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Transcript of remarks by FS at Budget press conference

Following is the transcript (English portion) of the question and answer session given by the Financial Secretary, Mr Henry Tang, during his Budget press conference today (February 22):

Reporter: Do you think that maybe the salaries tax cuts were kind of modest?

Financial Secretary: Actually, I'm constantly mindful that while this recovery is a very hard-earned recovery, it's due to Government controlling our expenditure and also we have the support of both the civil service, which has to implement these measures, and also the support of the community that we should take forward these measures. And together with the economic recovery, we are in a better fiscal shape than we have been since 1997. This is the first time that both the Operating Account and the Consolidated Account are able to be balanced. However, the future five years -- actually the situation is not as rosy as you may think it is, because if we look at 2006-07, the coming Budget, our Consolidated Account surplus is only going to be $5.6 billion, while the Operating Account surplus is going to be only $0.6 billion. And even the year after that, 2007-08, we have only forecast a $10 billion surplus. So these are not very big figures compared with the deficit that we had in the last four years. In 2001-02, we had a $63 billion deficit, in 2002-03, we had $61.7 billion, 2003-04, we had 40.1 billion, and 2004-05, it was only because we issued $26 billion of debt that we got a $21 billion surplus, but if you take that debt out, it's still a deficit. So I would not say that we are in very, very robust fiscal health and that we are able to afford large cuts. And I think I am doing it in a prudent manner and we will see if the situation improves further, then of course, we are perfectly willing to consider other measures.

Reporter:  It was mentioned several times that your Budget is rather defensive, prudent and compared with last year your description of the international environment was more sombre. You mentioned political tensions, interest rates, oil, the American deficit, and finally you are saying early or later this American deficit problem has to be corrected. Might it be the year 2006 is the year where this correction is taking place and that is one reason why you are betting on the secured side?

Financial Secretary:  I think it is fair to say that I am more concerned about the global macroeconomic environment this year than I was last year, partially because the US asset prices have been growing for a long time and whether a correction will come, and if it comes whether this correction will be more volatile than people expect. The other uncertainties are, of course, with the higher oil prices passing through that will affect inflation and also interest rates, and these will all have direct bearing on a small and open economy like Hong Kong. So there are a number of clouds over the horizon which I am concerned about and that's why I have highlighted some of these concerns. They are not exhaustive but they are concerns which I have, so it all the more augurs that this Budget should be prudent because I have seen what happened in the last four years when the economy turns downward, or southward, our deficit could go all the way down to $60 billion and that is nearly 4% of GDP. I don't think anybody will want to see those things happen again, so that's why I feel that the tax relief I have offered is moderate, but it is realistic in view of the macroeconomic situation.

Reporter: I'd like to return to that question because while you're trying to balance your Budget, working class people and middle class people are trying to balance their budget as well. You don't even have the figures, I think, for January, February and March in yet. They could actually show a larger surplus than what you are projecting at the end of the day. If that's the case are you leaving the door open or is the door shut on any further questions of tax concessions, any further question of people getting a write-off for investment, for example, in health insurance, greater child deduction, etc.?

Financial Secretary: Our figures are actually based on the best information available. One of the main revenue sources is obviously our income from both profits tax and salaries tax and for these taxes, the demand notes are sent out well before the end of the year and they are mostly due either in December or January.  So therefore the figures that we have now already reflected those figures. We do not expect February or March to be major revenue months, if anything, we expect them to be deficit months. So our figures are reasonably, to the best of our knowledge accurate.

Reporter: Will that open the door or close the door on any further changes ... tax concessions?

Financial Secretary: We have made our tax concession based on our best projections and we feel that in view of our fiscal health that we are just in the process of recovering, emerging from a large deficit. I think this is a right balance.

Reporter: I just want to know about goods and services tax and you are finally going to launch a consultation on the matter. But can I just remind you that this comes right after the Government had to repackage the West Kowloon Cultural District. Are you concerned that this will be another setback given that you also mentioned that the tax is very controversial?  And how will you actually convince the public that this not only is needed and this is not only is the right time, but the best time to launch it?

Financial Secretary: The consultation document actually will not propose a timeframe for implementation, because it is a very controversial tax and any new tax is generally not welcome by the population. So therefore I think it is incumbent upon us to present the consultation document in such a way that we will have a series of specific recommendations or specific choices for people to make so they will have a lot of information in hand, for example, whether the tax is regressive, how we can make it less regressive or non-regressive; what kind of concessions, what kind of compensations would be provided; and also (what would be) the effect on tourism, the effect on consumption and the effect on small and medium enterprises. So (there are) a whole series of these questions and we will lay them out carefully in the document so that people will have this information on hand to make an informed and rational discussion on the subject. It has nothing to do with West Kowloon, of course. One is a cultural project and this is a treasury issue. So I believe actually that the community is mature enough and ready for this discussion, knowing that it will take at least three years for it to be implemented once the decision to implement is taken.

Reporter: When do you expect .... ?

Financial Secretary: We will launch this consultation in the middle of this year and it will last for nine months. This will be a long consultation process. We will finish the consultation after nine months and we will write a report and give it to the next Government on July 1, 2007.

(Please also refer to the Chinese portion of the transcript.)

Ends/Wednesday, February 22, 2006
Issued at HKT 22:06