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Public Finances
143. As Financial Secretary, I am obliged to ensure that our public finances are sustainable and can embrace the short, medium as well as long-term needs and development of Hong Kong. Government expenditure will be directed where required in line with our policies. Government revenue will be built around a simple and low tax regime, avoid over reliance on one or two types of tax and adhere strictly to the "user pays" principle. In drawing up the Budget, we must follow the principle of keeping expenditure within the limits of revenue, avoid deficits, and keep the budget commensurate with economic growth.
Use of Resources
144. Government has to contain expenditure growth in the face of an ageing population, a shrinking labour force and the slowing economy. I initiated a three-year measure as from 2015-16 to contain expenditure by requiring policy bureaux to achieve more efficient use of resources through re-engineering, phasing out dated procedures and re-prioritising. We aim to reduce operating expenditure by two per cent in three financial years. Resources saved have all been re-allocated to policy bureaux for new services.
145. Recently the community has aired concerns about cost overruns of infrastructure projects. The progression of a project from planning and study, design and construction to commissioning takes years. It involves a host of uncertainties such as ground conditions, surges in prices of construction materials, wage hikes, economic fluctuations, as well as unforeseen circumstances in the course of construction. All these may lead to cost overruns. Large-scale infrastructure projects face even greater challenges.
146. To strengthen cost control of public works, the task force I set up last year has examined the causes for the rising costs of works projects and formulated improvement measures. I have asked the Development Bureau to establish a multi-disciplinary office to conduct a comprehensive review of the guidelines on public works, reduce unnecessary design and contractual requirements, and scrutinise closely the cost estimates of 300 major new projects in the next three years. It will report progress to me on a regular basis with a view to controlling project costs.
147. We shall introduce more competition, and seek to fine-tune the works procedures and enhance training to improve productivity. Subject to safeguarding priority employment of local workers and their wage levels, we shall rely on the enhanced Supplementary Labour Scheme to alleviate the delays and cost overruns caused by labour shortage.
148. Recent fluctuations in construction costs have occasionally resulted in higher-than-expected tender prices. To avoid the need to seek additional funding for unexpectedly high tender prices, we have urged departments to invite tenders before submitting funding applications to LegCo for less controversial projects, such as schools and hospitals, which are livelihood-related. We can then present more accurate project estimates to LegCo.
Preserving Revenue Base
149. Government has been committed to modernising the tax legislation in recent years to ensure that Hong Kong maintains a fair tax environment, aligns our tax system with international standards, and enhances our competitiveness.
150. Government just introduced a bill into LegCo this January on the implementation of the international standard on Automatic Exchange of Financial Account Information in Tax Matters. I look forward to early completion of the legislative process to bring the first automatic exchange into effect in 2018 as pledged.
151. Hong Kong is also obliged to implement the project of the Group of Twenty against base erosion and profit shifting. We shall conduct analysis, consult the trade and consider participating in an international framework being developed by the Organisation for Economic Co-operation and Development.
152. Over the past three years, we have made strenuous efforts to remind all government departments to regularly review their fees and charges. Unless justified on policy ground, all fees and charges for government services have been set in accordance with the "cost-recovery" and "user pays" principles. The review mechanism has been re-activated in most of the departments. Relevant fees and charges have registered an average annual increase of $400 million in the three years since 2012-13.
Fiscal Reserves
153. With a relatively sound fiscal position, Government has recorded successive years of surpluses. Fiscal reserves are estimated to be $860 billion by the end of March 2016, equivalent to 24 months of government expenditure.
154. The reserves are all that we have at our disposal. They have yet to take into account unavoidable commitments including $300 billion for ongoing works projects and $800 billion for statutory pension.
155. Our fiscal reserves are the mainstay of our economy. It helps us ensure the stability of the Hong Kong dollar and withstand challenges posed by economic cycles and ageing population. As one may recall, Hong Kong was beset with severe economic doldrums from 1998 to 2004. During the period, we experienced five years of fiscal deficits which depleted 40 per cent of our fiscal reserves.
156. Prolonged depletion of the reserves to meet ever-increasing recurrent expenditure is not sustainable. Recurrent expenditure must be funded by sustainable revenue. To maintain the health of our public finances and enable us to cope with possible threats, we must exercise fiscal prudence and live within our means.
157. To tackle the problems that come with an anticipated structural deficit, I have established the Future Fund to set aside part of our fiscal reserves for long-term investments when we can still afford to do so. I have instructed HKMA to allocate $220 billion from the balance of the Land Fund, which is part of the fiscal reserves, as an initial endowment of the Future Fund, and to inject one-third of the actual surplus in 2015-16 into the Future Fund. HKMA will deploy half of the Future Fund for incremental placement with the Exchange Fund's Long-Term Growth Portfolio to achieve greater returns.
Forward Planning
158. In preparing the Budget, I have been particularly mindful of the long-term needs of Hong Kong. I have set up the Housing Reserve in support of public housing development, set aside $200 billion for the ten-year hospital development plan and established the Future Fund as part of our long-term investment strategy. Government will continue to make forward planning for major financial commitments to meet the needs of social development and people's livelihood.
(To be continued.)
Ends/Wednesday, February 24, 2016
Issued at HKT 12:18
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