Budget Speech by the Financial Secretary (10)

Medium Range Forecast

202. The MRF projects, mainly from a macro perspective, the revenue and expenditure as well as financial position of the Government. For 2023-24, the real economic growth rate between 3.5 per cent and 5.5 per cent is adopted, and that for 2024-25 to 2027-28 is 3.7 per cent per annum.

203. During the above period, the average annual capital works expenditure will exceed $100 billion, while the recurrent government expenditure will grow at a rate between 3.3 per cent and 5 per cent per annum. The ratio of total government expenditure to GDP will gradually fall from about 25 per cent for 2023-24 to about 22 per cent.

204. Regarding revenue from land premium, the forecast for 2024-25 and onwards is mainly based on the 15-year average ratio of revenue from land premium to GDP, which is 3.7 per cent of GDP. I also assume that the growth rate of revenue from profits tax and other taxes will correspond to the economic growth rate in the next few years. Overall, the ratio of government revenue to GDP will gradually increase from about 21 per cent for 2023-24 to over 23 per cent.

205. In addition, the MRF reflects the proceeds from the annual issuance of government green bonds and infrastructure bonds worth approximately $65 billion in total. I will explain the details a little later.

206. Based on the above assumptions and arrangements, after taking into account proceeds from issuance of bonds and repayments, with the exception of a forecast deficit in 2023-24, the Consolidated Account will turn to a surplus in the coming four years. There will also be a deficit in the Capital Account from 2023-24 to 2026-27, which will turn to a surplus in 2027-28. As Hong Kong is susceptible to the influence of external political and economic environments given its fully open and externally-oriented economy, government revenues fluctuate rather substantially. The Operating Account is therefore estimated to record a deficit in 2023-24 and 2024-25, which will turn to a surplus in the subsequent years. The above forecast has not taken into account any tax rebate or relief measure that the Government may implement over the coming four years.

207. Fiscal reserves are estimated at $983.7 billion by the end of March 2028, representing 25.6 per cent of GDP, or equivalent to approximately 14 months of government expenditure.

Public Finance

Article 107 of the Basic Law

208. Our economy remained sluggish in the past few years because of the epidemic, resulting in huge fiscal deficits. Some people have raised concerns as to whether the Government's fiscal management conforms to the requirement of Article 107 of the Basic Law. Article 107 states that the Government should follow the principle of keeping the expenditure within the limits of revenues in drawing up its budget, and strive to achieve a fiscal balance, avoid deficits and keep the budget commensurate with the growth rate of its gross domestic product. I would like to offer some views here.

209. Hong Kong is a small and open economy with scarce natural resources. It is, therefore, unavoidable that our economic performance is susceptible to external forces. When the external environment worsens or a natural disaster occurs, the downward pressure on Hong Kong's economy will intensify, which may result in a substantial drop in government revenue. The primary policy objective of the Government is striving for the well-being of the people. To this end, we need to launch counter-cyclical measures during economic downturns to stabilise the economy and safeguard people's livelihood, so as to relieve the pressure on them. With an increase in expenditure and a decrease in revenue, the Government will record a fiscal deficit. In times of an economic upturn, government revenue from tax and other sources, on the contrary, will increase, while the need to increase expenditure will also be less imminent. A surplus will be seen under such circumstances.

210. Therefore, in analysing the Government's financial position, we should look at the entire economic cycle rather than focus on the short-term performance. The Government's financial position has been volatile over the past two decades or so. Some may consider that the Government runs a structural surplus during economic boom and slips into a structural deficit in times of economic downturn. There are limitations in either one of these conclusions as they are based on observations of short-term performance. In my opinion, it is more appropriate to assess the Government's financial position on the basis of economic cycle rather than individual financial year. Since Hong Kong's return to our Motherland, we have passed through three economic cycles of varying durations, with the most recent one being the longest, lasting for more than 10 years.

Level of Fiscal Reserves

211. As to the appropriate level of our fiscal reserves, public opinion also varies. Some people think that the more, the better while others are of the view that the Government should not keep excessive social resources but allocate them to the people and the market as much as possible, and in this way, higher economic efficiency will be achieved. I think that our fiscal reserves have several functions, including:

(a) as savings for rainy days, that is, keeping a certain amount of savings for use in times of adversities to support our people and enterprises, thereby maintaining social stability;

(b) helping safeguard financial stability; and

(c) generating investment returns. These returns from our reserves are one of the important sources of government revenue. The proper use of our reserves facilitates the development of our economy and industries.

212. Taking Hong Kong's previous financial position in times of adversity as a reference, I consider that our fiscal reserves are currently maintained at a prudent level.

Bond Issuance

213. Through issuance of bonds, the Government has been fostering the development of our bond market and attaining other policy objectives such as financial inclusiveness and promoting green and sustainable development.

214. In fact, the Government's outstanding debts remain at a low level, currently accounting for only four per cent of GDP, far lower than most of the other advanced economies. Against this background, Hong Kong should make good use of the room for bond issuance to support and expedite economic development while creating capacity and investing for the future, with a view to enabling early sharing of the fruits of economic development with the public.

Green Bonds

215. The Government Green Bond Programme (GGBP), which has won considerable acclaim from international investors since its launch, has become a benchmark for issuance of green bonds in the region. The Government will further expand the scope of the GGBP to cover sustainable finance projects. The HKMA will announce the details in due course.

Infrastructure Bonds

216. Infrastructure is one of the key areas for sustained economic development and improvement of people's quality of life. I propose the setting up of an Infrastructure Bond Scheme to enable us to better manage the cashflow needs of major infrastructure projects and facilitate the early completion of projects for the good of the economy and people's livelihood, so that members of the public can enjoy the benefits early. Meanwhile, we will also explore public participation in bond subscription for our people to develop a "sense of participation" and a "sense of gain" in their support for Hong Kong's long-term development projects. I will introduce the relevant proposals to the LegCo in 2023-24.

217. Even with further bond issuance in future, we will still strive to keep the government debt-to-GDP ratio at a relatively low level, which is expected to remain below 10 per cent by the end of the MRF period in 2027-28. I have to emphasise that we will continue to adhere to the fiscal discipline of keeping expenditure within the limits of revenue. Proceeds from bond issuance will not be used for funding recurrent expenditure.

Concluding Remarks

218. Mr President, life has not been easy during the past three years, and sometimes we might inevitably feel disheartened. With the epidemic now coming to an end, we are free to travel again. Mega events are resuming one after another. I now see many happy faces around, as people start to reconnect with each other and cherish the moments they are spending together. I am deeply touched by these scenes, which inspired me to come up with the idea of launching the "Happy Hong Kong" Campaign that comprises a wide variety of events. I hope that people can share more joyful moments with their families and friends through participating in these fun-filled activities.

219. Happiness can actually be found just around the corner. Over the past few years, more people have developed an interest in joining fascinating local tours. They have discovered the beauty of our countryside, the elegance of our historical buildings as well as a wide range of gourmet food in various districts. Each discovery brings us a happy memory. If only we feel the things around us with our heart, we will see that there is so much to treasure in this city.

220. Recently, I have made quite a number of overseas visits and received many visiting guests. It left a deep impression on me that many misconceptions about Hong Kong exist overseas. Often, such misconceptions originate from biased news reporting. After all, interaction between Hong Kong and the outside world has been hindered for more than three years and many of those living overseas have been prevented from visiting Hong Kong. Henceforth, showcasing the new strengths of Hong Kong to the outside world is our top priority. In the midst of complicated and volatile international relations, it is all the more important that we stand firm in explaining the actual situation in Hong Kong and establish new connections and friendships. While we will strain every nerve to get the job done, your concerns and efforts in this regard are also crucial. History has taught us that Hong Kong people can always turn crises into opportunities in turbulent and stormy times, and achieve still greater development.

221. Under "One Country, Two Systems", Hong Kong's orientation and positioning in the global arena serve a crucial role. In spite of all the trials and tribulations, we still have many friends around the world, both old and new, who are always ready to offer us valuable advice and suggestions. Our country sustains high-quality development and adheres to the strategy of two-way opening up under the principle of reciprocity and mutual benefits. These, together with our country's staunch and robust support to Hong Kong, enable us to explore new markets and forge new partnerships in the current international landscape.

222. Under the leadership of the Chief Executive, the new-term Government embraces a new paradigm and a new outlook by giving its all with vigour and competence. As stated by President Xi Jinping in his important speech on 1 July 2022, the next five years are important for Hong Kong to break new ground and achieve another leap forward. While there are both opportunities and challenges for the future of Hong Kong, opportunities definitely outnumber challenges. On this new journey towards the great rejuvenation of the Chinese nation, Hong Kong has a unique and crucial role to play and an irreplaceable function to perform. I therefore have full confidence in the future of Hong Kong.

223. Hong Kong people, as always, have no fear of challenges. In fact, challenges nurture greater creativity and capability. The story of Hong Kong in the past few decades reveals our success in overcoming one challenge after another, and each time scaling new heights. Each and every one of us has a place in Hong Kong's success story. We all need to keep striving for a better future for Hong Kong, contributing to its success. Fellow citizens, I can say with certainty that Hong Kong will forge ahead in the new era, on a new stage and along a new journey!

Ends/Wednesday, February 22, 2023
Issued at HKT 13:18