The long-standing policy of fiscal prudence is the reason that enables Hong Kong to tide over the Asian financial crisis and to cover for another rainy day, the Financial Secretary, Mr Donald Tsang, said today (Wednesday).
Speaking at the Economist conference - "Hong Kong 2000: The Challenges and Opportunities Ahead", Mr Tsang said by keeping expenditure within the trend rate of growth over time, sizeable fiscal reserves had been built up. But the "gold mine" was not bottomless.
"We do have to take into account the financial discipline stipulated in the Basic Law. And, we do have a shrinking revenue base, partly as a result of the tax concessions we have made over the years and partly as a result of the financial crisis," he said. He pointed out that there would be a sizeable deficit this year, although it was likely to be smaller than the original forecast of $36 billion made in March, and a projected deficit next year of $5.6 billion.
He warned that the tax base was shrinking with around 70% of the yield from salaries tax being shouldered by 15% of salaries tax payers, and some 80% of the profit tax revenue coming from only 5% of all the taxable business entities this financial year.
Moreover, structural changes in Hong Kong's revenue base is expected, that is, less reliance on land-related revenue as land supply and demand stabilise, and the economy being diversified from long-standing dependence on property. "The situation is serious. We have to look at broadening our tax base to find other stable sources of revenue," Mr Tsang stressed.
He said it was his duty as a responsible Financial Secretary, and the duty of the legislature which has the ultimate say on public revenue and expenditure, to bring the financial position back into the black over the medium term.
"This is also essential if we are to maintain our international credit rating, which underpins investors' confidence in Hong Kong and the borrowing capability of local businesses," he said.
"I need also to respond sensibly to the legitimate expectations of the community in the prevailing economic climate. In other words, the first full budget of the new millenium will be an intricate balancing act. But one, I fear, that will not be sprinkled with 'gold dust'," Mr Tsang said.
Turning to the challenges facing Hong Kong, the Financial Secretary said while our economic growth figures were encouraging, with GDP growth forecast for 1999 revised upward to 1.8 per cent, there were still external factors which should be watched out, such as the interest rate trend in the United States which could impact on the stock market and the strong Japanese Yen.
Another issue which needs to be addressed is Hong Kong's long term competitiveness. He said this would become even more pronounced with the further opening up of the Mainland after its accession to the World Trade Organisation (WTO).
"If our costs are high, we will be in danger of losing out to Shanghai or some other regional cities in transactions where currency convertibility is not essential," he said.
Although there is a premium for doing business in Hong Kong, as with New York or London, he said the premium here was justified by our advantages: our location, world-class banking, financial services and infrastructure; free market philosophy; strong legal system based on the common law; highly-developed services culture and economy which ranges across the whole services spectrum etc.
In conclusion, Mr Tsang said: "We fully recognise there are difficulties we need to overcome to meet the challenges and capitalise on the opportunities of the 21st century."
"And that requires not only entrepreneurial flair and modern managerial skills, but also steadfastness and a clear vision of Hong Kong's position in our Nation and this global economy."
End/Wednesday, December 1, 1999