The 2004-05 Budget will give the community a respite while helping to maintain the momentum of economic recovery, the Financial Secretary, Mr Henry Tang, said today (March 10).
Unveiling his first Budget, Mr Tang said a turnaround in Hong Kong's economic performance last year had demonstrated the tenacity of Hong Kong people.
He said that despite difficulties caused by SARS, the economy staged a rapid rebound to register GDP growth of 3.3% in real terms in 2003, up from 2.3% in 2002. "This clearly demonstrated the great advantage we have in leveraging on our special relationship with the Mainland while engaging the world at large," said Mr Tang.
He foresaw a more deeply seated and broadly based recovery in 2004, with GDP forecast to grow by 6% in real terms. Deflation should ease further with a forecast 1% fall in the Composite Consumer Price Index for the year as a whole. A trend GDP growth rate of 3.8% in real terms was forecast over the medium term, with a 0.7% increase in the trend rate of the GDP deflator. The trend growth rate of nominal GDP over the period is forecast at 4.5%.
Hong Kong's economic growth in 2004 would be aided by the ongoing implementation of the Mainland/Hong Kong Closer Economic Partnership Arrangement, increased tourist arrivals from the Mainland and solid growth in external trade, including robust performance of offshore trade and professional services exports.
The Financial Secretary revealed that the Government's forecast outturn deficit for 2003-04 would be $49 billion, compared with the $61.7 billion deficit in 2002-03.
The Government's operating expenditure for 2004-05 will be $212.2 billion, a 2.4% reduction from the original estimate (incorporating the SARS measures) of $217.4 billion for 2003-04. The total government expenditure for 2004-05 will be $258.7 billion, with 23% for Education, 26.4% for Social Welfare and Health, and 10.5% for Security.
Mr Tang said he was pleased to see a strong consensus in the community that we should strive to balance our Budget and pledged to continue with the Government's drive to tackle the deficit by stringently containing expenditure. He forecast that the Government would restore balance in the consolidated account and reduce public expenditure to 16.9% of GDP by 2008-09.
"To achieve the target of restoring fiscal balance by 2008-09, I will review our economic and financial position annually and put forward the necessary operating revenue proposals at the appropriate time", he said.
Mr Tang said he was proposing no further increases in salaries taxes, profits tax or any other taxes in this year's Budget.
"This respite will allow the Hong Kong community and our enterprises to consolidate. It will also create conditions favourable for a sustained economic recovery," he said.
Mr Tang did announce plans to issue government bonds to fund infrastructure or other investment projects that will bring long-term economic benefits to Hong Kong. But he stressed that the Government will not issue bonds for the purpose of meeting operating expenditure. "We will definitely not live on credit," he said.
He explained that the issuance of government bonds would provide greater flexibility in management of Government's liquidity and also help promote the development of Hong Kong's bond market.
"Quality bonds are an investment option that can provide a steady and higher return. The issuance of government bonds could offer retail and institutional investors such an option," he said.
"I propose that the Government issue bonds not exceeding $20 billion in 2004-05. We will decide whether to issue additional bonds in future in the light of market conditions, the amount of funds required for our investment projects and the implementation of our asset sale and securitisation programme."
Mr Tang proposed extending two tax concessions - the salaries tax deduction for home loan interest and the duty concession for ultra low sulphur diesel (ULSD).
The entitlement period for home loan interest deduction will be extended by two years - from five years to seven - with the maximum deduction in any year maintained at $100,000. Subject to LegCo's approval, the concession would take effect from the 2003-04 year of assessment. The proposal would cost the Government $4.6 billion in revenue forgone over five years and several hundred thousand taxpayers would benefit from it.
The concessionary rate of $1.11 per litre for ULSD, due to expire at the end of March, was proposed to be extended until the end of the year. This proposal would cost the Government about $0.9 billion in revenues forgone for 2004-05.
Mr Tang said that more than 90% of ratepayers would see an average reduction of 11% in their rates bills next year because of a drop in rateable values, though the rates percentage charged would remain at 5%.
The Financial Secretary pointed out that free market economy is the bedrock of Hong Kong's success so the guiding principle in fostering economic development should be "market leads and government facilitates".
To foster creativity and innovation, the Financial Secretary earmarked $250 million to launch a DesignSmart initiative to nurture start-up design ventures, train manpower in design and branding, and promote and honour design excellence. The initiative also includes setting up a Design and Innovation Centre to attract design talent from different places.
"Through these efforts, we seek to instil into our industries high value-added, high intellectual property and creativity content. We also wish to turn Hong Kong into a focal point of design excellence in the region," he said.
To facilitate this promotional initiative, the profits tax deduction for research and development expenses would be extended to cover expenses on design-related activities.
An extra $95 million has been earmarked for tourism promotion and training activities. The Tourism Orientation Programme will be extended for two years and a series of studies will be carried out to formulate a strategy for future tourism development.
"At the same time as I strive to foster economic growth, I remain very concerned about our society's development," said Mr Tang.
To encourage various sectors of the community to work together to create a cohesive, harmonious and caring society, Mr Tang has earmarked an additional $200 million on a one-off basis to promote the development of a tripartite social partnership among the Government, the business community and the welfare sector, and to encourage corporations to take part in helping the disadvantaged.
To raise revenue, the Financial Secretary proposed the introduction of a Personalised Vehicle Registration Marks Scheme.
Under the scheme, which is expected to raise an additional $70 million a year, a vehicle owner will be able to select a personalised registration mark made up of any combination of up to eight letters and numerals, subject to bidding and other conditions.
Mr Tang signalled the Government's intention to reduce the amount of subsidies given for various fees and charges, especially those items not related to livelihood, in line with the "user pays" principle. Most of these fees and charges have been frozen since 1998 as an exceptional measure to alleviate the financial burden on the public in times of economic difficulty.
"We will first deal with fees that do not directly affect people's livelihood or general business activities," he said.
Mr Tang noted that economies in all parts of the world have successively introduced a goods and services tax (GST) to broaden their tax base and increase tax revenue. Hong Kong is the only mature economy that does not have one.
"GST is broad-based and equitable, and is capable of yielding a sizeable and steady revenue," he said. It was estimated that a GST of 5% would generate around $20-30 billion revenue for the Government in a full year.
Mr Tang said an internal committee was conducting a detailed and comprehensive study on the implementation of a GST in Hong Kong. A report will be submitted to him by the end of this year upon completion of the study.
Economic Performance for 2003
Real GDP growth: 3.3% (2002: 2.3%)
Unemployment: 7.3% (down from the peak of 8.7% in mid-2003)
Total exports: Up 14.2%
Offshore trade: Up 16.5%
Outlook for 2004
Real GDP growth: 6%
CCPI: -1% in 2004
Trend GDP growth rate over medium term: 3.8% p.a. (real); 4.5% p.a. (nominal)
Ends/Wednesday, March 10, 2004