property prices has slowed down a bit in recent months, the increasing risk of a property bubble cannot be ignored. The measures in the Budget are being rolled out, but some like increasing the supply would take some time to produce their full effect. We will nonetheless strengthen our effort in rolling out these measures so that they could promptly reduce the risk of forming a property bubble. I will give below a brief update on the four measures proposed by the Budget.
To curb speculation, the Budget has proposed that the rate of stamp duty on transactions of properties valued more than $20 million be increased to 4.25 per cent. Also, buyers will no longer be allowed to defer payment of stamp duty on such transactions. These measures took effect on 1 April this year. We will closely monitor the trading of properties valued at or below $20 million. If there is excessive speculation in the trading of these properties, I will consider extending the measures to transactions of properties valued at or below $20 million.
Furthermore, the Inland Revenue Department (IRD) will closely follow up all cases involving speculators profiting from property speculation. It will levy profits tax on the persons or companies earning profits arising from such transactions. The IRD maintains a huge database where details of all property transactions are recorded. To identify cases of possible property speculation, a computer selection is run periodically to analyse the sale and purchase transactions in the database. The cases identified are then reviewed one by one by IRD officers who will consider whether any follow-up action is necessary.
In 2008-09, for example, excluding cases with tax files maintained, there were over 13 000 suspected speculation cases identified by the computer programme. More than 4 000 cases required follow-up action after being reviewed by IRD officers. If it is proved that the cases involve speculation, the IRD will recover profits tax from the persons or companies involved. The IRD will continue to actively track property transactions involving speculation and levy profits tax on profits arising from speculation, according to law.
To reduce the risk of forming a property bubble, we are committed to combating speculative activities. In the past, the Government has taken various measures to curb such activities. These include prohibiting subsale, imposing restrictions on the target groups for sale of uncompleted residential flats, and requiring developers to put up for sale all flats within a certain period. We will continue to closely monitor market developments. Where necessary we will consider reinstating appropriate measures to ensure a healthy and stable development of the property market.
Second, the Budget has proposed to strengthen the regulation of the sale of first-hand, uncompleted private residential flats to ensure transparency in property sales and transaction prices. There have been calls for property transactions to be conducted more fairly and with greater transparency. In addition, sanctions should apply to those who take advantage of misinformation.
In the past two years, the Transport and Housing Bureau have strengthened the regulation of the sales of first-hand, uncompleted residential flats through the Consent Scheme of Lands Department and the guidelines issued by the Real Estate Developers Association of Hong Kong (REDA). These measures have to a certain extent helped buyers ascertain information on the properties and property transactions, and protected the interest of the consumers.
To address comprehensively the public's concern about sales arrangement and the dissemination of pricing and transaction information, the Transport and Housing Bureau has requested REDA to issue new guidelines on nine proposals. The proposals include:
(1) Developers should duly observe REDA's guidelines in selling all uncompleted and completed first-hand private residential properties;
(2) Developers should provide on-site unit(s) at the development for the public to visit when selling completed first-hand residential properties;
(3) Developers should indicate, at the same time when making public the transaction information under the existing "five-day disclosure rule" on transactions, those transactions which involve members of the Board, and their immediate family members;
(4) Show flats have to comply with a list of requirements, including the requirement that there should be at least one show flat showing the same conditions of the actual flat to be handed over to buyers upon completion in respect of internal partitions, fittings and finishes, and complimentary appliances;
(5) More units should be included in the first price list. For small-scale development, the minimum number of units to be included will be 30 units or 30 per cent of the total number of units available for sale, whichever is the higher. For large-scale development, the minimum number of units to be included will be 50 units or 50 per cent of the total number of units available for sale, whichever is the higher;
(6) The requirement for making public the sales brochures should be advanced from the existing 24 hours prior to the commencement of sale to seven days prior to the commencement of sale;
(7) Developers should make public the price list at least three days in advance of the commencement of sale when selling any number of units to whichever parties;
(8) Promotional materials of the development should clearly provide the name of the district where the development is located and the address of the development; and
(9) Developers should concurrently upload the sales brochures and all the price lists onto their websites.
The Transport and Housing Bureau aims to implement these new measures with REDA within the next few months. We will closely monitor the effectiveness of these measures. Should they prove to be ineffective, we will not rule out the possibility of introducing legislative regulation.
The third aspect is about curbing excessive borrowing. Last October, the Hong Kong Monetary Authority (HKMA) issued guidelines to banks, lowering the loan-to-value ratio for mortgages on properties valued at $20 million or above. Banks are also required to process mortgage loan applications prudently. The HKMA has been monitoring the mortgage lending activities of the banks closely. Between June and September last year when the property market was buoyant, an average of around 10 700 new mortgage loans were drawn down per month. The number has subsequently declined from a monthly average of 9 600 in the fourth quarter last year to about 7 800 in the first two months of this year. The HKMA is now conducting a new round of on-site examinations of the major mortgage lenders to ensure that they adopt prudential lending practices.
The HKMA is considering inclusion of mortgage data in the positive credit data sharing arrangement. This will help banks access more comprehensive credit information for more effective management of credit risks. It will also help borrowers avoid over-stretching themselves. Also, customers with greater financial strength will find it easier to borrow on more favourable terms. In view of the sub-prime mortgage lending problem exposed by the recent global financial crisis and the extremely low interest rates at present, we should not overlook the risk of over-borrowing by customers in buying properties. The HKMA is now studying with the Office of the Privacy Commissioner for Personal Data and the Consumer Council how best to address privacy and other issues. I hope that all relevant issues will soon be resolved to make way for early availability of positive credit data on mortgage loans.
Lastly, on increasing the supply of flats, the latest forecast is that some 55 000 units will be made available on the private residential market in the next three to four years. They include flats which are either available for sale, under construction but not yet for pre-sale, or with construction to start at any time. In addition, there will be a further supply of 3 500 units in the coming few months when a number of residential sites are granted and turned into "disposed sites" or have their tendering procedures completed.
I would like to reiterate that the existing market-driven Application List system for sale of government land is still an effective mechanism for ensuring a stable and healthy development of the property market. Since the end of last year, three residential sites in Tai Po and Tseung Kwan O have been sold through the Application List system. Another two large residential sites in Tung Chung and Fanling triggered from the Application List will be put up for auction on May 11 and 24 respectively. They will provide a total of 2 550 units or so. These auctions reflect that the Application List system can, in accordance with market need, supply residential flats effectively including small and medium-sized ones.
The Budget has proposed that depending on market conditions, the Government will put up six urban residential sites in the Application List for 2010-11 for sale by auction or tender in the coming two years if they have not been triggered. To demonstrate our determination to increase the supply, we have decided to hold two auctions in June and July this year. The sites to be auctioned are located at Homantin, Kowloon (Ex-Valley Road Estate Phase 2) and Mount Nicholson Road, Hong Kong Island respectively. We estimate that the sites will provide a total of approximately 1 200 residential units. Further details will be announced shortly by the Lands Department.
In other words, we will hold four auctions in the next three months, providing more land to the market for the construction of different kinds of housing units. We will continue to closely monitor the situation and, depending on market conditions, put the remaining four sites on the market.
The Budget also proposes putting the former Yuen Long Estate site on the market as a pilot project to increase the supply of small and medium-sized flats. The Government is now preparing the land sale conditions, and the tendering exercise is expected to commence early next year. We will also continue to liaise with the MTR Corporation Limited and the Urban Renewal Authority to increase the supply of small and medium-sized residential flats in their West Rail property development projects and urban renewal projects.
In short, over the next three to four years, there will be a supply of 58 500 first-hand private residential flats on the market. This figure has not yet included the 4 800 remaining units for sale under the Home Ownership Scheme of the Hong Kong Housing Authority and the Sandwich Class Housing Scheme by the Hong Kong Housing Society, the 3 750 units from the four pieces of land to be auctioned shortly, and the flats to be provided in the former Yuen Long Estate site pilot project. These additional flats would help meet peopleˇ¦s aspiration for buying homes. We will continue to provide land in response to market conditions.
I must stress that the Government is deeply concerned about the rising trend of property prices. There is no question about our determination to prevent the property market from overheating. The Government and the regulatory bodies will continue to closely monitor the situation and take further measures if necessary.
Special Loan Guarantee Scheme
A number of Members have expressed their wish to extend the application period for the Special Loan Guarantee Scheme. Launched at end-2008, the scheme aims to counter the credit crunch triggered by the global financial crisis. So far, loans totalling $74 billion have been approved by banks, benefiting over 17 000 enterprises and helping to preserve jobs for 300 000 employees. The scheme has played a positive role in supporting enterprises and preserving employment.
Recently, our economic conditions have improved significantly and the credit crunch has eased off. I consider that it is time to let the credit market resume its normal operation step by step. Taking into consideration that enterprises need some time to consolidate their businesses during the early stage of economic recovery, I have decided to extend for the last time the application period for the Special Loan Guarantee Scheme for six months to end-December this year. The existing SME Loan Guarantee Scheme will continue to operate and provide appropriate assistance to small and medium enterprises.
Economic development
Some members have remarked that the Budget provides no long-term planning and strategies for economic development, especially the development of industries. Others take the view that the proposed measures are inadequate. Let me point out that, in support of the directions set out in the Policy Address, the Budget has put forward specific proposals on promoting sustained development of our economy. In a globalised economy, Hong Kong can no longer adopt a low-cost strategy. We must complement the development of our country by transforming Hong Kong into a high value-added, knowledge-based economy if we want to get ahead of the game.
We will fully capitalise on the "China advantage" and promote regional co-operation through our work in three aspects. We will support the formulation of the National 12th Five-Year Plan. We will foster co-operation between Guangdong, Hong Kong and Macao. We will also boost exchanges with Taiwan. To strengthen the co-operation with Guangdong, we signed earlier this month the "Framework Agreement on Hong Kong/Guangdong Co-operation" with the Guangdong Province, witnessed by the state leaders. The Framework Agreement is the first agenda on Hong Kong-Guangdong co-operation ever endorsed by the State Council. It sets out clearly the positioning for Hong Kong-Guangdong co-operation. It also translates the macro policies of the "Outline of the Plan for the Reform and Development of the Pearl River Delta" into concrete measures, with a view to incorporating the related initiatives into the National 12th Five-Year Plan.
We also established the "Hong Kong-Taiwan Economic and Cultural Co-operation and Promotion Council" this month. The Council will enhance senior-level exchanges between Hong Kong and Taiwan. At the corporate level, the "Hong Kong-Taiwan Business Co-operation Committee" comprising members of the local commercial sector and Taiwan businessmen in Hong Kong was also set up on the same day. This will promote co-operation and exchanges between Hong Kong and Taiwan in trade, investment, tourism, and so on. The establishment of these platforms marks a milestone in regional co-operation. We will make good use of these new platforms to take forward the relevant work.
In addition, we will continue to invest in cross-boundary infrastructure to strengthen our links with the Mainland and neighbouring areas. Construction works for the Hong Kong-Zhuhai-Macao Main Bridge, site formation works for the new cruise terminal and the works for the Hong Kong section of the Guangzhou-Shenzhen-Hong Kong Express Rail Link project have commenced. In this financial year, we will start the works for the Kai Tak Cruise Terminal Building and ancillary facilities. Including other works projects, the capital works expenditure for each of the next few years will be at an all-time high of over $50 billion. These projects will not only enhance the competitiveness of Hong Kong, but also create employment opportunities and promote economic development.
We will capitalise on the unique advantage of our financial services industry to promote its development, meeting the overall needs of our nation's development. We will develop offshore RMB business and boost our status as an asset management centre and a global financial centre that attracts capital and talent from within and outside the country. In February this year, the HKMA issued a circular to banks on the supervisory principles and operational arrangements regarding RMB business. This has increased the potential scope and flexibility for developing RMB business. I hope that the industry will capitalise on the opportunities to bring RMB business in Hong Kong to a new level.
Our strategies for the development of industries are crystal clear. Under the principle of "Market Leads, Government Facilitates", the Government will provide the necessary support in land resources, human capital and incentives to facilitate the development of the four pillar industries and the six industries where we enjoy clear advantages under the market mechanism. To this end, the Budget has proposed specific supporting measures and these measures have already been rolled out.
The measures for revitalising industrial buildings introduced on April 1 this year will release large amounts of land resources to support the development of various industries. The Lands Department has set up a dedicated team to process applications centrally. Some cultural and creative industry bodies based in industrial buildings are worried that their operation would be affected during the transitional period when the revitalisation measures are first rolled out. To ease their worries and provide them with necessary assistance, the Government is actively liaising with those industrial building owners who intend to convert their premises. We encourage them to fulfil their corporate social responsibility and lease the converted units in their industrial buildings at concessionary rents during this transitional period. This would provide support to the local cultural and creative industry bodies that need to find new places for their operations upon implementation of the new measures.
I have announced in the Budget that the Government will take the lead in injecting impetus into the revitalisation of industrial buildings. If appropriate, we will consider relocating some government offices and facilities to old industrial buildings where wholesale conversion can be carried out. Up till now departments such as the Buildings Department and the Water Supplies Department have already indicated support. We will continue to follow up with these departments.
Separately, the sites reserved by the Government for the development of medical services and education services are being put on the market. We have received a total of 30 submissions in the expression of interest exercise on the development of private hospitals at the four reserved sites. The response is encouraging. Of these submissions, 21 are from local parties, seven from overseas parties and the remaining two from joint partnerships of local and overseas parties. We will formulate the relevant land disposal arrangements in the next few months with a view to disposing the sites as soon as possible for the prompt development of private hospitals.
Regarding education services, we have reserved six sites for development purposes. In March this year, we put up three sites for application by interested institutions under the Land Grant Scheme. By the end of the year, we will also invite expressions of interest from institutions to develop the site at the former Queen's Hill Camp. Depending on market conditions, we will also consider making available the remaining two sites at the end of the year or later.
Last month, the Hong Kong Council for Testing and Certification submitted an industry development plan. Apart from proposing a package of recommendations to promote the overall development of the testing and certification industry, it also recommended to focus efforts on Chinese medicine, construction materials, food and jewellery. Two emerging areas with great potential were also identified for further exploration, namely environmental protection and information and communications technologies.
I now move on to innovation and technology. This month the Government launched the Research and Development Cash Rebate Scheme. We will also develop Science Park Phase 3, focusing on the development of renewable energy and environmental technology. To promote creative industries, we launched the $300 million CreateSmart Initiative last year. Last month, the Government invited proposals from the public for converting the former Hollywood Road Police Married Quarters into a landmark centre for promoting creative industries. As regards green economy, preparatory work is underway for the setting up of a $300 million Pilot Green Transport Fund to foster the development of innovative green technologies in Hong Kong.
We have adopted a strategy of providing a conducive environment for the development of industries to facilitate their diversification. At the same time, we will leverage on the advantage of "Big Market" to bring market forces into its full play in promoting the development of industries. Ultimately, the scope and pace of development will rely on the joint efforts of the industries and all market participants, and be decided in the most efficient manner under the market mechanism.
People's livelihood and poverty problem
Some members have remarked that the Budget only introduces one-off relief measures and lacks long-term planning for improving people's livelihood and alleviating poverty. I disagree. In the Budget I have already proposed short, medium and long-term strategies to address the poverty problem. In the short term, the one-off relief measures worth about $20 billion are targeted precisely to alleviate the imminent burden faced by people who have yet to benefit from the economic recovery and help them tide over difficult times.
In the medium term, we must improve the quality of our workforce through education and training to meet the challenges brought by globalisation and enhance social mobility. In the Budget, I have proposed a number of measures to develop human capital and strengthen manpower training. They include enhancing after-school support and facilitating Internet learning for needy students; fostering the development of higher education by launching the fifth Matching Grant Scheme; boosting the Language Fund; and enhancing employment services for young people with special employment difficulties and the unemployed. Many of these measures were suggested by various sectors of the community during the Budget consultation. They can provide the necessary assistance to people who need it most. They encourage self-advancement through education and training to escape poverty.
In the long term, the best way for us to alleviate poverty is to promote economic growth and opportunities for wealth creation in the community. I have already talked about strategies and measures for economic development such as closer regional co-operation, investing in infrastructure, and supporting the development of industries. We are committed to developing our economy in order to provide opportunities for all people, especially low-income earners, to create wealth and improve their standard of living.
Between 2004 and 2008 when our economy was on an upturn, the number of low-income earners decreased and income levels generally improved. More recently, our economy resumed positive growth in the fourth quarter of last year after the financial tsunami began to subside. We see in parallel a general improvement in people's income at the end of last year. The wage index measuring the income of non-managerial staff rose by 0.8 per cent year-on-year in end 2009. This ended three consecutive quarters of decline. The average monthly salary for some low-skilled jobs even recorded a year-on-year increase of two to four per cent. In fact, nearly 60 per cent of companies indicated last December that their employees' wages had increased. This represented a substantial rise of 17 percentage points over last September and was the highest ratio since September 2008. All these figures show that economic booms can benefit most of the community, including the grassroots.
Let me stress that we do not rely solely on economic development to ease poverty. We promote economic development to create opportunities for the public to improve their livelihood. We also invest heavily in education and training to provide opportunities for our people to free themselves from poverty. Through spending in areas such as housing, healthcare and social welfare, we provide disadvantaged groups and people in difficulties with a basic "safety net". In times of economic downturn, we also introduce additional short-term relief measures to help them tide over their difficulties. Our strategy is multi-pronged, taking into account the short, medium and long-term needs.
As a matter of fact, our recurrent expenditure reaches around $230 billion for 2010-11. This represents an increase of more than 15 per cent over the recurrent expenditure three years ago. Fifty-six per cent of these recurrent, long-term resources will be used in education, health and social welfare services to provide a "safety net" for the disadvantaged and less well-off and to improve the quality of life of our citizens.
The measures proposed in the Budget cover a wide range of areas. They include enhancing after-school support and facilitating Internet learning for needy students; improving public healthcare services such as those provided for cancer, cataract and renal patients, strengthening the training of nurses and expanding the Drug Formulary; strengthening primary care services; increasing the support services for the elderly, persons with disabilities, patients with mental illness, victims of domestic violence and job seekers. Last month, we announced measures to help students attending special schools to extend their education. These measures will improve the lives of our people, benefiting those from all walks of life.
The Government has the determination and commitment to improve people's livelihood and alleviate poverty. Our efforts to address these problems will continue well beyond this Budget. Much remains to be done. This includes legislating for a minimum wage, reforming healthcare financing arrangements, introducing competition law, and reducing the burden of travel expenses for the working poor. We will continue to work with various sectors of the community and members of this Council to build a caring society in Hong Kong.
Fiscal reserves
Some members are of the view that the Government has huge fiscal reserves. It should invest more resources in projects for alleviating poverty and promoting economic development. First of all, I must clearly point out that we will not hesitate to commit our resources as and when needed. Under no circumstances will we sacrifice any essential projects, including those for improving people's livelihood and the economy which I have just mentioned, for the purpose of increasing our reserves.
Since I took up the post of Financial Secretary three years ago, government expenditure has increased from about $230 billion to over $310 billion for 2010-11. It represents an increase of over $80 billion, or in percentage terms, more than 35 per cent. This increase is much larger than the 5.7 per cent nominal growth in the Gross Domestic Product (GDP) over the same period. In 2010-11, I will still draw on the fiscal reserves to make up the budget deficit of over $25 billion to achieve the objectives of consolidating recovery, developing our economy and building a caring society.
In the long run, the Government aims to maintain an adequate level of fiscal reserves. The determination of an "adequate" level of fiscal reserves is an exercise of judgment. My considerations include the following. Our reserves must be able to provide sufficient resources to meet liabilities not provided for, and to cope with pressure on government finances arising from economic downturns, unforeseen events or changes in social structure. The five fiscal deficits that occurred in the six years starting from 1998-99 as a result of the Asian financial crisis reduced our reserves by about $200 billion. In a globalised economy and with the advance in technology, economic fluctuations or crises will become increasingly destructive. Without adequate reserves, Hong Kong would not be able to stabilise the economy and relieve the difficulties of our people in times of economic downturn.
Apart from providing a buffer, the fiscal reserves can also generate significant investment income. It is a relatively stable source of revenue providing resources for investing in economic and livelihood projects. In 2010-11, for example, our fiscal reserves are expected to generate sizeable income of around $30 billion, equivalent to about 75 per cent of salaries tax revenue or approximately 40 per cent of profits tax revenue. Without this investment income, the Government will have to consider adopting other measures which may not be welcomed by Hong Kong people and may even add to the burden of our next generation. Besides, we must take into consideration that an adequate level of reserves can help the Exchange Fund to maintain the stability of Hong Kong's monetary and financial systems.
According to the medium range forecast, the fiscal reserves will be reduced to a level equivalent to 15 months of government expenditure or 21.7 per cent of our GDP by end-March 2015. This level of reserves is on the low side compared with the levels since the establishment of the Hong Kong Special Administrative Region in 1997, which range from 14 to 28 months of government expenditure, or approximately between 22 and 35 per cent of our GDP.
To conclude, I will commit our resources as and when needed to essential projects for improving people's livelihood and the economy. At the same time, I will maintain adequate fiscal reserves and adhere to the principles of prudent management of public finances and keeping expenditure within the limits of revenues. The objective is to ensure that the reserves can meet the challenges ahead.
Concluding remarks
Mr President, it is never easy to promote economic development and deal with issues related to people's livelihood. As our economy is highly developed, it is neither desirable nor possible for us to sustain rapid economic growth. However, with the development of society, it is often the case that the issue of resource allocation will bring out many controversies, giving rise to grievances and complaints. To break this "zero-sum game" impasse, we need to explore new growth areas. We also need to foster a co-operative spirit to support the socially active "third sector" in a bid to seek solutions to social problems through tripartite collaboration between the community, the business sector and the Government, and not through the effort of just any one party.
We have heard many views from the community about the Budget since its announcement. Some of them are positive, some critical while some put forth concrete suggestions. We may find some of the criticisms acute and some remarks vehement. But whether showing support or otherwise, I am sure they have been made with strong affection for Hong Kong and the desire for prosperity and progress. In this sense, our goal is the same. While the Budget cannot respond to the aspirations of all people, I am confident that we can promote the prosperity and progress of Hong Kong with the spirit of co-operation and our affection for the place we live.
I would like to extend my heartfelt thanks again to all members and various sectors of the community for their valuable views. I hope members will support the Appropriation Bill 2010.
Ends/Wednesday, April 21, 2010
Issued at HKT 14:16
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