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Budget Speech by the Financial Secretary (5)

Principles of Management of Public Finances

43. As Financial Secretary, I will uphold our well-established principles of management of public finances.  I will continue to manage public finances prudently by keeping expenditure within the limits of revenues, maintaining a low and simple tax regime, and following the direction of "Market Leads, Government Facilitates".  These principles are all very familiar to you, and I think there is no need for me to explain them again.

44. In drawing up the first Budget of the Government of this term, I have strictly adhered to three basic principles.  First, the Budget should demonstrate the Government¡¦s commitment to our society; second, financial policies should be sustainable; and third, we should be pragmatic in decision making.  By following these principles, we strive to ensure that the measures proposed in this Budget respond to the aspirations of the community and lay a solid foundation for our economy to meet future challenges.

Commitment to Society

45. My first principle is that fiscal policies should demonstrate the Government's commitment to society.

46. I am aware that recent inflation has brought pressure to bear on the public.  We must understand that inflation is partly driven by our strong economic growth and that a vibrant economy is beneficial to our people.  Our declining unemployment rate is one of the indicators reflecting this situation.  Nonetheless, I am deeply concerned about the fact that some disadvantaged groups have not yet been able to enjoy the fruits of economic growth.  I believe that, through proper revenue and expenditure proposals, this Budget can help improve their lives.

47. It is the duty of the Government to provide a final safety net for those who cannot help themselves.  Concern over the livelihood of low-income families has now become a consensus in our community.  In line with this consensus, I will propose measures to help them.

48. The Chief Executive has clearly stated in his Policy Address that the Government should not attempt to narrow the wealth gap by redistributing wealth through high levels of tax and welfare.  Such a measure would only inhibit people¡¦s incentive to work hard and, in turn, undermine the productivity and competitiveness of the community as a whole.

49. We will create favourable conditions, such as strengthening education and training, to help people enhance their skills.  By helping people to help themselves, we will enable them to contribute to the economic development of Hong Kong.  Education provides an opportunity for the next generation of low-income families to move up the social ladder, thereby reducing cross-generational poverty.  The Government will continue to invest heavily in the community by making long-term commitments to education, retraining and health care.


50. My second principle in managing public finances is that our financial policies should be sustainable.  If we increase recurrent public expenditure or reduce recurrent public revenue, we must be able to give reasonable assurances that the changes can sustain themselves.

51. Recently, there have been calls for the Government to make good use of the fiscal surplus and return wealth to the people.  I share this view.  This year, with our economy performing well, our tax revenue has increased.  Revenues from stamp duty and land premium income, in particular, are far higher than expected.  However, we must realise that a substantial surplus will not occur every year.  Temporary improvements in our fiscal position, therefore, are not sufficient reasons for significant increases in recurrent expenditure or reductions in tax.

52. Thus, in studying the feasibility of increasing recurrent expenditure, we must examine carefully the sustainability of each proposed measure.  We must avoid measures that impose burdens that the community will find hard to bear in the long run.

53. Article 107 of the Basic Law stipulates that the Hong Kong Special Administrative Region shall follow the principle of keeping expenditure within the limits of revenues in drawing up its budget, and strive to achieve a fiscal balance and avoid deficits.  To ensure fiscal sustainability, I will strive to achieve fiscal balance over the next five years.  I may introduce one-off measures which will increase government expenditure in the short term if there are needs in the community and our finances permit.

54. Past Budgets have been formulated to meet the prevailing needs of the community.  For example, Hong Kong¡¦s economy declined substantially after the Asian financial crisis and the SARS outbreak.  The Chief Executive and the Financial Secretary at the time, faced with swelling deficits, took unpopular measures to increase revenues and reduce expenditure.  Such measures indeed laid the foundations for the subsequent return to sound Government finances a few years later.


55. My third fiscal principle is to be pragmatic.

56. Public resources are limited, but social aspirations are unlimited.  As Financial Secretary, I must manage and use public money properly because this is the public¡¦s wealth.  My objective is to allocate resources where they are required, to ensure that every dollar is well spent and that measures introduced are targeted to benefit those most in need.

57. I will continue to maintain fiscal discipline, strictly control recurrent expenditure and uphold the principle of "Big Market, Small Government", so that the share of public expenditure will be maintained at 20 per cent or below of GDP.

58. A big market can increase the share of the private sector in the economy and allow market forces to allocate our limited resources in the most efficient way for the maximum benefit of the community as a whole.  A small government can prevent the public sector from acquiring excessive resources and thus reducing efficiency in the allocation and use of resources.  Moreover, a small government can minimise regulation, thereby facilitating business operations and attracting overseas investment.  However, we will also keep government expenditure in line with economic growth to ensure that our services can meet the changing needs of the community.

59. We should adopt a pragmatic approach to the problem of the narrow tax base of Hong Kong.  In July 2006, the Government launched a public consultation on reforming Hong Kong's tax system to broaden our tax base.  According to consultation findings, the community recognises that there is a need for the Government to broaden the tax base.  However, there is no clear consensus or inclination on how to achieve this objective.

60. We will continue to study options on broadening the tax base.  I hope to provide opportunities for the community to discuss the tax reform options that are equitable and conform to the "ability-to-pay" principle, can generate stable revenue, offer certainty and are predictable.

(To be continued)

Ends/Wednesday, February 27, 2008
Issued at HKT 11:31


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