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LC: Speech by FS on Second Reading debate on Appropriation Bill 2014

     Following is the speech (translated from Chinese) by the Financial Secretary, Mr John C Tsang, on Second Reading debate on the Appropriation Bill 2014 in the Legislative Council today (April 16):

Mr President,

     First of all, I would like to extend my heartfelt thanks to Honourable Members and the public for their valuable views on this year's Budget.

     The Chief Secretary for Administration and three Secretaries have just responded in detail to the views on individual policy areas.  To conclude, I shall now give a brief account of the latest economic situation before addressing a number of issues of concern.

Economic Situation

     According to the forecast made by the International Monetary Fund early this month, global economic growth this year is estimated at 3.6 per cent, exceeding last year's three per cent.  The growth rate for advanced economies is estimated to reach 2.2 per cent, the highest since 2010.  As for developing regions in Asia, the estimated growth rate is 6.7 per cent, a marginal increase over last year's 6.5 per cent.

     The global economic situation is still shrouded by a multitude of uncertainties, stemming mainly from the US Federal Reserve Board's asset purchase tapering and its impact on emerging markets.  With the upcoming of the interest rate up-cycle, there is the likelihood of more volatile market expectations about interest rates.

     Despite improvements in the US and European economies, there is no sign of pick-up in demand, leading to a rather sluggish performance of our merchandise exports.  Hong Kong's merchandise exports registered a year-on-year decline of 1.7 per cent in real terms in the first two months of this year.

     Domestically, consumer and business sentiments generally stay positive.  Our labour market remains in a state of full employment, and the latest unemployment rate stands at 3.1 per cent, the lowest in 16 years.  Total employment in 2013 increased by over 80 000, and people's income keeps improving.

     The sanguine job conditions and sustained growth in the number of inbound visitors have provided support to our consumer market.  Retail sales recorded a year-on-year increase of 7.9 per cent in the first two months of this year.  Investment activities in the private sector will still be rather volatile, but the overall investment spending will be underpinned by the major infrastructure projects in full swing.

     I forecast a real growth rate of three to four per cent in the local economy this year, a slight improvement from last year's 2.9 per cent.  I shall keep in view the implications of global economic and geopolitical developments, and act accordingly as appropriate.

Inflation Situation

     Local inflation continued to trend down, with the underlying consumer price inflation easing from an average of 5.3 per cent in 2011 and 4.7 per cent in 2012 to four per cent in 2013.

     The underlying inflation rate in the first two months of this year averaged four per cent, reflecting the rather modest external price pressures, and the gradual feed-through effect of the notable milder increases in fresh-letting rentals last year on consumer price inflation.

     The average underlying inflation rate for the year as a whole is forecast to further decline to 3.7 per cent.  I shall continue to keep a close watch on the inflation trend and its impact on low-income families.

Property Market Risks

     The Government's efforts in land supply are producing results.  A total of 71 000 residential flats will be provided in the coming three to four years.

     Over the past year, the average number of monthly residential property transactions was 3 800 (as at March 2014), far much lower than the 6 800 in 2012.  The rising trend in property prices notably subdued over the same period, and there was even a slight drop in property prices towards the end of last year.  The overall property prices in this February fell by 0.9 per cent when compared with the peak in last August.

     While the property market has slightly cooled off, we must not lose sight of the risk of a bubble.  Overall property prices in this February rose by a cumulative 133 per cent over the trough in 2008.  The affordability ratio, i.e. the ratio of mortgage payment to household income, still stood high at 54 per cent in the fourth quarter of last year as compared to the long-term average of 48 per cent.  This indicates that property prices are still out of tune with the economic situation and people's affordability.

     I am thankful that this Council passed the Stamp Duty (Amendment) Bill 2012 more than a month ago.  The introduction of the Buyer's Stamp Duty implies a windfall and a larger surplus this year for the Government.

     I hope that Members will complete the scrutiny of the Stamp Duty (Amendment) Bill 2013 and pass it as soon as possible for the implementation of the doubling of the ad valorem stamp duty rates.  The passage of the Bill is also necessary for allowing me to introduce appropriate responsive measures and make timely adjustments.

Fiscal Sustainability

     The Working Group on Long-Term Fiscal Planning published its report in early March, providing a scientific and objective basis for our next move.  According to the Working Group, if government expenditure keeps growing and outpacing economic and revenue growth amid an ageing population and slower economic growth, a structural deficit would be inevitable.

     The Government's financial position is still healthy in the short term, allowing us to implement the committed initiatives.  In the next two to three decades, our economy will continue to have a positive growth, yet at a slackening pace.  The Government's revenue will rise with the growth pace of our economy.  This implies that we can still afford an increase in the overall government expenditure, so long as the growth in public expenditure is commensurate with that of the economy and government revenue.  The Government will proactively follow up the Working Group's recommendations to cope with the sustained challenges posed by an ageing population to public finances.

     Heeding the warning issued by the Working Group in its report, I hope that the community will now focus on discussing how to prevent the growth of government expenditure from continuously outpacing that of government revenue and the economy.

     As a responsible government, we shall not subject Hong Kong to any fiscal crisis.  To avoid structural deficit, the Government must take a multi-pronged approach.  Apart from developing our economy, it should also work on its expenditure, revenue and savings.  As a first step, we should start from within the Government.

Containing Expenditure Growth

     The Working Group recommends that public expenditure be controlled at 20 per cent of Gross Domestic Product (GDP) or a comparable level.  I agree that this is a suitable level since it can help maintain Hong Kong's competitiveness and ensure that the Government will not over-consume the limited social resources which may impede the development of the private sector.  More importantly, government revenue does not generally exceed 20 per cent of GDP.

     To uphold the principle of "keeping the expenditure within the limits of revenues" as laid down by the Basic Law and maintain fiscal stability, the Government will stay within this target.  Of course, the 20 per cent mark should be an indicator for fiscal management rather than a rigid target.  Government expenditure growth should be allowed to exceed 20 per cent in individual financial years if necessary.

     To contain our expenditure growth, the Government will adopt eight specific measures as follows:

(a) In its internal resource allocation exercises, the Government will strive to contain overall government expenditure growth within the forecast nominal GDP growth rates over the medium term.  According to this year's medium range forecast, the growth of government expenditure should be around 5.5 per cent per annum between 2015 and 2018;

(b) we shall request all government departments to adjust service priorities and re-engineer work procedures to save recurrent expenditure in the coming two to three financial years.  The savings will be used to provide new and more targeted services;

(c) we shall strengthen the mechanism of financial impact assessment.  Major new policies proposed should be assessed for their fiscal sustainability for ten years or longer term before introduction;

(d) we shall actively identify individual policy areas for fundamental expenditure review to achieve the aim of doing more with less by streamlining procedures or consolidating potentially redundant services;

(e) we shall consider allocating funding that straddles different financial years to suitable subvented organisations.  This will facilitate medium-term service planning and resource deployment of the organisations, and save the administrative work relating to the submission and vetting of applications every year;

(f) we shall review procurement procedures and related rules, simplify the provisions of tender documents and reduce unnecessary assessment criteria so as to enhance the efficiency of government procurement without compromising fair competition;

(g) the Government will adjust the implementation schedules of new works projects as appropriate to prevent an over-concentration of works which will push up the construction cost.  We shall exercise tighter cost control over the various stages of projects such as planning, design, tendering and construction to avoid overspending; and

(h) we shall continue to allocate resources to promote the economy and prepare the community for the ageing population.  For better resource allocation and expenditure planning for capital works projects in areas such as developing land, enhancing healthcare and elderly facilities, and improving the environment, the departments concerned will draw up ten-year programmes for major projects to facilitate early preparation in this respect.

Preserving Revenue Base

     To preserve our revenue, we shall ensure that all the money receivable is duly received by the Government in the first place.  For example, to prevent revenue loss, the departments concerned will step up tax enforcement to combat tax evasion and avoidance.  To stabilise the revenue base, all departments will continue to review their fees and charges according to the user-pay principle.

     In the medium to long term, we need to explore ways to broaden the revenue base.  Any new taxes will be a subject of controversy requiring thorough consideration.

     The Government has conducted a number of reviews on tax policies over the past years.  For example, set up in 2000, the Advisory Committee on New Broad-based Taxes conducted vast amounts of research on how to broaden tax bases and gauged public views on the issue.  Later, in 2006, it launched an extensive consultation on the introduction of a Goods and Services Tax.  At that juncture, the public did not accept the introduction of such a new tax by the Government.  Despite so, members of the community generally agreed during the consultation process that the problems of our narrow tax base should be addressed.  They even put forward other options for broadening the revenue base, but did not have any clear inclinations or mainstream views as to which option the Government should adopt.

     Since the Working Group has alerted us to the long-term fiscal challenges, I am obliged to ensure that the Government will address the fundamental issue of broadening the revenue base at a suitable time in future.  After the measures to contain expenditure growth have been finalised, the Financial Services and the Treasury Bureau will revisit previous research and analysis findings and consultation results to explore the ways to push forward the tax review, taking into account the Working Group's projections.

     I must emphasise that the Government, at the moment, does not have any plan to introduce new taxes to increase revenue.  In principle, we keep an open mind on any new taxes.  However, in considering the various options on broadening tax revenue in future, we shall have regard to whether the option is effective in broadening the revenue base; fair and in line with the "capacity to pay" principle; and in line with our simple and low tax system.  I will keep the community informed of our views and proposals in due course.

Saving for the Future

     On the savings side, the Working Group recommends that we save for the future having regard to the experience of other economies.  Specifically, we can set up a sort of "Future Fund" scheme so that a contingency fund would be available for the next generation should the Government find itself in any fiscal predicament.  Given its non-recurrent nature, the Future Fund should not be used on recurrent expenditure.

     The recommendation of setting up a Future Fund calls for public discussion and consideration.  After the passage of the Appropriation Bill, I shall task the Working Group to conduct further in-depth studies on the recommendation and put forward specific proposals.  I shall also request the Working Group to explore ways to manage government assets in a more proactive and effective manner.

Developing Our Economy

     In the face of an ageing population, we shall address the resultant long-term fiscal challenges not only through the management of public finances, but also by maintaining Hong Kong's economic vibrancy, which is a key element in raising government revenue.

     The Hong Kong economy operates on market principles and has many competitive advantages, including free flows of information and capital, a simple and low tax regime, provision of an excellent infrastructure and judicial independence.  It is incumbent upon the Government to maintain a favourable business environment so that enterprises can capitalise on Hong Kong's tenacity and entrepreneurship for further business growth.  We shall also strengthen G2G ties to open up more markets for enterprises.

     On the development of industries, the four pillar industries employ almost half of the total labour force of Hong Kong and contribute close to 60 per cent of GDP.  To help develop a high value-added and knowledge-based economy, we shall promote innovation and technology industries and raise the productivity of all sectors.  In parallel, we shall nurture with patience other new industries which have potential to foster economic diversification.

     Small and medium enterprises (SMEs) are the mainstay of our economy and employment market.  They make up over 90 per cent of local enterprises and take on 1.3 million employees.  We attach great importance to the operating environment of SMEs, and we shall continue to lend support to these enterprises in financing, market expansion, brand building and productivity enhancement.

     Because of land and manpower constraints, the Government has put in place various measures to increase land supply for commercial and residential uses, and strengthen our human capital in terms of quantity and quality by enhancing the training of local talent and attracting talented people from overseas.  Furthermore, the Government will continue to develop our infrastructure to bolster the flow of people, goods, capital and information, thereby reinforcing our position as an international hub.

Relief Measures

     Since the announcement of the Budget, one-off relief measures have once again become a focus of concern.  In fact, expenditure on this year's counter-cyclical measures accounts for only five per cent of total government expenditure, whereas recurrent expenditure takes up 75 per cent.  This one-to-fifteen ratio shows the obvious difference in importance between the two.

     Over the years, the Government has been making use of recurrent measures to promote social development and improve people's livelihood.  In this year's Budget, I have increased recurrent expenditure by 7.8 per cent, bringing the total recurrent expenditure above the $300 billion level for the first time.

     These additional resources will be used to provide new services and enhance existing services to meet the needs of all walks of life.  Education, healthcare and social welfare together account for almost 60 per cent of recurrent government expenditure.  In the coming year, recurrent expenditure on these three areas will exceed $170 billion, an increase of 6.7 per cent over the previous year.

Concluding Remarks

     Mr President, with competitiveness as the theme of this year's Budget, I hope that the wide-ranging measures it proposes will help us consolidate Hong Kong's position as an international hub, move our economy up the value-added chain, overcome the development constraints and add impetus to the Hong Kong economy.

     At the same time, we must also respond to the long-term fiscal challenges brought by an ageing population.  It is therefore all the more important for us to maintain strict fiscal discipline as stipulated in Article 107 of the Basic Law by keeping the expenditure within the limits of revenues in drawing up the budget, striving to achieve a fiscal balance and keeping the budget commensurate with the growth rate of GDP.

     Structural fiscal problems are looming on the horizon.  We must make longer-term planning to ensure that our policies and measures will be implemented in a way such that we shall be able to maintain fiscal sustainability and remain competitive.

     This year, as many as 1 900 amendments have been proposed by Members.  The Government will make every effort to support this Council in scrutinising the Budget for its early passage.

     The funds on account totalling $78.7 billion previously authorised by this Council are sufficient to meet the overall expenditure before the end of May.  However, if the Appropriation Bill is not secured earlier, government departments and the public sector will begin to see resources running out in early June and the delivery of public services cannot be maintained.  In addition, the Budget initiatives cannot be taken forward without the passage of the Bill.

     To avoid disruption to public services, maintain the Government's normal operation, and facilitate prompt implementation of the Budget initiatives, I earnestly seek Members' support for an early passage of the Appropriation Bill 2014 in the overall interests of the community.

     I so submit, Mr President.  Thank you.

Ends/Wednesday, April 16, 2014
Issued at HKT 13:19


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