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Budget Speech by the Financial Secretary (3)
Economic Prospects for 2018 and Medium-term Outlook
38. Looking ahead, I am cautiously optimistic.  The global economy remains on an upward trend, with a synchronised upturn in major economies.  The International Monetary Fund lately forecast that the global economic growth this year should reach 3.9 per cent, the fastest since 2011.  Yet, we need to remain alert to changes in the global monetary environment and geopolitical situations, as well as policy risks of major economies.
39. The performance of the US economy last year exceeded expectation, with unemployment rate falling below the levels before the financial tsunami.  As the US implemented a tax reform at the end of last year, we need to continue monitoring its potential impact on the US and global economy, as well as the capital flows worldwide.  The pace of monetary policy normalisation of the Federal Reserve is another major factor affecting the global economic and monetary environment this year.
40. The recovery momentum in the Eurozone becomes more entrenched as the unemployment rate continues to fall.  The policy moves by the European Central Bank following its tapering of monthly asset purchases early this year and the progress of Brexit negotiations deserve attention.
41. In the Mainland, as it deepens the supply-side structural reform to promote economic upgrading and transformation, and continues to prevent and control financial risks, it is expected to maintain a medium-high rate of economic growth and remain the main engine of global economic growth this year.
42. All in all, the prevailing external environment is promising.  The expected gradual pick-up in demand from major economies will lead to considerable growth in Asian exports.  Hong Kong's exports of goods should be able to grow steadily.  If the recovery of tourism in recent months can be sustained, Hong Kong's retail sector will also see a more vibrant performance.
43. Our favourable employment and income conditions will spur consumption growth in Hong Kong this year.  Sanguine local economic sentiment and positive business confidence should also sustain investment growth.  In the light of the global and local economic situations at this juncture, I forecast economic growth of three to four per cent for Hong Kong this year.
44. On inflation, local cost pressures will go up somewhat amid sustained economic growth.  Imported inflation will also edge up alongside the global economic upturn, but such pressure is unlikely to be high.  Overall, inflation will remain moderate this year.  For 2018 as a whole, I forecast that the headline inflation rate will be 2.2 per cent with an underlying inflation rate at 2.5 per cent.
45. Since the start of this year, the expectation of a US interest rates adjustment has triggered substantial fluctuations in the global financial markets.  I urge all investors to stay vigilant.  As always, the Government is committed to ensuring an orderly and steady operation of our financial system.
46. Over the past few years, with a tight supply of residential flats, ultra-low interest rates and an influx of capital, property prices have soared beyond the affordability of ordinary citizens.  However, I believe that the key factors underpinning soaring property prices over the past few years are gradually undergoing fundamental changes.  First, the supply of residential flats will increase.  The private sector will, on average, produce about 20 800 residential units annually in the coming five years (from 2018 to 2022), an increase of 50 per cent over the annual average in the past five years.  Besides, as at end-December 2017, the projected supply from the first-hand private residential property market in the next three to four years will remain at a high level of approximately 97 000 units.  We anticipate that the tight supply situation in the property market will ease.  Besides, as the US interest rate normalisation process continues, the ultra-low interest rate environment of the past few years will no longer persist.  The changes in these key factors will put pressure on the property market.  The Government will keep a close watch over changes in the property market.  Before making a home purchase decision, the public should carefully assess the risks involved, especially the impact of interest rate hikes on their ability to repay.
Public Finances
New Fiscal Philosophy
47. The Chief Executive has put forward a new fiscal philosophy for the current-term Government.  It envisages that on the premise of ensuring the health of our public finance, the Government should adopt forward-looking and strategic financial management principles in optimising the use of surplus to invest for Hong Kong and relieve our people’s burdens.  I agree entirely with her view.
48. In formulating fiscal policies, we should strive to be innovative, responding to community aspirations promptly and effectively and making a head start to foster long-term development.
Budget Strategies for 2018-19
49. In preparing this year’s Budget, I have ensured that adequate resources are provided to implement the various policy initiatives put forth in the Policy Address. I have also adopted the following strategies:

(a) proactively promoting economic development by providing favourable conditions for emerging industries such as I&T and identifying growth opportunities on the one hand, and strengthening the competitiveness of the pillar industries on the other, so that our economy will prosper in a sustained and diversified manner, creating quality jobs for our young people;

(b) making bold investments to break through the development bottlenecks.  The Budget will optimise the use of surplus to build capacity in terms of land and human capital;

(c) improving the existing services and quality of life;

(d) preparing to meet the community's long-term needs for healthcare and elderly care;

(e) while maintaining the competitiveness of our tax regime, making suitable adjustments to ease the burden on taxpayers and enterprises, having regard to our prevailing fiscal position;

(f) caring for and sharing with the community by enhancing support for the disadvantaged and enabling members of the public to enjoy the fruits of our economic success; and

(g) maintaining adequate fiscal reserves.
50. I now turn to three issues on public finances which were frequently raised during the consultation exercise.
Annual Surplus
51. It is expected that the Government will have an estimated surplus of $138 billion in 2017-18.  As pointed out in my Budget last year, when considering how our annual surplus is to be deployed, I will carefully take into account the source and nature of the surplus, and make optimal allocation of resources in the light of the external and local economic environment, social needs and public expectations.  This year, I will follow the same principle by sharing with the community about 40 per cent of the projected annual surplus, and using the remaining for improving services and investing in the future.
Fiscal Reserves
52. We have a healthy fiscal surplus, but as a small and highly open economy, Hong Kong is susceptible to changes in the external economic environment.  The linked exchange rate system leaves us limited room to adjust our monetary policy.  Therefore, healthy public finances are vital for Hong Kong as they enable us not only to accelerate our development and expand our capacity when the economy is stable, but also to introduce counter-cyclical measures promptly and effectively in times of economic downturn, thereby stabilising the economy and safeguarding people’s livelihood.
53. As we all know, Hong Kong has a narrow tax base, and our revenue sources are concentrated.  In 2017-18, profits tax, salaries tax, stamp duties and land premium account for about 74 per cent of total government revenue.  Among them, land premium and stamp duties fluctuate the most and they account for 27 per cent and 15 per cent of our total revenue respectively.
54. Fiscal surpluses in recent years were attributable mainly to the buoyancy of asset markets.  However, experience shows that asset markets can be highly volatile and any downturn will put our revenue and fiscal position under pressure. 

55. When considering the allocation of resources, I often remind myself to take a more forward-looking perspective.  To better care for people in need, the Government has implemented measures proactively for elderly care and support for the disadvantaged over the past few years.  In the face of a rapidly ageing population and fierce competitions from other economies, we need to enhance our economic structure, strengthen healthcare and elderly services, nurture talent, increase land supply and housing, improve labour welfare, and build a caring and just society.  These are significant commitments.
56. Moreover, the Budget is prepared on a cash basis and mainly reflects the projected cash receipts and disbursements of the new financial year with forecasts for the following four years.  It does not fully reflect our liabilities and committed expenditure, such as the outstanding commitment of over $350 billion for ongoing works projects.  Besides, the financial implications of policy initiatives may not be fully reflected in the Budget of the new financial year because of the lead time required for implementation.
Relationship between Public Expenditure and GDP
57. In the past, it was a budgetary criterion that public expenditure should be kept at or below 20 per cent of GDP.  One of the considerations was to avoid over-expansion of the Government, which might not be conducive to resource deployment.  Today, while acknowledging the forces and roles of the market, we have to be more proactive in managing public finances in the face of various development needs of society and the economy.  During the period between the 2018-19 Budget and the subsequent years in the Medium Range Forecast, the public expenditure will be slightly higher than 21 per cent of our GDP, but I will ensure that the increase in public expenditure is necessary to meet the actual needs of Hong Kong, and broadly in line with our affordability in the long run.

(To be continued.)
Ends/Wednesday, February 28, 2018
Issued at HKT 11:30
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