Press Release



Budget Speech by the Financial Secretary


Following is the text of the Speech on the 2001-02 Budget delivered by the Financial Secretary, Mr Donald Tsang, in Legislative Council today (March 7):

Madam President,


I move that the Appropriation Bill 2001 be read a second time.

2. Over the past five years, Hong Kong has experienced some extraordinary ebbs and flows of the economic tide. As Financial Secretary, I have had to help chart a course through these. In my early Budgets, I was able to offer generous tax concessions up to the level allowed by our economic growth and buoyant public finances at the time. On 1 July 1997, our reunification with the Mainland took us into a new era. Then, in the wake of the Asian financial turmoil, we were buffeted by a series of unprecedented shockwaves that threatened our very economic survival. To our relief, the economy turned around in 1999. And in my Budget last year, I was able to greet the arrival of the new millenium with renewed optimism. Throughout this period Hong Kong has continued its economic restructuring. It is little wonder that I have found the preparation of each Budget a unique challenge and experience. This, my final Budget, is no exception.

3. Over the years, I have stressed the importance of prudent financial management and balanced budgets. This year, the need for balance has been particularly close to my heart. In recent months, many in the community, including honourable Members of this Council, have urged me not to put at risk our continued economic growth by seeking too rapid an improvement in our fiscal position. They have also pointed out that I should consider not just the buoyant economic indicators but also the standard of living of ordinary people. But, on the other hand, there are those, both in Hong Kong and overseas, who caution against the further use of fiscal stimuli and urge an early return to balanced budgets. As the Chief Executive said in his 2000 Policy Address, the Administration needs to strike the right balance in policy formulation, so that we foster Hong Kong's long-term development and improve the standard of living of our people. I trust that the community will support the balanced judgements which I have tried to make in this Budget.

4. I will begin by addressing the state of the economy and Hong Kong's way forward to continued economic development. I will then deal with our public finances in the short to medium term and my budget proposals for the coming year.

The Hong Kong Economy

Economic Performance in 2000

5. The economy returned to positive growth in the second quarter of 1999 and continued to flourish during 2000. Last year -

* GDP registered 10.5 per cent real growth, the highest since 1987;

* total exports of goods grew by 17.1 per cent in real terms, the highest rise since 1992. Exports to the United States, the European Union and Asia all recorded double-digit growth;

* exports of services grew by 14.3 per cent in real terms;

* our visible and invisible trade, taken together, achieved a surplus of $60 billion, with a substantial contribution from inbound tourism which recorded 9.4 per cent growth;

* local consumer spending grew by 5.4 per cent in real terms;

* overall investment spending turned around and grew by 8.8 per cent in real terms; and

* the rate of deflation slowed appreciably, with the composite CPI moving from -5.3 per cent in January to -1.8 per cent in December.

6. We have seen a continued steady decline in the rate of unemployment, from a high of 6.3 per cent in 1999 to 4.3 per cent in the quarter ended 31 January 2001.

7. These figures indicate that the level of economic activity has picked up dramatically. The adjustment in prices, wages and rents has been crucial to our economic recovery. We have enhanced our productivity and the competitiveness of our exports. The performance of other economies has also helped. This remarkable achievement has once again demonstrated Hong Kong's tenacity and resilience.

8. But I have not lost sight of the fact that many in the community have yet to experience an improvement in their own circumstances. For businesses, profit margins are tight and fall short of those before the financial crisis. Although the adjustment in wages has helped our economic recovery, it has been difficult and painful, particularly for those who have suffered pay freezes or reductions. Although the rate of unemployment is falling, it remains higher than before our recent economic setbacks. The downward adjustment in the property market also means that a considerable number of middle-income households find that the value of their flats has fallen. All this has been in the forefront of my mind as I prepared this Budget.

Economic Prospects for 2001 and Medium-term Prospects

9. Overall, Hong Kong's growth should moderate in 2001. On the downside, I expect our economic performance to be affected by the rapid slowdown of the US economy, continued economic stagnation in Japan and slower growth in domestic demand in East Asia. On a positive note, we should stand to benefit from steady economic growth in the European Union and the sustained vigorous growth of the Mainland economy. In particular, China's coming accession to the World Trade Organisation will give us new impetus. Domestically, local consumption and investment spending should continue to grow. We can expect to see improved employment prospects and wages picking up modestly. But I should point out that there are no grounds for complacency. Increasing globalisation means we are, more than ever, prey to adverse political and economic events elsewhere and we must be alert to any potential dangers.

10. I am forecasting that in 2001 -

* GDP will grow by 4 per cent in real terms;

* total exports of goods will show a 5.5 per cent real increase;

* exports of services will continue to grow in real terms by 6.5 per cent;

* local consumer spending will increase in real terms by 2.5 per cent;

* overall investment spending will grow in real terms by 3.6 per cent; and

* the fall in consumer prices will continue to ease off and prices will start to pick up again later in the year. For 2001 as a whole, I am forecasting zero inflation.

11. Over the medium term, I expect the economy to continue to grow steadily, but the external factors which I have mentioned may still pose some challenges. Last year, I forecast a trend GDP growth of 4 per cent a year, in real terms, for the period from 2000 to 2003. I believe this trend growth rate remains valid for the period from 2001 to 2004. I expect prices to rise gradually after zero inflation in 2001. The GDP deflator is forecast to be 2.5 per cent a year over the medium term.

Strategies for Development

12. Last year, in his Policy Address, the Chief Executive made it clear that we must seize the opportunities presented by our country's coming accession to the WTO and the development of its Western Region. We must upgrade our human capital. We must also hone our strengths as a centre for international finance and high-value-added services. It is success in these areas that will drive our economic growth to the benefit of the whole community. I would now like to elaborate on how I see these developments being taken forward. As always, the market will lead, with the Government in support.

China's Accession to WTO

Opportunities and Challenges

13. China will soon become a member of the WTO and will further open up its market to competition. This will be a milestone in history and will herald a new chapter in world trade. The decision to develop Western China, which covers more than half of our country, will expand the already enormous China market. These developments will put the Mainland on the road to greater prosperity and will open up to the world, especially Hong Kong, vast development potential and business opportunities.

14. China's accession to the WTO will affect everyone in the community. This is not just a matter of trade. It is a significant step that will trigger off a chain reaction throughout our economy. It will bring opportunities and challenges to all businesses, big and small.

15. Our economy is linked very closely to that of the Mainland. Last year, some US$44 billion, or 70 per cent of the capital raised on the Hong Kong securities market was for Mainland enterprises. In 2000, the number of overseas companies with regional offices in Hong Kong increased by 20 per cent because of Hong Kong's obvious value as an intermediary for developing business on the Mainland. These are but two indicators of the huge potential for Hong Kong arising from China's accession to the WTO. The stage is now set for another economic take-off.

16. Along with these opportunities will come challenges. Although Hong Kong is a Special Administrative Region of China, it does not enjoy any preferential trade treatment from the Mainland. Our role as an intermediary between the Mainland and the rest of the world will come under challenge. There will be competition not only from overseas markets but also from Mainland cities, whose remarkable performance in recent years must not be overlooked. To turn these challenges into opportunities, Hong Kong needs to build on its traditional strengths with pragmatism and a spirit of enterprise.

17. "One Country, Two Systems" gives us an enviable advantage. Hong Kong stands on the doorstep of the vast China market. The majority of our population is Chinese, steeped in Chinese culture and sharing a common heritage. Our trading partnerships with businesses on the Mainland go back many generations. We have excellent commercial networks linking the Mainland with overseas markets. We know the business environment. What is more, we pride ourselves on living by the rule of law, maintaining a level playing field, upholding all our freedoms and providing clean government. All these have made Hong Kong a magnet for international businesses.

18. Capitalising on "One Country, Two Systems", we must build on these advantages and reinforce our economic partnership with the Mainland, starting with our neighbour, Guangdong, and particularly with the Pearl River Delta. We must aim to complement each other, making the most of our different strengths, turning them into a competitive advantage for the entire South China region. We must grasp this opportunity to become the World City of Asia and a first-class international financial centre, providing an unrivalled breadth and depth of financial and high-value-added services. All this will contribute to the development of our country and enhance Hong Kong's unparalleled value as an SAR of China.

19. We cannot sit back and wait for this to happen. We must work together with the Mainland. We must take the initiative to step up co-operation with Guangdong. The interbureau research group which I am leading is, as a matter of priority, examining practical ways of helping Hong Kong businesses capture opportunities in the new markets that will emerge following China's accession to the WTO. We have been holding intensive discussions with the Central People's Government and other Mainland authorities. Focusing on the services industry and professional services in which Hong Kong has an edge, we aim to help Hong Kong businessmen gain first-hand access to the latest market information and to help them explore the scope for co-operation with their Mainland counterparts.

20. Our efforts will not stop there. Hong Kong needs better infrastructural links, greater support services for businesses and more exchanges of people and knowledge.

Enhancing Infrastructural Links

Developing a Regional Transportation Network

21. I will start with infrastructural links. Since reunification, there has been an increasing flow of economic and social activities between Hong Kong and the Mainland, particularly Guangdong. On average, 330,000 passengers travel between Hong Kong and the Mainland each day. The growth in passenger traffic by land has been particularly impressive. It has surged by nearly 80 per cent since reunification. The average daily throughput of cargo exceeds three million tonnes. Over the last three years, the throughput of land cargo has increased by more than 250 per cent.

22. To cater for the burgeoning economic activities between Hong Kong and the Mainland, we are already expanding our facilities and services. Projects include early construction of the Shenzhen Western Corridor connecting Hong Kong with Shekou, the Deep Bay Link and the Lok Ma Chau Spur Line. We are also seeking a further expansion of air services between Hong Kong and the Mainland. And the Airport Authority is pursuing the development of a high-value-added logistics centre and a marine cargo terminal at the airport.

23. But we need to do more. Improvements to infrastructural connections with the Pearl River Delta and intermodal transport interchanges in the South China region should be priorities. We need to smooth the flow of people and goods across the entire region. This should help to increase efficiency and sharpen the competitive advantage of the region to the benefit of both Guangdong and Hong Kong.

24. As the Chief Executive reminded us last October in his Policy Address, we need a new way of thinking. So we must continue to innovate. In this direction, we must find ways for our railway corporations and their Mainland counterparts to work more closely together. I would like to see particular emphasis being placed on improving cross-boundary services and expanding the railway network in the region. We will also put forward proposals for a regional transportation network, in the light of the findings of strategic studies to be completed later in the year on the development of our port, airport and logistics centres. In addition, we should expand transport links between our international airport at Chek Lap Kok and ports and airports in the Pearl River Delta. The Airport Authority will also seek to strengthen co-operation between airports in the region.

Cross-boundary Telecommunications

25. The liberalisation of our telecommunications market has resulted in the formation of an advanced telecommunications infrastructure by the private sector. Over the past 12 months, the capacity between the Mainland and Hong Kong has, amazingly, increased more than eight times. This is a significant boost towards meeting the demand for internet and digital communications between the two places. Greater competition has also reduced the cost of private-leased circuits between Hong Kong and the Mainland by more than 50 per cent since January 2000.

26. As the market develops further, we will continue to issue new licences to qualified applicants, promoting investment in infrastructure to increase telecommunications capacity between Hong Kong and the Mainland. To encourage the development of cross-boundary electronic commerce, we will step up our discussions with Mainland authorities on cross-certification arrangements. We recognise that the development of IT is market-led and we will bring together the IT industry of the two places, encouraging both sides to explore further scope for co-operation.

Providing Support Services

27. We intend to introduce a series of measures to help businesses, especially Small and Medium Enterprises, to start up or expand their activities on the Mainland.

Special Support for Small and Medium Enterprises

28. I have asked the Trade Development Council to enhance its support for SMEs. Specifically, I am looking to the TDC to provide SMEs with more market information and advice on doing business on the Mainland. The TDC will conduct an in-depth analysis of the South China region, covering the development potential in different sectors, the distribution systems and import channels. It will also liaise with the relevant Mainland parties to secure the most comprehensive and timely market information for Hong Kong businesses. The TDC will set up a China Business Advisory Unit to provide SMEs with one-stop services for doing business in Guangdong.

29. We are considering setting up an Economic and Trade Office in Guangdong to strengthen our liaison with the local governmental trade and commerce authorities. Enhancing Efficiency at Boundary Crossings

30. We are helping to speed up the flow of people, vehicles and goods between Hong Kong and the Mainland. We will -

* deploy over 100 additional immigration staff at Lo Wu in the coming fiscal year to alleviate congestion;

* expand the facilities at Lok Ma Chau in phases, so that by September 2003, we will have increased the capacity by more than 70 per cent, from 21 to 36 vehicles a minute; and

* use the latest technology to speed up customs and immigration clearance, including the possible implementation of an automatic vehicle recognition system and electronic data interchange programmes for the preclearance of cargo.

31. The growth in cross-boundary traffic is so rapid that these measures, while meeting the short-term situation, will be insufficient to deal with longer-term demand. We will initiate a fresh and comprehensive assessment of traffic volumes in the medium to long term and will draw up plans for new and improved cross-boundary facilities and arrangements.

Encouraging Exchanges and Deepening Understanding

32. As China opens up more, the world will gain a better awareness of the Mainland market. To stay ahead of the race we must deepen our own understanding of our country, her geography, culture, language, political and economic environment, and development potential.

33. I support the private sector's efforts in conducting exchange visits and staff exchange programmes with their Mainland counterparts. Indeed, I encourage them to do more. Various government bureaux and departments will actively participate in these programmes. I want to encourage and help Hong Kong businesses to capture the opportunities in the Western Region. In May, I will be leading a high-level delegation, comprising government representatives and local businessmen, to major cities in Western China. I hope this will kick-start economic activity between the two places. In addition, the Immigration Department will continue to maintain close contact with the Mainland authorities with a view to simplifying procedures for Mainland residents coming to Hong Kong for business and training.

34. I also appeal to the education sector for its support. We must improve our students' knowledge of China. We must equip our primary and secondary students with the skills necessary to write good Chinese and English and to speak fluently, not only in Cantonese, but also in Putonghua and English. And we must help them to understand our extensive economic ties with the Mainland.

Upgrading Our Human Capital

35. People are our most precious asset. In a knowledge-based economy, we must upgrade their capacity to acquire and apply new skills. We need to blend their traditional strengths with these new skills, particularly in IT, so that they are better-equipped to meet the challenges of the 21st Century.

Strengthening Training and Easing Unemployment

36. In recent years, we have devoted considerable effort and resources to training and retraining our workforce. On top of recurrent funding of over $2 billion a year for the Vocational Training Council, we have allocated nearly $1 billion over three years to various training institutions to run courses that meet market needs. Over that period, their wide range of programmes has offered over 400,000 places, with over 70 per cent of attendees successfully finding jobs on completion of their training. In addition, we have embarked on aggressive job placement programmes to help the unemployed.

37. To augment these efforts, the Chief Executive announced, in his 2000 Policy Address, a series of new measures. They include the provision of recurrent funding for the Employees Retraining Board and a special grant for skills upgrading. We have earmarked sufficient funds in the draft Estimates for these measures.

38. To strengthen the training of IT manpower, we have formed a Task Force comprising representatives from the IT industry and training institutions. We are pursuing the Task Force's recommendations. These include inviting international training institutions to provide training programmes on IT and multimedia content creation, engaging the industry in the provision of IT education in schools, examining the provision of accreditation for non-degree IT courses, increasing the IT content in vocational training and providing opportunities for overseas training.

39. The Government, employers and the rest of the community must work together if Hong Kong is to succeed in upgrading its human capital and realising the objective of lifelong learning. The Government will continue to invest in training. By the end of this year, we will also complete a review of the division of responsibilities among the various training and retraining institutions to improve cost-effectiveness. For their part, employers must provide their employees with training suited to business needs. They must be prepared to employ less-experienced staff and provide them with on-the-job training. Individuals must recognise the challenges ahead and take full advantage of the training opportunities available.

Supporting Employers' Staff Training

40. During the Budget consultations, many, including Members of this Council, suggested that the Government should offer employers, especially SMEs, tax concessions or subsidies to encourage their investment in staff training. Such suggestions have rightly focused on the fact that many SMEs, by their nature, are inhibited from investing in staff training. I recognise this problem and I have decided to set aside $300 million for the establishment of a training fund to subsidise SMEs' training initiatives. I will invite the SME Committee to advise on the detailed operation of the fund, including the scope of training, the eligibility criteria and the amount of subsidy to be provided. The Trade and Industry Department will administer the fund.

Government Setting an Example

41. As the largest employer in Hong Kong, the Government will set an example in taking forward the policy objective of promoting lifelong learning.

42. With the additional $50 million recently approved by the Finance Committee, we will enhance the training of civil servants over the next three years. Heads of departments and grades will draw up detailed training and staff-development plans. We will consult the Staff Side and work closely with them as we take forward these training initiatives.

Admission of Mainland Professionals

43. According to the latest manpower projections, Hong Kong will face a shortage of as many as 120,000 people with high academic qualifications over the next five years. Although we will continue to invest in education and training, we have to ensure that we have an adequate supply of the right manpower skills in the short to medium term to sustain Hong Kong's economic growth.

44. For foreign professionals with skills which are in short supply in Hong Kong, there is generally no restriction on entry for employment. But professionals from the Mainland are currently admitted for employment only if they qualify as top-notch talent under the Admission of Talents Scheme. To overcome our manpower shortage, we have decided to revive in modified form the Admission of Mainland Professionals Scheme implemented in the mid-90s. We will consult Members on the implementation framework. I will mention the major features of the scheme -

* employers will be able to bring in Mainland professionals only in specific disciplines with known shortages. Initially, the scheme will apply only to the IT and financial services disciplines;

* it will meet employers' immediate operational needs, unlike the Admission of Talents Scheme which focuses more on innovation and research; and

* it will not be subject to any quota, so that the scheme will operate in line with supply and demand in the market.

45. In addition, we are devising a scheme that will allow Mainland students studying in our universities to remain in Hong Kong for employment upon graduation, provided they fulfill prescribed eligibility criteria.

46. Let me stress that these admission schemes are intended to meet the shortage of professionals in Hong Kong in the short to medium term. They will not deprive local professionals or local graduates of jobs. Nor will they bring in semi- or low-skilled workers. We will set reasonable admission criteria and require remuneration packages to be broadly comparable with those for local professionals.

47. These schemes will boost Hong Kong's economic development. By bridging the gap between supply and demand, we will be helping businesses to grow, thereby creating more job opportunities. The admission of professionals will bring about a much-needed transfer of knowledge and experience of the Mainland. This will be invaluable to us in the competition for an expanded China market. Failure to take immediate measures, when other economies are already making similar moves, will undermine Hong Kong's competitiveness.

Wealth Gap

48. Upgrading the skills of the workforce is not only essential for Hong Kong's economic development but also an effective means of tackling the wealth gap within the community. In recent times, the question of a wealth gap has attracted attention. No doubt this is because the recent recession has hit those most affected by the ongoing restructuring of our economy and resulted in the displacement of some of our low-skilled workers who have limited education.

49. A wealth gap is common among developed and developing countries. Some countries have tried to tackle this through welfarism and a high-tax policy. These measures have often created even greater problems than the ones they sought to remedy. They have brought upon their economies a series of structural problems. We must not make the same mistake. Our focus cannot be to remove this wealth gap. Instead we must provide the poor with a basic level of social security and help them escape poverty.

50. As the Chief Executive pointed out in his Policy Address, the key to helping the poor is to ensure sustained economic development and the creation of more job opportunities and, at the same time, to enhance their employment prospects through education and training. And, of course, we must also ensure that our society remains free and open, so that people from all walks of life can move between different occupational sectors and progress to better jobs. We must all strive to excel and help our children to do the same.

51. According to a recent survey, of the 20 per cent lowest-paid workers ten years ago, nearly 60 per cent have now risen above this level. This finding demonstrates the high upward mobility of Hong Kong workers and indicates that those who are able and hardworking have every opportunity to better themselves. But there are some who, through no fault of their own, cannot escape the effects of misfortune when it strikes. They are the ones who most need our help.

Hong Kong as an International Financial and High-value-added Services Centre

Developing High-value-added Services

52. Hong Kong has established a strong foothold as an international financial and services centre. We aim to become a leading player in both areas. We need to continue to improve our quality, efficiency and service diversification. Harnessing the latest developments in IT and capitalising on China's accession to the WTO, we will stay at the cutting edge of market trends and pioneer new development frontiers.

53. Given the breadth of our service industries, I will be focusing on only a few areas this afternoon. I have already mentioned the future development of transport and logistics services. I would now like to say a few words on tourism, one of the pillars of our economy.

54. Last year, more than 13 million tourists visited Hong Kong and total income from tourism exceeded $60 billion, contributing about 5 per cent of our GDP. Our mission is to ensure that Hong Kong remains the leading tourist destination in Asia. We have created the Tourism Commission and revamped the work of the Tourist Association. We have published a strategic plan mapping out more than 50 short- and long-term initiatives. We are making good progress on a number of exciting projects, including Hong Kong Disneyland and a cable car system on North Lantau. We are committed to improving the quality of service to tourists, particularly in our hotels, shops and restaurants. To help achieve this, we will promote the Quality Tourism Services Scheme and improve the regulatory system for local travel agents. We will work with the Mainland authorities on two fronts: to attract more visitors from the Mainland and to devise new travel packages combining Hong Kong and Mainland destinations for overseas tourists.

IT Development

55. Information technology is a linchpin for the development of high-value-added services. Hong Kong has invested heavily in this sector in recent years. The wave of "dotcoms" brought fresh impetus, at one stage, to our equities market. That excitement soon evaporated and rapid adjustments in the market brought a painful shock to many. But we must not let that deter us from developing IT. We must not confuse the speculative trading of IT stocks with investment in IT infrastructure.

56. Hong Kong has in place one of the best infrastructures for a knowledge-based economy. The Cyberport will open in phases between 2002 and 2003 and will bring together new capital, facilities and talent. We have liberalised the local and international telecommunications markets. Our external communications capacity will grow tenfold over the next three years, entailing investment of over $9 billion. Our broadband network now covers all commercial buildings and 95 per cent of residential buildings, a coverage rate which is among the highest in the world. In less than two years we have implemented the Electronic Service Delivery Scheme, opening up a new arena for e-government and e-business. That makes Hong Kong a front-runner in Asia. In the middle of this year we intend to award four licences for third generation mobile services.

Financial Infrastructure

57. We continue to upgrade our financial infrastructure, making the best use of IT to increase efficiency, reduce costs and risks, and enhance market transparency.

58. We have achieved good progress in implementing the short-term initiatives in the securities and futures markets recommended by the Steering Committee on the Enhancement of the Financial Infrastructure. In particular, the Securities and Futures Commission has set up the Securities and Derivatives Network and last August ushered in its first application, the electronic filing of Financial Resources Rules returns. Last month, the Commission successfully linked the SDNet with the Hong Kong Monetary Authority's electronic network for submission of banking returns. This is a first step towards forming FinNet, a robust, efficient and secure network for financial market transactions.

59. Last September, we introduced the first electronic initial public offering for the MTR Privatisation Share Offer. Public response was encouraging and this has laid a good foundation for other eIPOs. Last year, the Stock Exchange of Hong Kong also successfully launched the third generation of the Automatic Order Execution and Matching System to enable the industry to exploit the full potential for on-line trading.

60. I have tasked the Steering Committee to produce a detailed roadmap and timetable to implement the longer-term measures. These include straight-through processing, scripless transactions and single clearing arrangements. The Steering Committee will work closely with the relevant government agencies, financial regulators and the industry.

61. In the currency market, we successfully launched the US Dollar Clearing System in the second half of last year. A few months on, more than 20 overseas banks have joined the System, in addition to banks in Hong Kong. Apart from providing for the efficient settlement of US dollar transactions in Hong Kong and the region, the System eliminates settlement risks which could arise when a transaction spreads across different time zones. In addition, the System allows participating banks to conduct US Dollar Real-Time Gross Settlement for interbank payments. It is also the first Payment versus Payment foreign exchange transaction system in the world. This has increased Hong Kong's attractiveness to global investors as a trading platform. The average daily turnover of the System has now reached US$3 to 4 billion. It can also handle other investment instruments denominated in US dollars such as securities and bonds, helping to develop our securities and bond markets further. Following the success of the US Dollar Clearing System, the HKMA is now studying the possibility of introducing clearing systems in other foreign currencies.

62. After more than a year's extensive consultation, we introduced the Securities and Futures Bill into this Council last November. Enactment of the Bill will help businesses to raise capital in our market. It will also consolidate Hong Kong's position as an international financial centre and the premier capital formation centre for the Mainland. The proposals to combat market misconduct and enhance disclosure will help raise our corporate governance standards. I hope that, with the full support of Members and the industry, the Bill will gain early enactment in the current legislative session.

63. The HKMA is examining the establishment of a commercial credit reference agency in Hong Kong. This would help meet the financing needs of SMEs, increase market transparency and strengthen the risk management system of the banking sector. In this exercise, the HKMA has enlisted the help of representatives from the banking sector, other businessmen and the Office of the Privacy Commissioner for Personal Data. They will consider various matters, including the agency's ownership and management rights and whether banks should be required to disclose information. The HKMA will make specific proposals later in the year.

64. Looking ahead, we will foster creativity in the market and encourage it to introduce new financial and securities products. Over time, new channels for raising capital will emerge. Our aim is to provide the best financial intermediary services, comparable to those available in New York and London. The Secretary for Financial Services will draw up a plan with the industry's help and oversee its implementation.

65. The HKMA is widely respected, both in Hong Kong and overseas, for its professionalism, fairness and transparency. But to keep pace with financial market developments and to reinforce transparency and accountability, I will consider how to improve Hong Kong's monetary management structure.

Corporate Governance

66. High standards of corporate governance are the hallmark of a first-class international financial and business centre. In my Budget Speech last year, I announced that the Standing Committee on Company Law Reform would conduct a comprehensive study on corporate governance standards in Hong Kong. The study is making good progress. In the coming year, we will continue to strengthen our corporate governance regime. We will -

* take forward proposals to amend the Companies Ordinance to strengthen the accountability of directors and enable shareholders to monitor and participate directly in corporate affairs;

* conduct an overall review of the codes on Takeovers and Mergers, and Share Repurchases, to bring them into line with recent international developments;

* conduct an overall review of the Listing Rules and enforcement procedures, to strengthen their corporate governance provisions and improve the efficiency of enforcement; and

* strengthen the regulatory regime and legislation for disclosure of market information, having regard to overseas practices.

67. In addition, the Standing Committee is conducting an overall review of directors' duties and responsibilities, shareholders' rights and the disclosure of corporate information. It will also conduct in-depth research into institutional investors' perception of corporate governance standards in Hong Kong, the correlation between shareholder profile and corporate performance and the latest developments in enhanced corporate governance standards in other regions.

68. Our aim is to establish Hong Kong as a paragon of corporate governance, ensuring that those investing in Hong Kong are afforded the best protection and that our listed companies are managed with excellence, complying with the highest international standards including those relating to risk management and disclosure of information. I firmly believe that this is a core area of work that will help us maintain our leading position in financial services in our Asian time zone.

Public Finances

69. Let me turn now to our public finances. I will deal first with the estimated outturn for the current financial year. I will then set out my budget strategy and my budget measures for 2001íV02, followed by an analysis of the Government's financial position over the medium term.

2000-01 Outturn

70. A year ago, I forecast a deficit of $6.2 billion for 2000íV01. I now estimate a larger deficit of $11.4 billion for the year. I expect revenue to be $21.4 billion lower than originally forecast. But this is partially offset by reduced expenditure of $16.2 billion.

71. On the revenue side, the estimated reduction is largely attributable to -

* the revenue from land premia which is expected to come in $13.3 billion less than we anticipated;

* the return on the investment of our fiscal reserves in the Exchange Fund which is expected to fall short of our original estimate by $8.7 billion;

* the proceeds from the partial privatisation of the MTR which fell short of our budgeted figure by $5 billion;

* but, at the same time, receipts from profits tax are expected to exceed the original estimate by $5.1 billion.

72. On the expenditure side, the estimated reduction mainly comprises -

* reduced spending of $6.8 billion arising largely from Government's determined efforts to enhance productivity and efficiency and the lower-than-expected prices of goods and services;

* lower-than-expected spending of $2 billion on Comprehensive

Social Security Assistance;

* reduced spending of $8.7 billion on capital works, loans and other non-recurrent expenditure due mainly to lower-than-forecast project costs and lower demand for various loans;

* but, at the same time, we have made pension and related payments of $1.3 billion in respect of the voluntary retirement schemes, for which no provision was made in the original estimates.

73. Although our overall deficit is larger than forecast, I now expect an operating deficit of $19.2 billion, lower than the $25 billion which I originally estimated.

74. Our fiscal reserves will drop from $444.3 billion at 31 March 2000 to $432.9 billion at 31 March 2001.

Budget Strategy for 2001íV02

75. In deciding my budget strategy for 2001íV02, I have taken into account the state of our economy, people's livelihood, the future direction of Hong Kong's economic development and Government's financial position. I have also ensured that the budget strategy is built upon the well-established budget principles with which Members are so familiar. They are -

* living within our means and striving to achieve a balance between revenue and expenditure over the medium term;

* ensuring that the growth in government expenditure does not outstrip GDP growth over time;

* maintaining a simple and predictable tax regime with low tax rates; and

* maintaining sufficient fiscal reserves.

76. My budget strategy for 2001íV02 has four main elements -

* first, the Budget must reflect our economic circumstances and underpin future development. It must not stifle our economic growth or hurt our livelihood;

* second, we must devote sufficient resources to address the needs of the community, particularly the grassroots and the disadvantaged, and implement all the undertakings made by the Chief Executive in his Policy Addresses;

* third, we must continue to control government expenditure; and

* fourth, we must strive to achieve a balanced budget, raising

additional revenue if necessary.

Let me now elaborate on each of these elements and on the budgetary measures which I propose.

Maintaining Steady Economic Growth

77. The strong performance of the economy last year was hard-earned. It came about largely because of the community's industry and perseverance. But the fact remains that, after much pain, the recovery has taken root. We must let those roots grow stronger for the benefit of all. So long as we can afford to hold back, I agree with those who have said we should not rush to improve our finances at the expense of economic growth. 2001íV02 could be another eventful year. We are facing China's accession to the WTO, continuing economic restructuring in Hong Kong and a rapid slowdown in the US economy. Another year of consolidation makes good sense.

78. I propose two concessions which should assist Hong Kong's development.

Salaries Tax Deductions

79. To take forward a suggestion made by the Chief Executive in his 2000 Policy Address, and to further encourage lifelong learning, I propose to increase the maximum amount of deduction for self-education expenses under salaries tax, from $30,000 to $40,000. This concession is expected to cost $10 million in 2001íV02 and $70 million over the period of the Medium Range Forecast to 2004íV05.

Stamp Duty on Stock Transactions

80. To maintain our position as an international financial centre, keeping our stock market competitive rates as a high priority. At present, no stamp duty is levied on transactions in many stock markets around the world, including the US, Japan, Germany, Singapore and New Zealand. Indeed, the worldwide trend is to reduce or entirely abolish stamp duty on stock transactions.

81. In view of this, I reduced the duty by 10 per cent last year. At that time, I encouraged the Stock Exchange to reduce brokerage commissions, which constitute two-thirds of the cost of stock transactions. I also urged the industry to open up to competition.

82. I am very pleased to learn that Hong Kong Exchange and Clearing has decided to abolish the minimum brokerage commission rate and to open up the brokerage licensing system from 1 April 2002. To complement their efforts, I propose to lower the stamp duty on stock transactions from 0.225 per cent to 0.2 per cent per round transaction. This concession is expected to cost $680 million in 2001íV02 and $4.2 billion over the next four years.

83. At the same time, there is a need to set up a new Investor Compensation Fund through a levy on stock transactions, as proposed under the Securities and Futures Bill. The Securities and Futures Commission will shortly consult the public on the details, including the transfer of assets from the existing Unified Exchange and Futures Compensation Funds to the new Fund, and the existing transaction levy increasing from 0.01 per cent to 0.012 per cent for a limited period until such time as the new fund has accumulated $1 billion. I want to stress that this small rise in the levy, though increasing the cost of stock transactions, is essential to provide reasonable protection for investors in Hong Kong securities and futures products. We will implement the stamp duty reduction and the levy increase proposals at the same time. In combination, they will lower the overall transaction cost to investors by about 10 per cent.

84. The proposed stamp duty reduction is much more than a cost saving for investors. It is a positive move to promote the development of our financial market and will, over time, bring about additional revenues. I should also point out that, given the operating deficits which we are likely to experience over the next few years, we will need to take a cautious and step-by-step approach when we consider further reductions in the stamp duty on stock transactions. We will keep a careful watch on the effects of the reduction in transaction costs and the deregulatory measures taken by the brokerage industry.

Other Concessions

85. Other than these two items, I do not propose any further tax concessions. Given the adjustments underway in the economy, further fiscal stimuli are unnecessary and could undermine the stability of our public finances.

86. Although I am proposing no more concessions, I hope Members and the community alike will appreciate that, as a result of the cumulative decline in prices of 7.5 per cent over the past two years, the various salaries tax allowances have already increased in real value.

87. There is one other area in which most taxpayers will pay less: rates. The latest revaluation shows an average reduction of 1 per cent in rateable values. With no change to the rates percentage charge, 70 per cent of ratepayers will, on average, pay 7 per cent less in 2001íV02 than in the previous year.

Addressing the Needs of the Community

88. Let me now turn to the second element of my budget strategy, which is to address the needs of the community, particularly the grassroots and the disadvantaged.

89. For the past two years, I have emphasised the need to bring the cumulative growth in government expenditure into line, over time, with the cumulative growth in GDP. To achieve this, I said last year that we needed to keep the growth in government expenditure below the GDP trend growth rate of 4 per cent up to 2003íV04. Specifically, I said I would contain growth to 2.5 per cent from 2001íV02 to 2003íV04.

90. Last Friday, the Secretary for Treasury published the draft Estimates of Expenditure for 2001íV02, setting out details of spending under all policy areas. Not counting payments of $2 billion from the Capital Investment Fund, government expenditure will amount to $252.7 billion, an increase of $26.6 billion over the revised estimate for 2000íV01. We have made provision for all the new initiatives and improvements announced in the Chief Executive's Policy Addresses. We have also earmarked sufficient funds for the various measures and expenditure initiatives in this Budget Speech. I have already announced my proposal to set up a training fund. Let me now describe other expenditure initiatives which are targeted at the grassroots and the disadvantaged.

91. In drawing up this Budget, I have constantly borne in mind the need to care for the disadvantaged, to give them the positive assistance they need to integrate into the community and to share in our economic prosperity. Last year, the Chief Executive emphasised in his Policy Address the need for compassion and goodwill towards the disadvantaged and set out a number of initiatives to help those who are less fortunate. In the same spirit, and in response to views received during my budget consultation, I propose to allocate additional funding to assist the disabled, youth at risk and people with low educational attainment.

Support for the Disabled

92. Thoughts of the disabled bring touching scenes to mind: our disabled athletes running in international games; a student overcoming her severe physical disability to write with great determination and achieving high marks in a public exam; the innocent smiles on the faces of the mentally handicapped; parents shouldering the lifelong challenge of caring for their disabled child without resentment or complaint. I cannot fail to admire and respect the resilience of the disabled and the parents who find themselves in such situations. Those of us who do not have to face such problems should count our blessings. As a community we have an obligation to do more to help.

93. At present, 5,400 disabled people are waiting for residential places. The average waiting time is four to five years. The provision of day services such as sheltered workshops and supported employment also falls short of the demand. In addition, 1,800 young children with special needs are waiting for pre-school services. The situation will deteriorate unless we provide more resources.

94. To strengthen our services for the disabled, I have earmarked $219 million in 2001íV02 to implement a package of measures to address their basic needs, improve their employment prospects and help them realise their potential. The measures include -

* provision of 1,000 residential places and 1,380 day service and supported employment places over the next five years, on top of those already pledged in our policy commitments;

* provision of an additional 360 integrated programme places over the next two years for pre-school children with disabilities;

* allocation of an additional $30 million a year to provide continuous community support services for the disabled and their families;

* introduction of an on-the-job training programme, on a pilot basis for three years, helping 350 disabled people a year by facilitating their integration into the job market and promoting self-reliance;

* one-off provision of $50 million for non-government organisations to create employment opportunities for the disabled; and

* a special grant of $50 million to provide subsidies for disabled athletes and to help them find employment at the end of their athletic careers.

95. In the long term, the Government will provide annual recurrent funding amounting to over $240 million a year for this package of measures.

Care for Youth at Risk

96. There is increasing concern about young people. We are all aware of the problems of youths roaming the streets at night, joining gangs and abusing psychotropic substances. Surveys suggest that many young people are disenchanted with life. Young people are the future pillars of our society. If we turn a blind eye to youths who risk following this path, Hong Kong will lose out.

97. The Chief Executive has pointed out in his Policy Address that we should tackle this through the early identification of problems and timely counselling. Accordingly, I have earmarked $84 million in the draft Estimates, rising to about $180 million a year by 2003íV04, to launch a comprehensive programme of support services for youth at risk. We will -

* work with the education and social service sectors to screen students in 200 secondary schools to identify youths at risk and to extend this screening service to primary schools as soon as possible;

* allocate additional recurrent funding rising to $70 million, over the next three years, to increase the number of integrated social service teams aimed at providing timely counselling to youths identified as at risk;

* provide an extra $10 million a year to step up police liaison with schools; and

* provide additional funding for non-government organisations to employ an extra 30 outreach social workers devoted to helping those on the streets at night and to strengthen Community Support Services Schemes.

98. Rehabilitation of youths at risk is a demanding mission. It requires genuine care, listening and counselling. In addition to the Government's increased commitment on this front, I appeal for the collaboration of parents, teachers, social workers and the media. Together we must save Hong Kong's younger generation at risk.

Training for those with Low Educational Attainment

99. In recent years we have provided a wide range of vocational training and retraining programmes for those with low educational attainment. Some have suggested that these programmes are too sector-specific and skills-based and that there is not enough basic induction training for adults with low educational levels. To help overcome these deficiencies, I propose to allocate an additional sum of $72 million over the next two years for practical adult education. Specifically, we will provide subsidies for educational institutions and non-government organisations to run courses focusing on generic workplace skills, including language, IT and interpersonal skills. We believe these courses will improve the employment prospects of new arrivals, those who have been in Hong Kong for some time but are still seeking employment, and other Hong Kong residents who have never had the chance to receive formal education.

Strengthening the Role of the District Councils

100. My final spending initiative is to improve community facilities and promote community-building. The Home Affairs Bureau is reviewing the functions of the District Councils to strengthen their role in their local communities and will make recommendations later this year. I have earmarked an additional $100 million a year in the draft Estimates to allow an early start in implementing the recommendations of this review. The District Councils will of course be fully consulted.

Enhancing Public Sector Productivity

101. It is vital to ensure that the money we are spending achieves the best possible results. This is all the more important when we are containing the growth in government expenditure.

102. We are committed to improving the management and operation of the public sector. Over the past two years, we have introduced civil service reforms, implemented the Enhanced Productivity Programme, contained the size and growth of the Civil Service and re-engineered services delivery. We have two main aims -

* first, to keep the Civil Service abreast of the times and enable it to deliver quality services to the community in a more flexible and cost-effective manner; and

* second, to deliver productivity savings that release resources to meet community needs and minimise the need for tax increases.


103. We have made great strides on these fronts. We have -

* adjusted the entry points for new recruits to the Civil Service and modernised their fringe benefits;

* delivered savings of $3.4 billion, or 3.3 per cent of operating expenditure, since the start of the EPP in 2000íV01. This exceeds the target of 3 per cent savings over two years. We have redeployed these savings to provide more facilities and better services for the public;

* deleted an extra 8,000 posts, in a single year, reducing the total Civil Service establishment to 190,000, well below my forecast a year ago. More important, we have made the Civil Service leaner and fitter and encouraged management and staff to re-engineer procedures, innovate and operate more cost-effectively;

* implemented the Voluntary Retirement Scheme, allowing departments with surplus staff a wider scope for efficiency improvements. The Scheme should ultimately achieve net savings of over $970 million a year; and

* increased private sector participation in the delivery of public services, through outsourcing, to enhance efficiency and quality. Examples include meal services for the elderly and the supply of automotive parts.

104. These achievements have not come easily. They underscore the strong team spirit of the Civil Service and its continuous drive for improvement and greater value for money. Increasing productivity with reduced resources is always a challenge, for management and staff alike. Each post deleted and every dollar saved inevitably have an impact on workloads or involve operating in new ways. My thanks go to all those colleagues who have set aside their own interests and staunchly supported these many reforms for the wider public good.

Lifting the Recruitment Freeze

105. As we have made such a successful start in reducing the size of the Civil Service, I have, in consultation with the Chief Secretary for Administration, decided to lift the freeze on recruitment which has been in force for two years. I am confident that this will not trigger off an expansion of the Civil Service. Departments now meet most demands for additional services through redeployment of resources or process re-engineering, rather than simply taking on new staff. In addition, under the Voluntary Retirement Scheme, some 50 grades may not conduct open recruitment for the next five years. And government procedures for vetting the creation of new posts are well-established and stringent.

Keeping Up Our Effort

106. Enhancing public sector productivity is our pledge to the community. We will not allow complacency to creep in. With the management culture changing and experience growing, the public sector is set to become yet more enterprising. We will keep up our effort. Our major targets include -

* pressing forward with the EPP to meet our target of 5 per cent savings of operating expenditure by 2002íV03;

* even after lifting the freeze on recruitment, reducing the size of the Civil Service by 9,000 posts over the next two years, through natural wastage, staff redeployment and the Voluntary Retirement Scheme. By the end of 2002íV03, the number of posts should fall to around 181,000, a greater reduction than forecast in my previous Budget Speech and well below the level in 1994íV95;

* with this Council's support, corporatising the Survey and Mapping Office in 2001 to provide the public and the business community with more-efficient and higher-quality services;

* exploring further private sector involvement in the delivery of public services. These projects include : the Non-means-tested Loan Scheme of the Student Financial Assistance Agency and the licensing services of the Transport Department;

* with the experience gained from the partial privatisation of the MTR, strengthening our work in asset management in order to increase the rate of return from those assets that have a commercial value. We will also consider corporatising or privatising individual assets to enhance efficiency and service quality and bring to the market additional high-value investment opportunities. Specifically, we will complete examination of the case for privatising government tunnels within this year. We will also monitor market developments closely and offer a second tranche of MTR shares for sale at a suitable time; and

* introducing accrual accounting in preparing the Government's Annual Accounts. From 2002íV03, we will publish two separate sets of Annual Accounts of the Government, one under the existing cash accounting convention and the other prepared on an accruals basis. Since accrual accounting requires the reporting of assets and liabilities, future accounts will give greater information in respect of items such as our investments in public corporations, our fixed assets and our financial obligations, including those arising from the Civil Service Pension schemes. These arrangements will help tighten our management of public finances, increase the transparency of government accounts and enhance cost-control and cost-effectiveness.

Striving to Achieve Fiscal Balance

107. Enhancing productivity and controlling expenditure can only go so far towards achieving fiscal balance. When they alone cannot balance the books, we must critically consider the need to raise revenue. But, I have acknowledged earlier in this speech that we should refrain from imposing too great a burden on the community at this time. On balance, I propose to make only modest adjustments to a small number of revenue items that do not impact on economic growth and have a negligible effect on people's living standards. Let me explain my proposals.

Tobacco Duty

108. I propose to increase tobacco duty by 5 per cent with immediate effect. This proposal will generate additional revenue of $130 million in 2001íV02 and $580 million over the period of the Medium Range Forecast to 2004íV05.

109. The duty increase should not lead to a rise in the smuggling and peddling of contraband cigarettes. With the provision of additional resources in 2000íV01, the Customs and Excise Department has strengthened its enforcement work. I am most pleased with the results. The number of successful operations has increased 40 per cent and the number of peddling black spots has decreased by 70 per cent. But we will not be complacent. The Department will continue to step up enforcement to protect both government revenue and public health.

Duty on Alcoholic Beverages

110. The duty rates on alcoholic beverages, except wine, have remained unchanged since 1994. For the purpose of raising revenue, I propose with immediate effect to increase from 30 per cent to 40 per cent the duty rate on liquors with an alcoholic content of 30 per cent and below.

111. I have decided not to increase the duty rates on strong spirits or wine, which are already taxed at rates of 100 per cent and 60 per cent respectively. Increasing these duty rates might significantly push up retail prices and risk a switch to the consumption of cheaper products, defeating my objective of increasing revenue.

112. This proposal is expected to generate additional revenue of $90 million in 2001íV02 and $360 million over the period to 2004íV05.

Vehicle and Driving Licence Fees

113. I also propose a modest 10 per cent increase in driving licence fees and in vehicle licence fees for private cars, motor cycles and motor tricycles. For new licences, the new fees will take immediate effect. For licence renewals, the new fees will apply only to licences expiring on or after 7 July 2001, as announced by the Commissioner for Transport last week.

114. There has been no revision in these licence fees since 1991. Over that period we have experienced cumulative inflation of 52 per cent. An upward adjustment of 10 per cent will fall far short of restoring the real value of these fees, although it can still help to reduce our operating deficit. My proposals should have a negligible impact on living standards, given the small share these fees have in household expenditure and the modest level of the increase. The proposal to increase private vehicle licences will not impact on the transportation sector, and the increase in driving licence fees will have minimal impact in the medium term as most drivers have opted, in recent years, for ten-year licences.

115. This increase is estimated to bring in additional revenue of $160 million in 2001íV02 and $1.1 billion over the next four years.

On-street Parking Meter Charges

116. On-street parking meter charges have always been a stable source of income for the Government and an effective traffic management measure. I propose to raise the maximum charge from $2 to $3 for every 15 minutes.

117. In proposing this adjustment, I have noted that parking meter charges have not increased since 1994. I am also conscious of the high utilisation rate, both on weekdays and weekends, of metered parking spaces in busy areas. The proposed increase will bring the hourly rate for on-street parking to $12, which is closer to, but still considerably below, the charges made by off-street carparks in busy locations. This should help traffic management by discouraging the use of metered parking for lengthy periods.

118. Subject to the approval of this Council, I propose to phase in the new charge over a six-month period, to allow for necessary modifications to parking meters. This proposal should generate additional revenue of $110 million in 2001íV02 and $500 million over the four-year period to 2004íV05.

Air Passenger Departure Tax

119. I propose to increase Air Passenger Departure Tax from $50 to $80 and to widen the tax base to include passengers departing by helicopter. This proposal will not take effect until some months after the enactment of the relevant legislation, in order to allow the airlines and helicopter operators sufficient time to make the necessary arrangements.

120. This increase will not affect people's livelihood. Neither should it affect tourism, airline businesses or airport operation. Our Air Passenger Departure Tax will still be the lowest in the region for international flights. It is also an insignificant portion of the price of air tickets and of the overall cost of travelling. An increase of $30 should have no impact in attracting tourists to Hong Kong nor should it deter local residents from air travel. For tourists, the availability of good facilities, attractive tourist spots and quality service is far more important. Past experience has shown that an Air Passenger Departure Tax as high as $100 or even $150 did not affect our tourism industry. The other part of the proposal, to cover helicopter passengers, is made as a matter of equity.

121. In total, I expect this proposal to yield additional revenue of $170 million in 2001íV02 and $1.3 billion over the period to 2004íV05.

Implementation of Revenue Proposals

122. That concludes my revenue proposals. The proposals to increase tobacco duty, the duty on certain alcoholic beverages, driving licence fees and vehicle licence fees have taken effect from 2:30 this afternoon under a Public Revenue Protection Order. My proposal to increase Air Passenger Departure Tax will not take effect until some months after enactment of the relevant legislation. My other proposals for increased on-street parking meter charges, reduced stamp duty on stock transactions and an increased level of deductions for training expenses under salaries tax will take effect once the relevant legislative amendments have been passed.

Unchanged Revenue Items

123. Before leaving the subject of revenue measures, I will highlight some of the revenue items which will remain unchanged.

Profits Tax

124. Views are diverse on whether or not the Government should adjust profits tax. Some in the community believe there is scope for a modest increase in the profits tax rate without undermining Hong Kong's competitiveness, as our profits tax regime is already one of the most attractive in the region and indeed the world. Others have cautioned against such complacency, citing uncertainties in the world economy. After thinking long and hard, I have decided to maintain the status quo.

125. Some have suggested that Hong Kong should introduce a progressive profits tax system. I remain of the view that this would be a retrograde step, creating opportunities for abuse and running counter to the world trend towards simpler tax regimes. It makes no sense to undermine our own competitiveness by bucking this trend.

Salaries Tax

126. I have considered not only raising the rates of salaries tax but also reducing allowances to cut our operating deficits. Such adjustments could yield substantial additional revenue. But they would hit middle-income earners hardest and could adversely affect local consumption and hence our economic growth. I have decided not to pursue such a course at this time.

127. To provide relief for home owners, particularly those with negative assets, there have been suggestions that the Government should increase the maximum amount of deduction for home loan interest and extend the entitlement period for such deductions. I fully appreciate that, to many people in Hong Kong, home purchase is the biggest investment in their lifetime. I also understand that such interest payments constitute a large share of household expenses in Hong Kong. That said, recent successive reductions in mortgage interest rates have reduced the burden on mortgage-payers. Stabilisation of the property market should provide relief for those with negative equity. Even a small increase in the maximum amount of deduction would result in a substantial loss of revenue. For example, increasing the maximum deduction from $100,000 to $120,000 would cause a revenue loss of about $1 billion over the forecast period to 2004íV05. Having taken all these factors into consideration, I do not think it is appropriate for Government to provide further concessions and aggravate the problem of operating deficits.

Land and Sea Departure Tax

128. Last year I promised to come back to this Council when the time was ripe on the question of a land and sea departure tax. I received diverse views on this topic during my Budget consultations: some in favour and some against. I remain convinced that a land and sea departure tax is equitable and would provide a major boost to our recurrent revenue. But I will examine the recommendations of the Task Force on Review of Public Finances and the Advisory Committee on New Broad-based Taxes before proceeding.

Betting Duty

129. Betting duty and the so-called "green" taxes, which have attracted considerable attention in recent years, are similar in nature, in that they do not simply entail fiscal considerations but also important social policy implications.

130. Faced with continued operating deficits, I was very tempted to increase betting duty, a tax which is not related to livelihood.

131. But having considered the hard facts, I have come to the conclusion that this would be counterproductive. In the last three years, betting turnover per horse race has fallen by 17 per cent. Although the slack in the economy may have accounted for the lower turnover, it seems to have had no such effect on other gambling activities. On the contrary, we have seen the rampant spread of betting on horses and the Mark Six through illegal bookmakers, extraterritorial betting, gambling on soccer matches and internet gambling. Illicit activities have become so widespread that dividend payouts are openly advertised in the media. I was staggered to hear that even conservative estimates placed the annual turnover on these illicit gambling activities at tens of billions of dollars.

132. I am concerned that an increase in betting duty might further divert money from legal betting avenues, undercut our duty revenue and, more important, pose a threat to law and order. The latter could have serious ramifications.

133. To address the problem, we need a two-pronged approach. First, we must step up enforcement action against illegal gambling to maintain law and order in Hong Kong. Second, we must face up to reality. There has been increasing interest in, and demand for, soccer betting within the community. This has become so popular that it is unlikely to be curbed. We cannot arrest all the Hong Kong residents placing illegal bets on soccer matches nor can we stifle overseas bookmaking. Rather than aiming to achieve the impossible, we should examine the case for providing a legal avenue for soccer betting. With the approach of the World Cup in 2002, we need to address the problem urgently and in a rational and objective manner. Gambling has always been a sensitive subject. We would like to hear the views of the community on this problem before coming up with an appropriate and effective solution.

"Green" Taxes

134. I now refer to a subject that has come increasingly and understandably to the forefront of many people's concerns in recent years: the environment. Quite apart from the health costs and other social burdens associated with a poor quality environment, whether it be on land, in the sea or in the air, comes another major concern. Hong Kong cannot hope to maintain and improve on its position as a leading financial and commercial centre in the region if it does not clean up its act. Improving the environment ought to be a goal shared by us all and not solely the domain of a few pressure groups. For its part, the Government has made a number of major revenue concessions in recent years aimed at improving air quality by the use of cleaner fuel. But there is a limit to the number of "carrots" of this nature that we can or ought to be giving out to reduce pollution. It is clear that these "carrots" are insufficient. We need to wield the "stick" as well.

135. In the run-up to this Budget, I have received a good number of proposals for "green" taxes. But, with respect, I consider these merely scratch the surface of the problem and do not address the fundamental issues. I believe it is high time that the community, as a whole, faced squarely up to the reality of our deteriorating environment. We need to take an honest look at some of the inconsistencies that have got us to where we are today. For example -

* why do we continue to exempt franchised buses from duty on diesel and indirectly undermine the competitiveness of railways which are more environmentally friendly?

* why do we maintain a much lower duty rate for diesel and indirectly encourage growth in the number of diesel-powered vehicles?

* why do we continue to charge no duty on industrial diesel, thus fostering its illicit diversion for use in vehicles?

* why do we continue to subsidise the disposal of solid waste?

* why do we allow our scarce landfills to be used as public dumps for waste that can be recycled?

* why do we continue to subsidise sewage services at historically high levels?

136. The answer to these questions is that it seems expedient to most of us to continue doing so. Higher tariffs cause some pain in the community. I understand that very well. But we must as a community understand that if our environmental sores are left to fester, inaction will, over time, result in far worse pain and far greater costs than will an early cure. Most of the rest of the world seems to have woken up to that fact. When will Hong Kong ? So, although I do not put forward any "green" measures in this Budget, I want to use this as a focus for the community to start to change its mindset about our environment and accept that the polluter must pay to clean up his mess. If nothing else, that is simple economic justice. I hope I can look to Members to support and encourage this trend so that we can become as "green" a city as any in the years to come.

2001íV02 Estimates

The Estimates

137. Total government spending next year, including the expenditure initiatives which I have announced today, will amount to $254.7 billion. I estimate that, after implementation of my revenue proposals and the budgeted receipt of $15 billion in the year from the sale of a second tranche of MTR shares, total revenue will be $251.7 billion. As a consequence, I am forecasting a small overall deficit of $3 billion, with the fiscal reserves falling slightly to $429.9 billion at 31 March 2002.

138. Within these overall figures I must point out that in 2001íV02 we will face an operating deficit of $16.6 billion. Put simply, our recurrent expenditure will once again exceed our recurrent revenue by a significant margin.

Possible Volatilities

139. I must emphasise that these figures are our best estimates. Experience in recent years has shown that market volatility can cause the outturn from a number of major revenue items, such as the investment return on our fiscal reserves, land sales premia and stamp duty on stock and property transactions, to deviate considerably from the estimates. Increasing globalisation may lead to greater and more frequent volatility in world markets.

140. The windfall gain from our investment return on the fiscal reserves in 1999íV2000 is one example of the effects of market volatility. That resulted, somewhat dramatically, in a surplus for the year of nearly $10 billion, against an original estimated budget deficit of over $30 billion. In the current financial year, on the other hand, the less-than-satisfactory return from the Exchange Fund in the first half of 2000, albeit with improved performance in the second half of the year, has resulted in investment earnings for the year which are some $8.7 billion below our original estimate and hence an increase in the deficit. I cite these examples only to illustrate the difficulty of ensuring accuracy in budgeting. I have often been criticised for "crying wolf", but let me assure Members that it is never my intention to under- or to over-estimate.

141. In the light of recent fluctuations in the investment return on the fiscal reserves, the Finance Bureau has explored with the HKMA various measures to minimise these fluctuations. Having considered the limitations of such options, we have decided not to change the arrangements at this time. We will monitor the investment return over the next few years before deciding on the way forward. This will mean that our estimates of investment earnings will continue to be subject to market volatility. I ask for Members' understanding in this regard.

Medium Range Forecast

142. A sound budget strategy cannot focus on the coming financial year alone. I have had to take into account the effect of my revenue and expenditure proposals on our financial position over the medium term. Only in this way will we be sure that we can afford our recurrent spending commitments and that my revenue proposals are consistent with our financial position over the medium term.

143. My detailed Medium Range Forecast is published as an appendix to the printed version of this speech. I have based it on a forecast trend GDP growth of 4 per cent a year in real terms and a trend annual GDP deflator of 2.5 per cent. I have also assumed that, starting from 2002íV03, government expenditure will grow by 4 per cent in real terms, in line with the trend GDP growth rate.

144. In each of the next three financial years, I am forecasting a very small overall deficit followed by a fairly healthy surplus in 2004íV05, the final year of the forecast period. Being less than 0.5 per cent of GDP, the deficits are quite insignificant, and we can regard the budgets for those years essentially as balanced.

145. As a consequence, the Medium Range Forecast shows that our fiscal reserves will fall slightly over the next three financial years before picking up again in 2004íV05. At the end of the forecast period the reserves will stand at $427.5 billion. This is within the guidelines set out in my 1998 Budget Speech, albeit very close to the lower end of the range.

Successive Operating Deficits

146. We have been running operating deficits since 1998íV99. I expect this situation to last until 2004íV05. In 2001íV02, the surplus on non-recurrent items will offset much of the operating deficit. But non-recurrent items are by their nature unstable and unreliable sources of revenue.

147. Our forecasts indicate a gradual reduction in operating deficits over the medium term. Nevertheless, they remain a matter of concern. The International Monetary Fund and the international credit rating agencies will look with nervousness on a government which, over the longer term, continues to let its recurrent expenditure exceed its recurrent revenue. This could lower investors' confidence and mean a lower credit rating for Hong Kong. Borrowing costs would then increase for all Hong Kong businesses that need to raise capital in the markets. And higher borrowing costs for businesses ultimately translate into reduced economic growth, fewer jobs and lower living standards. This is not hollow theory, but a very real problem of the kind that all economies must guard against. The IMF and the major credit rating agencies will continue to monitor our performance closely.

Dissecting the Problem

148. I would like to make the point that successive operating deficits are not the result of unrestrained government spending or the Government's lack of vigour in raising revenue. I have, after all, for many years been emphasising fiscal prudence and the need to achieve fiscal balance. More recently, we have exercised stricter control over spending to narrow the gap between the growth of government expenditure and that of GDP. Indeed, I have my critics for being overly conservative in the management of public finances.

149. We do not know whether this series of successive operating deficits is cyclical or structural in nature and this leads to uncertainty. But we know for sure that, while the relief packages of expenditure and revenue measures introduced in recent years have helped people ride out the Asian financial storms, they have put pressure on government finances.

150. My Medium Range Forecast assumes that government expenditure will grow by 4 per cent a year starting in 2002íV03. This is worth remembering. It is 1.5 percentage points higher than in my Medium Range Forecast last year. I believe that, as some Members have suggested, we should allow the growth rate of government expenditure to come into line with the trend growth of GDP and hence provide more services and facilities for the benefit of the community. This should be affordable unless changing economic circumstances erode our recurrent revenue in the medium to long term.

151. I wish that I could say, today, with certainty that there will be no such erosion. But I cannot. We need to monitor the trend of our revenue collections during times of steady economic growth before we can come to that or any other conclusion. The Task Force headed by the Secretary for the Treasury, which I announced last year, continues to study this problem.

152. Meanwhile, the Advisory Committee on New Broad-based Taxes, set up last year, is looking into new taxes suitable for Hong Kong, so that we have appropriate strategies at hand if it is confirmed that the operating deficits are structural in nature.

153. In the interests of Hong Kong's long-term development, we must not overlook the current and medium-term phenomenon of operating deficits. The Advisory Committee and the Task Force will report their findings later this year. I hope that Members of this Council and the public will study their reports carefully and with open minds. I must stress that our objective remains to keep a simple and predictable tax regime with low tax rates.

Maintaining Fiscal Prudence

154. The phenomenon of successive operating deficits makes it all the more important to uphold prudent fiscal principles. Although supporting the need for fiscal prudence, some Members of this Council have called on the Government to relax its style of fiscal management. They have suggested that the Government could, for example, afford expenditure growth faster than GDP growth and that the fiscal reserves could be run down to finance its outlays.

155. I am puzzled as to how we can relax standards on the one hand and claim, on the other, that we have not deviated from the principles of fiscal prudence. The fact is that if government expenditure grows faster than trend GDP growth, we will incur excessive financial obligations, not only in the short term, but also in the long run. This is because a large proportion of our expenditure is devoted to funding recurrent services and facilities which represent a long-term commitment on the part of the Government. Put simply, any excess amount spent today may increase the pressure for tax increases tomorrow.

156. I must also point out that, notwithstanding the adequate level of our fiscal reserves, we should not take the easy way out and rely on them for a living. This would undermine our ability to cope with unforeseen circumstances which may arise at any time. It would also compromise our fiscal discipline and jeopardise our international credibility. Such action could have very serious consequences. Taking the easy way out today could cost every man, woman and child in Hong Kong dearly over the longer term. That would be far too high a price to ask our future generations to pay.

157. Let me turn back to the expenditure programme for 2001íV02. During my Budget consultations some Members suggested that I should raise the expenditure guideline by more than 2.5 per cent. The robust growth of our economy last year restored the balance between the cumulative growth in government expenditure and cumulative economic growth earlier than we had expected. But I do not think it prudent to deviate from my stated intention of allowing the expenditure guideline to increase by 2.5 per cent in 2001íV02.

158. Let me explain why. First, we are expecting a substantial operating deficit of over $16 billion in 2001íV02 and the situation will start to improve in the following year only if all goes well. Second, we do not yet know whether successive years of operating deficits represent a structural problem or merely a cyclical phenomenon. Third, I think it is wrong to increase taxes substantially, at this time, to support a higher level of expenditure. Fourth, I have noted that, in 2001íV02, government expenditure as a proportion of GDP will be at its highest level since the introduction of the Medium Range Forecast in 1986íV87. We must see to it that the public sector does not overexpand.

Concluding Remarks

159. Preparing this Budget has been a challenge. I need to take care of the present needs of the community and at the same time cater for the future development of Hong Kong. I have to keep our public finances healthy and at the same time promote development and improve living standards. I must take care of those in need but without forsaking fiscal prudence. I am most grateful to Members of this Council, representatives from various sectors and members of the public, who have all shared with me their observations and suggestions. Your ideas have helped shape my thinking and have influenced the initiatives that I have announced this afternoon.

160. This Budget is a deliberately conservative one. I have proposed to spend what I promised last year to meet the community's needs. I have also proposed modest revenue measures to uphold our principles of fiscal prudence. I do not yet have enough evidence to determine whether the problem with our public finances is structural or cyclical. It is too soon to come to a verdict. It would be unwise to rush into major tax increases or new taxes at the risk of prejudicing economic growth.

161. But we must have a clear vision of our future direction and continue to hone our strengths in the economic interests of Hong Kong.

162. In our public finances, we must face up to the reality of successive operating deficits and a narrow tax base. We must come up with suitable solutions in a practical, reasonable and open manner. We must not let expediency override fundamental financial and economic considerations.

163. In economic development, we must grasp the opportunities of China's accession to the WTO and the development of Western China. We must capitalise on Hong Kong's synergy with Guangdong and the Pearl River Delta, and initiate joint development. As a community, we must pull together and focus on our next economic take-off. We must strive to excel as Asia's World City.

164. I also appeal to the community to consider the less fortunate among us and to provide them with the support and assistance they need.

165. I have proposed various measures to help members of the public rise to the new challenges of a knowledge-based economy. Members of the community must take every opportunity to upgrade their own knowledge and skills. Their personal advancement and that of Hong Kong depend on this.

166. I firmly believe that, despite the many external uncertainties which may face us in 2001, we should be able to withstand any economic fluctuations that may arise so long as we are properly equipped. Hong Kong has in recent years been through a baptism of fire and has emerged stronger than ever. We have become more competitive than we were before the financial crisis. We have strengthened our monetary and financial systems. Our public sector has become more efficient and forward-looking. Most important, the people of Hong Kong have become more down-to-earth and realistic, focusing more on the fruits of real endeavours than on quick gains.

167. We can look forward with hope, but we must at the same time be aware of the challenges we face. We must keep up the hard work. Only by doing our best will we succeed.

168. I leave my post of Financial Secretary confident in the future of Hong Kong.

Wednesday, March 7, 2001