Budget Speech by the Financial Secretary (11)

Adhering to Fiscal Discipline

141. Government expenditure has more than doubled from nearly $200 billion in 1997-98 to over $400 billion in 2013-14, while recurrent expenditure has almost doubled from $150 billion to over $290 billion.  However, GDP has grown by only 60 per cent for the same period.  The use of public resources has always been guided by the principle of pragmatism.  Resources are allocated in accordance with actual needs and priorities, taking into account fiscal sustainability.  When implementing new policies and measures, especially those involving long-term financial commitments, the Government must consider them thoroughly and conduct appropriate consultation in advance.

142. Fiscal sustainability and prudent management of public finances require us to strictly contain the growth of government expenditure.  We must not increase expenditure without good cause, or without regard to our low tax regime.  Our revenue, now amounting to about 20 per cent of GDP, is unlikely to achieve significant growth.  Our public expenditure, on the other hand, has stayed at around the same level in recent years.  As we are obliged to uphold the principle of keeping expenditure within the limits of revenue, the Government would need to increase revenue if we want to increase expenditure.  This would mean raising taxes or resorting to borrowing.  Both options are controversial.  Tax hikes will overhaul our simple and low tax regime which has been the key to our success, and undermine Hong Kong's overall competitiveness in the longer run.  This will also adversely affect our community and businesses.  We must carefully assess the pros and cons in considering any proposal to increase tax.

143. In the wake of the financial tsunami, many European countries and the US have fallen into financial difficulty.  The major causes are the prolonged mismanagement of public finances by their governments and over-expanded welfare measures.  Beset with huge debts from overspending, these countries eventually find themselves in a dire financial crisis, and have to cut the deficit through fiscal austerity.  Hong Kong must draw a lesson from them.  We must maintain effective fiscal management and fiscal discipline by adhering to the principles of keeping expenditure within the limits of revenues and allocating resources where they are required.  Any indiscriminate increase in expenditure will only impose a heavy burden on our next generation.

Government Revenue

144. We need to ensure that the Government has a stable income by preserving tax revenue and adhering to the "user pays" principle.  Tax revenue, accounting for more than 60 per cent of the total government revenue, exceeds $280 billion in 2013-14.  Of this, two-thirds will come from direct taxes (i.e. profits tax, tax under personal assessment, property tax and salaries tax) and the remaining one-third from indirect taxes (e.g. rates, motor vehicles first registration tax and duty on dutiable commodities).

145. On the premise of maintaining the existing low and simple tax regime, we shall strive to prevent revenue losses on payable taxes.  To this end, the Government will examine the tax information stated by taxpayers through an audit and investigation mechanism.  Back tax is assessed and penalties are imposed on cases of understatement or omission.  In 2011-12, the Inland Revenue Department (IRD) collected back tax and penalties of about $6.8 billion, which was 76 per cent higher than that of the previous year.  The IRD will continue to combat tax evasion and avoidance, and strive for greater effectiveness by making better use of information technology, reinforcing staff training and adjusting investigation strategies.

146. Regarding indirect taxes, the annual revenue from tobacco duty and motor vehicles first registration tax is over $4 billion and $7 billion respectively.  We notice that the main modus operandi of selling illicit cigarettes has recently changed from street peddling to telephone order, making law enforcement more difficult.  On the other hand, some dealers provide false information on the selling prices of vehicles to evade motor vehicles first registration tax, which reduces our tax revenue.  To protect the revenue from tobacco duty and motor vehicles first registration tax, the C&ED will deploy more resources to step up its efforts to combat tax evasion in the coming year.

147. The provision of government services is generally charged in accordance with the "user pays" principle.  There are thousands of fees and charges, including all types of licence fees and other fees related to the issue of identity documents, registration, etc.  The cost recovery rate for some items is as low as 30 per cent.  The rate for more than 1 000 fees and charges has not been adjusted since reunification.

148. In 1997-98, government services with charges determined on a cost-recovery basis generated nearly $12 billion in revenue, equivalent to four per cent of government revenue.  In 2011-12, revenue from this source dropped to only $10 billion, or a share of only two per cent of revenue.

149. To prevent cost recovery items being turned into heavily subsidised items, we need a systematic review.  I shall ask all policy bureaux and departments to review their respective fees and charges, and submit plans for their revision for the coming one or two years.  We shall first deal with fees that have not been revised for years and do not directly affect people's livelihood.  Examples are fees for pesticide permits, riding establishment licences and temporary permits for exhibitions of animals and birds.  We shall also deal with items which have low cost recovery rates such as fees for visas or licences for storage of dangerous goods.  The Government will make appropriate fee revisions as and when necessary.  There will not be substantial revisions at one go to avoid affecting people's livelihood.  We shall also strictly control costs and reduce the need for increasing fees and charges as far as possible.  I hope that the community will consider our proposals for fee revisions in a fair and objective manner.

(To be continued)

Ends/Wednesday, February 27, 2013
Issued at HKT 12:40