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Budget Speech by the Financial Secretary (4)
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Social and Economic Development

34. In the early stage of recovery, the key to fostering sustained social and economic development is the ability to grasp the opportunities arising from the financial tsunami and consolidate our fundamentals.  I will elaborate on the lessons learned from the financial crisis on the Government's role, which can help us chart our way forward.

"Big Market, Small Government"
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35. With economic globalisation and advances in technology, any economic fluctuation or crisis will ripple through more rapidly and extensively.  Being a small and open economy, Hong Kong will inevitably be affected.

36. The market mechanism remains the best means to make effective adjustments in a fast-changing age.  The market is the aggregate of the choices of many participants.  Their decisions should work more flexibly and efficiently than those made by the Government.  Under the principles of "Market Leads, Government Facilitates" and "Big Market, Small Government", the Government will continue to create conditions for market development.  These include maintaining the rule of law and a simple and low tax regime, nurturing talent, investing in infrastructure, and helping enterprises tap markets outside Hong Kong.

37. While acknowledging the importance of market mechanism, the Government will not be completely passive in regards to the adjustment of the economy and the allocation of resources.  Where necessary, the Government will introduce measures to safeguard social stability and sustain the normal operation of the economy in the face of fluctuations in a fast-changing economic environment.

38. During an economic downturn, some people are trapped in difficulties for various reasons.  Therefore, the Government adopted a pragmatic and flexible approach and introduced expansionary measures during the financial crisis to stabilise the economy and safeguard the livelihood of our people.  When our economy is in the early stage of recovery, it is still necessary for the Government to take measures to help those who have not benefited immediately from the recovery or adapted themselves to the new economic environment.  Once the economy resumes steady growth, the Government should let our society and economic activities return to normal operation.

Ensuring Adequate Fiscal Reserves
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39. Our quick recovery from the financial tsunami is, to some extent, attributable to the Government's prompt deployment of huge fiscal resources to stabilise the economy.  The intensity of several rounds of stimulus measures introduced since 2008 and involving a total of $87.6 billion is unprecedented.  This clearly demonstrates that maintaining adequate fiscal reserves is a prerequisite for the Government to fulfil the functions of ensuring social and economic stability.

40. Government revenue is highly susceptible to economic fluctuations.  Flexibility in expenditure is very low.  Over the years we have adopted the strategy of containing expenditure prudently and using our fiscal reserves as a buffer for deficits in individual years.  As such, we are able to achieve a fiscal balance and keep expenditure within the limits of revenues over a period of time.  The reserves required for the buffer can be substantial.  Take the six years starting from 1998-99 as an example.  The five fiscal deficits that occurred in these years reduced our fiscal reserves by about $200 billion íV the equivalent of 40 per cent of our fiscal reserves as at end-March 1998.

41. Apart from providing a buffer, the fiscal reserves also generate revenue of tens of billions of dollars each year.  In 2009-10, for example, investment income accounted for 11 per cent of total government revenue.  Should the reserves continue to fall, the revenue from this source will drop accordingly. This will reduce the resources available for investing in projects to build our economy and improve people's livelihood.

42. Where necessary, I will draw on the fiscal reserves to implement measures for economic and social stability.  However, I must act with prudence and replenish our reserves as and when appropriate.  After the financial tsunami, we should appreciate more deeply the importance of adequate fiscal reserves.  In the long run, an ageing population and a shrinking working population will further narrow our tax base. More than ever, we need to prepare for the future by increasing our reserves to meet these challenges.

(To be continued)

Ends/Wednesday, February 24, 2010
Issued at HKT 11:26

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