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Expenditure
208. Government revenue is susceptible to fluctuations in the external economic environment, but it is undesirable to make any drastic changes to expenditure during periods of adversity. That is because almost 60 per cent of our recurrent expenditure is provided for education, health and social welfare, which are closely related to people's livelihood. Reducing expenditure during an economic downturn will only add hardship to our people. Instead, we shall increase government expenditure, and our adequate fiscal reserves can provide the headroom for financial manoeuvres under such circumstances. In times of reduced revenue resulting from an economic downturn, the fiscal reserves allow us to maintain all the necessary public services, and adopt counter-cyclical fiscal measures to alleviate people's burdens, stimulate the economy and invest in the future. Take 2009 as an example. When GDP was forecast to contract by two to three per cent that year, we adopted counter-cyclical measures. We increased government expenditure and relieved the pressure on our people. The strategy also created conditions favourable for the subsequent economic recovery.
209. During the consultation period, there were quite a number of views on the appropriate level of public expenditure as a proportion of GDP. The share of public expenditure is close to 20 per cent of GDP in recent years. Our policy is to prevent overspending by the Government, which will stifle the development of the private market. We strive to strike a proper balance between increasing government expenditure and maintaining a low tax regime. In the event that our expenditure continuously exceeds this level, we shall need to explore ways of increasing our revenue to maintain a higher level of expenditure. The European and the US governments have to resort to fiscal austerity measures of all kinds to tackle the debt crisis caused by their escalating expenditures in recent years. This illustrates the importance of upholding fiscal principles and maintaining the health of our public finances.
210. However, I must state that we can go beyond this level on a need basis. In fact, in four of the past ten years, public expenditure exceeded 20 per cent of GDP. This is also the case for the estimated public expenditure for 2012-13.
211. In figuring out the level of government expenditure, we must take into account the fact that our Government adopts a cash-based accounting system with no provision for our liabilities, contingent liabilities and commitments, including the government bonds issued in 2004, the loan guarantees for SMEs, infrastructure commitment and civil service pension. As at the end of March 2011, the present value of public officers pension obligations was over $530 billion. Further increase is expected in the coming years. As for infrastructure, the value of capital projects approved by the Finance Committee and to be submitted to this Council within the year has reached $400 billion. The loan guarantees for SMEs have surpassed $70 billion. If government revenue drops due to any economic downturn, we shall have to draw on our fiscal reserves to pay for these expenditure.
212. Structural changes in the community such as an ageing population will also bring pressure to bear on public finances. We estimate that our population aged 65 or above will increase from the current 0.9 million to 2.1 million in 2030. To cope with this long-term issue, both the community and the Government will have to make sustained efforts in various respects. Measures implemented in certain policy areas, such as the healthcare financing reform, will help us get ready for the future. We also need to maintain adequate fiscal reserves if we are to take on the challenges posed by an ageing society.
Medium Range Forecast
213. For the medium term, I project that the annual average growth rate will be four per cent in real terms for the period 2013-16, while the underlying inflation rate will average 3.5 per cent. I forecast a small deficit in the Operating Account, Capital Account and Consolidated Account for 2012-13. The Operating Account will see a surplus for the period between 2013-14 and 2016-17. With expenditure on infrastructure projects ever increasing, a deficit will arise in the Capital Account for the whole period. As we have earmarked $50 billion for 2015-16 to support the healthcare financing arrangements, the Consolidated Account will also run a deficit in that year. Fiscal reserves are estimated at $670.4 billion by end-March 2017, representing about 27 per cent of GDP or 18 months of government expenditure.
Concluding Remarks
214. Mr President, the office of Financial Secretary represents the most demanding responsibility that I have taken up during my years in the public service. It is my great honour to have had the opportunity to take on these challenges and difficulties with the people of Hong Kong.
215. I shall never forget the days when we were working together to fight against the financial turmoil. Beset with an unprecedented crisis, our financial stability was shaken, local exports fell by the biggest margin ever. This led to rising unemployment and negative GDP growth, affecting SMEs and the livelihood of our people. But, the people of Hong Kong rose to the difficulties with perseverance and flexibility. We not only rode out the crisis, we also staged a swift rebound well in advance of other economies. Thanks to the solidarity and commitment of all our people, our financial system remained stable while GDP has returned to positive growth. With full employment, Hong Kong saw a more vibrant retail business and market growth.
216. While adhering to the principles of prudent management of public finances, we show our commitment to the community. For my five budgets, I have increased government expenditure by nearly 70 per cent. This exceeds GDP growth of 21 per cent for the same period. Dedicated to education, medical services and social welfare to cater for public needs in such areas, this spending also helps invest in the future and sustain economic vibrancy. The increase in expenditure demonstrates our commitment, and confidence in Hong Kong. But we always bear in mind the importance of ensuring the structural integrity of public finances and keeping adequate fiscal reserves for future challenges. This will also save our next generation from bearing a heavy burden. In this year's Budget, I have made proposals to build on the sound economic conditions facing us to brace ourselves for a possible downturn. Although this term of Government will end in the middle of this year, we shall never give anything but our very best. Where necessary, we shall take appropriate and timely measures in a responsible manner to safeguard the well-being of our society and economy.
217. A number of advanced economies around the world are currently engulfed by debt crises. The crux of their difficulties lies in lax fiscal discipline that makes it hard to rectify the situation. These governments have no alternative but to slash their expenditure or drastically increase their revenue, resulting in problems of all kinds in the political economy and society. These are real examples of how much trouble overspending and excessive borrowing can cause. They have convinced me that fiscal prudence is crucial if we are to maintain our socio-economic stability. It is sensible to uphold the principle of sustainability in public finance management. It is a principle that should not be abandoned lightly.
218. Looking ahead, global economic crises will take a different course in terms of frequency, speed of contagion and intensity under the impact of globalisation. As Hong Kong continues to grow, being an open and small economy, it is inevitably vulnerable to any fluctuation in the world economy. In the face of social and economic changes in the days to come, we must uphold the principle of prudent management of public finances and strive to take pragmatic relief measures. This will involve greater wisdom and courage.
219. Trust and co-operation are keys to the functioning of a modern economy. With trust and co-operation come reduced transaction costs, increased opportunities for economic development and social advance. Without them, crises and shocks may easily make us stumble. That is why we always want the "big society" to play its part in fostering opportunity for community co-operation and solving social problems by engaging public resources to support community efforts.
220. This Government puts people first. We introduced an array of measures to stabilise the economy and safeguard people's livelihood during the past five years. We attach importance to preserving employment not just for the sake of socio-economic stability, but because we take our people as our primary concern. Similarly, when we invest in the future, we do not focus solely on hard infrastructure. We place particular emphasis on the provision of education opportunities for individuals and promote the well-being of the community. We make every effort to ease the hardship of those living in poverty. No matter how difficult the economic environment is, we never give up our commitment to do so.
221. Since I became Financial Secretary five years ago, I have always worked conscientiously. As the saying goes, "A steady conscience can stand the brunt of life." We have weathered tough times together, and overcome challenges and, each time, we have scaled new heights in our economic development. We may not always see eye-to-eye with each other on how to deal with the difficulties we face, but working together we have always been able to find ways to develop Hong Kong into a better place. Behind the intense discussions are our shared beliefs and affection for the place we live in, our home, Hong Kong. We have survived all the crises and made Hong Kong a modern international city which we can all be proud of. We are also able to show to the world our tenacity in the face of global competition.
222. Mr President, we are fortunate to live and work in Hong Kong. True, this extraordinary city is not immune to challenges, but it also brings out the best in us by providing inspiring opportunities. From every crisis, without exception, we have emerged stronger and stood taller before the world. Undoubtedly, there will be many more ups and downs on the road ahead. But, if we take our shared beliefs as our guide and seek unity in our cause and trust in each other, there is nothing to stop us reaching many more milestones. This is not only my sincere wish, but my unshakeable conviction.
Ends/Wednesday, February 1, 2012
Issued at HKT 13:24
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