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Madam President,
I move that the Appropriation Bill 1999 be read a second time. 2 It has been a year since I presented my 1998 Budget in this Chamber. At that time I believed that by now we would have largely overcome the economic difficulties which first beset us in the final quarter of 1997. I was optimistic that the storm waves washing over our shores in the aftermath of the Asian financial crisis would have subsided and that, despite some occasional turbulence, all typhoon warnings would have long been lowered. 3 In the event that has not proved to be the case. The storm has lasted longer and spread wider. It was more severe than anyone had expected. Few, if any, sectors of the local community have been left untouched by its passing. During 1998, external demand for our goods and services weakened dramatically, the Hong Kong dollar came under acute speculative pressure, asset prices dropped sharply and unemployment surged. 4 Since the middle of the year, interest rates have come down again, stock prices have rebounded somewhat and property prices have stabilised. The package of tax concessions presented in my last Budget will by now be having their desired effect. The $30 billion package of special relief measures which we announced last June has also helped. But these small rays of sunshine are of little comfort to those unfortunate members of the community who, try as they may, are unable to find jobs. 5 Hong Kong is facing a major challenge. Many companies have downsized or closed down. Many people have suffered a pay freeze, a pay cut or even unemployment. The immediate task of the Government is to relieve, as far as possible, some of the pain caused by the economic adjustment. Our medium term objectives must be to strengthen our economic foundations, enhance the robustness of our markets and maintain the health of our public finances. We should, above all, see the present crisis as an opportunity to remove structural obstacles, seek to maximise the strategic advantage of Hong Kong's geographical location and prepare ourselves for the new millennium. 6 This year, I have consulted more widely than ever in an effort to establish how this Budget could help meet the community's expectations. I have sought views and invited suggestions from Members of this Council, from the Chairmen of the Provisional District Boards, from academics and the media, from business associations and from professional bodies. I have visited shopping arcades to get a better and more personal feel of the impact of the economic adjustment on small businesses and on people's livelihoods. To gauge the public mood better, I have also paid particular attention to the findings of the many telephone surveys and opinion polls. In addition, I have read the many letters I have received from individuals telling me their very personal experiences and expressing their views about the state of our economy. The motion debate in this Council on 10 February has forcefully reminded me of Honourable Members' expectations. I wish to thank all those who have shared their feelings with me on the Budget. 7 The Government is acutely aware of the pain suffered by the community. We are deeply concerned. Even in the best of times, the community takes a keen interest in the annual Budget and the government's revenue and expenditure proposals. This year, understandably, that interest is even more intense. Nobody expects the Budget to be a cure for all our ills. But most people hope that the Government can at least provide some way of relieving the worst of their pain. I must also be sure that any action I take now works towards our longer-term interests. A "quick fix" now at the expense of our longer term economic health would be the worst possible thing for Hong Kong. 8 The views I have obtained consistently demonstrate that the Hong Kong public are mature and rational. They are eager to see the Government encourage consumption and stimulate economic growth. Yet, at the same time, they fully understand that there is a limit to how much the Government can do. They recognise that the Government is facing a dilemma: they want us to keep taxes low to provide relief, while at the same time sustaining public services and continuing to invest to meet our social and economic needs. They also support the principle of our living within our means, and believe that maintaining a balanced budget is a laudable objective. 9 These are the thoughts which have been uppermost in my mind in framing the proposals before Members this afternoon. 10 I will begin by detailing our economic performance in 1998.
11 As an open economy with elaborate trade and investment links with the rest of East Asia, Hong Kong was hit hard by the regional financial turmoil which engulfed the Region and swept beyond it. During 1998, the harsh external environment, coupled with speculative attacks on our currency and stock markets, put the Hong Kong economy to its most arduous test in recent times. 12 Consumer spending declined for the first time since the 1974 Oil Crisis. Fortunately this decline abated somewhat towards the end of the year, as sentiment improved with the rebound in the stock market and more stable property prices. For the year as a whole, consumer spending fell by 6.6 per cent in real terms. 13 Overall investment receded in 1998, after achieving double-digit growth for four years in a row. To some extent, this was caused by the fall in public sector construction following the completion of the Airport Core Programme. In the first half of the year, private sector construction still showed solid growth. But this slackened considerably in the second half of the year as the property market slump dampened developers' confidence and curtailed building activity. Higher interest and the uncertain business outlook also held back expenditure on machinery and equipment. Taking all these components together, investment spending for the year dropped by 5.8 per cent in real terms. 14 Externally, our exports to the United States and Europe grew, but this growth was unable to compensate for the marked shrinkage in our exports to East Asia. The growing volume of Mainland products being shipped out directly from Mainland ports instead of through Hong Kong also trimmed our export performance. As a result, total exports of goods dropped by 4.3 per cent in real terms. This was made up of a 7.9 per cent fall in domestic exports and a 3.7 per cent fall in re-exports. 15 Inbound tourism was weak in the first half of the year. Intensive promotion and price reductions by operators in the tourist industry helped recover some of the lost ground in the second half of 1998. The net outcome was a decline of 14 per cent in real terms in total tourism receipts for the year as a whole. The setback in regional demand also meant that our exports of financial and other business services were subdued. Overall, exports of services fell by 6.6 per cent in real terms for 1998 as a whole. 16 As domestic demand weakened, our imports also declined, resulting in a large reduction in the visible trade deficit. Coupled with a still sizeable invisible trade surplus, our overall trade balance improved to a small surplus last year, from the deficits recorded in the preceding three years. 17 The end result was a fall in Gross Domestic Product (GDP) in 1998 of 5.1 per cent in real terms; this contrasts sharply with the 5.3 per cent growth in 1997. The decline in GDP accelerated up to the third quarter of last year, but slowed down in the fourth quarter as local financial conditions turned more stable. 18 Amidst all these setbacks, the remarkable flexibility and adaptability of Hong Kong businesses and the Hong Kong workforce were evident. To maintain greater competitiveness, many businesses took decisive action to achieve greater economy and efficiency and to reduce costs. This, together with the rates rebate, the freeze in Government fees and charges, and the public utility companies' restraint in adjusting charges, caused consumer price inflation to ease sharply throughout the year and to turn slightly negative towards the year-end. For 1998 as a whole, the Composite Consumer Price Index rose by only 2.8 per cent, the lowest since 1981 when this Index began. 19 Looking forward, the external environment could still be difficult in 1999. The United States may not be able to sustain last year's robust consumer demand created partly by its strong stock market performance. Brazil has recently suffered from financial instability which may yet spill over to other economies. A good part of Europe is still under the shadow of Russia's earlier financial fall-out. In East Asia, although financial conditions appear to have stabilised, domestic demand remains weak. The pace of economic re-vitalisation in Japan will be the key to regional recovery, but that re-vitalisation remains elusive. 20 Demand in our major markets will be mixed in the near term. Imports by the United States, Europe and East Asia are likely to moderate or decline further. Competition for export business from within the region is expected to be very keen. But conditions within the region should improve in due course as the affected economies gradually bottom out. Taking these factors together, I forecast the total export of goods to decline by 3.7 per cent in real terms this year, comprising declines of 5 per cent for domestic exports and 3.5 per cent for re-exports. As for the export of services, I forecast a 3 per cent growth in real terms this year, anticipating a further recovery in tourism as well as in some other service areas. 21 Fortunately, economic growth in the Mainland, as both our number one market and our production hinterland, should continue to be robust in 1999, at a forecast of 7 per cent. This will present wide-ranging business opportunities for Hong Kong. 22 In our domestic economy, some encouraging signs have emerged more recently. Liquidity has improved. Local interest rates have been trending downwards, not only as a result of cuts in US interest rates but also because of a narrowing of the risk premium for the Hong Kong money market. Share prices have risen from their low of last August. The property market has also stabilised. In consequence, local economic sentiment has gradually improved. 23 At the same time, the public sector is progressively stepping up its infrastructure programmes which should boost local demand. But relatively high real interest rates, a cautious approach to lending by banks and corporate consolidation could still dampen investment in the private sector. In particular, building activity in the private sector is likely to remain slack in the near term. Overall, I expect investment spending to continue to decline this year by around 4 per cent in real terms. 24 Concern over job security and wage cuts could still constrain consumer spending during the year. Yet the substantial tax concessions in my last Budget should help stimulate consumption. More stable asset markets should also have a positive effect on consumption. I forecast local consumer spending to resume a modest growth of 2.5 per cent in real terms this year. 25 I expect the economy will still be slack in the early part of 1999, with a more visible pick-up in the latter part. I forecast overall GDP will grow by around 0.5 per cent in real terms for the year as a whole. | |
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26 On inflation, price pressures from external sources should remain subdued this year as world commodity prices trend downwards and inflation in our major supplier economies stays low. Domestically generated price pressures should subside further. The fuller effect of the significant decline in market rentals during the course of last year should filter through in 1999. Wages are likely to adjust further amidst a slack labour market. The freeze announced last year in Government fees and charges and in a number of public utility charges will continue to render relief. Inflation could remain negative for some time. I forecast the Composite Consumer Price Index to fall by an average of 2 per cent in 1999. This reduction in consumer prices helps contain the cost of living at a time when economic conditions are difficult. The easing in wages and rentals helps soften the cost of doing business, and consequently, enhances our competitiveness.
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27 Rising unemployment is now a major problem facing most economies in the region. Hong Kong is no exception. Since the third quarter of 1997, the seasonally adjusted unemployment rate in the local economy has jumped from a low of 2.2 per cent to the latest 5.8 per cent, and the underemployment rate from 1.0 per cent to 3.1 per cent. In absolute terms, the number of unemployed has more than doubled, to slightly over 200,000. Yet total employment has also increased, by around 110,000. The worsening in unemployment is due more to the increase in manpower supply than to any decline in the number of jobs in the economy. Unemployment has hit hardest the younger and older members of the workforce and those with lower education and skill levels.
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28 This grave situation has made the work of our Task Force on Employment all the more important. Since its establishment in June 1998, the Task Force has devised a wide range of measures to ease unemployment and help job creation. We have advanced government projects, strengthened employment services, enhanced vocational training and employee retraining and tightened measures to combat illegal employment. Some 38,000 jobs were created in the second half of 1998. Over 30,000 people were placed in jobs through the Local Employment Service of the Labour Department last year. In addition, the training capacity of the Employees Retraining Board has been increased by 30 per cent, enabling 78,000 people to benefit from retraining programmes during the current financial year. These efforts will continue in 1999. We estimate that the implementation of our policy initiatives and infrastructure projects will create about 122,000 jobs in the coming two years. 29 Along with the easing in labour market conditions, wages and household incomes have moderated. Median household income was down by 5.3 per cent last year. For employees, wage reductions, though unwelcome, are clearly preferable to the loss of their jobs. Viewed from a macro perspective, moderation in wages is necessary and unavoidable in order to uphold our competitiveness against other economies in the region. It is however important that these wage adjustments are undertaken in a smooth and amicable manner aimed at preserving harmonious labour relations.
30 The dramatic reversal in our fortunes in 1998 is a timely reminder that growth should never be taken for granted. We must always strive to strengthen our fundamentals and improve our competitiveness. We need to face up to the challenges to our monetary, financial and securities systems. We need to embrace and grasp the opportunities presented by new technologies and we need to breathe new life into our tourism industry. 31 The financial turmoil has brought our monetary regime into sharp focus. Let me deal with this subject in greater detail. 32 Since October 1983, Hong Kong has followed a linked exchange rate system. Our system is based on one devised in the nineteenth century, and usually referred to as a currency board. In those days, transactions were settled using notes and coins. As money increasingly takes on an electronic form, the traditional currency board system must be upgraded. We have continued to upgrade our monetary arrangements over the past decade, but no one should misinterpret this process as a departure from the core principles of the traditional currency board. 33 Last September, we introduced technical changes to our monetary arrangements which followed on from, and were an integral part of, our incursion into the stock and futures markets to deter market manipulation. These revised arrangements allow local banks unlimited access to the Hong Kong Dollar Discount Window of the Exchange Fund, using their Exchange Fund papers as collateral. Consequently, the impact on interest rates will be much reduced when international speculative capital switches rapidly into or out of our currency as it is effectively countered by a much bigger pool of Exchange Fund papers held by the local banks. As a result we have the benefit of reduced volatility in interest rates, at the cost of some fluctuation in the level of our foreign reserves. By building upon the foundation of a traditional currency board and incorporating essential modern day features, we have strengthened and improved our monetary regime. I have entrusted the task of introducing further technical improvements to the Currency Board Operations Sub-committee of the Exchange Fund Advisory Committee, whose minutes are published in keeping with the high degree of transparency which we espouse in our monetary arrangements. 34 Regardless of the measures we ourselves can take, we have to recognise that Hong Kong is an international financial centre. Our monetary regime is closely intertwined with international markets. When global finance has outgrown the international financial architecture, Hong Kong as an open economy can never be completely immune to unrestrained manipulative activities on a global scale, targeting individual markets. That is why we have argued forcefully for the upgrading of the global financial architecture.
35 Next, I would like to discuss the investment strategy of the Exchange Fund. Following our incursion into the stock market last August, the Exchange Fund acquired a substantial Hong Kong equity portfolio. We have undertaken to review this level of holding, having regard to the requirement of the Exchange Fund to hold a portfolio of liquid US dollar assets that will provide at least a 100 per cent backing for our monetary base. That took the form of a comprehensive review of the Exchange Fund's overall investment strategy. 36 That review has now been completed. The Exchange Fund Advisory Committee has accordingly approved the adoption of a revised investment strategy for the Exchange Fund. The Hong Kong Monetary Authority (HKMA) will publish full details today. Our present holdings of local equity amounts to 17 per cent of the Exchange Fund. The new strategy requires us to bring this down to 5 per cent. I will be asking the Exchange Fund Investment Ltd. to advise me on how best this should be done without causing any disruption to the market.
37 Weaknesses in the banking systems in parts of the region were one of the main reasons why the Asian turmoil was so widespread. In Hong Kong, our banking sector has emerged from the crisis in remarkably good shape. However, we cannot afford to be complacent. Our banks must tighten their own risk management systems. In turn, our banking supervision must adopt a "risk-based" approach. We need to develop a greater capability to identify and quantify the risks faced by individual banks and to assess the quality of their policies, procedures and controls for coping with those risks. 38 HKMA commissioned a consultancy study on the strategic outlook for the banking sector and the implications which this has for the regulatory and supervisory frameworks in Hong Kong. The recommendations in the consultancy report were published last December. They involve major issues which require careful study. HKMA has embarked on a full consultation on the proposals. They include, for instance -
39 We will proceed deliberately, taking full account of comments received. The financial world around us is changing rapidly. Hong Kong cannot afford to be left behind if we want to remain vibrant and retain our position as a leading international financial centre. 40 In highly developed financial markets, companies as a matter of routine raise funds through the issue of debt instruments and savers generally regard these instruments as a conventional form of investment. By contrast, Asia suffers from a marked absence of deep and liquid debt markets and the alternative source of business finance that these markets can provide. 41 The recent crisis has highlighted this. In many parts of the region the uncertain economic outlook and over-reliance on volatile short-term capital flows resulted in a credit crunch. Loans dried up, even for healthy enterprises. Fortunately, the sound and prudent management practices of our banks in Hong Kong have protected us from much of the adverse impact. But, even here, companies have experienced reduced access to bank credit. Development of the debt markets both domestically and in the region would provide more stable and flexible financing for local businesses. It would give a greater depth to our financing structure as an international financial centre. I regard this as a pressing priority. 42 To strengthen Asia's bond markets, we have to work with other principal centres in the region to create the right market environment. Hong Kong is playing a leading role in co-ordinating an APEC initiative on developing bond markets and we will take an active part in promoting the sound financial development of the entire Asia Pacific region. 43 To promote the development of the local debt market, we will list Exchange Fund Notes on the Stock Exchange of Hong Kong in the second half of 1999, and allow the use of Exchange Fund paper as margin collateral for trading in stock options and futures. The listing of Exchange Fund Notes will enhance their liquidity in the secondary market, enlarge the investor base to include retail investors and contribute to the development of a retail debt market. This will pave the way for the listing of Hong Kong Dollar bonds issued by government-owned corporations, such as the Mass Transit Railway Corporation, and eventually to the listing and trading of corporate bonds on the exchange. 44 It is also important for us to encourage reputable overseas companies, especially Mainland enterprises, to obtain funding through the issue of debt paper in Hong Kong denominated in either the Hong Kong Dollar or foreign currencies. 45 Meanwhile, we are promoting the integration of the various clearing and settlement systems in the region so as to improve their efficiency and reduce transaction costs. We must also improve our credit rating capabilities within the region in order to establish fair and reliable market benchmarks for the full range of Asian debt instruments.
46 For many securities and futures markets 1998 was a stormy year. Market stability has become a subject of much rethinking among policy makers, market regulators and academics around the world. In Hong Kong, we responded in the Report on Financial Market Review published in April 1998. Last September, I announced a further 30-point programme to strengthen the discipline and transparency of our securities and futures markets to make them less susceptible to cross-market manipulation. These measures have largely achieved their purpose. I have asked the Financial Services Bureau together with the Securities and Futures Commission (SFC) to see through the implementation of the remaining measures. 47 The financial turmoil has awakened the world to the regulatory lacunae between domestic laws and international flows of capital and investment. Just as we are finding solutions to cope with such developments, we should be equally alert to the increasing challenges brought to us by globalisation. I believe Hong Kong must respond to these challenges. We need to reform our securities and futures markets in three main areas. 48 First, we need to embrace state-of-the-art technology to remain in the premier league of world financial centres. An immediate and critical task is to consolidate and integrate the clearing services on one platform so as to enhance the efficiency and competence of the overall risk management systems in our financial markets. The clearing systems are not only facilitators of trading activities, but serve a most crucial public utility function for the whole financial services sector. The enhancement of this critical infrastructure calls for a much stronger and better co-ordinated steer by the Government, as is demonstrated in the quantum advance in the banking settlement system through the establishment and operation of the Real Time Gross Settlement system by HKMA. I shall appoint a Steering Committee on the Enhancement of the Financial Infrastructure to be chaired by the Chairman of the SFC to report in six months' time with specific recommendations for action and an implementation timetable. The Committee will also look at the infrastructure requirement for straight-through processing, e-commerce through internet trading and a fully scripless market for Hong Kong. 49 Second, we need to undertake a comprehensive reform of the regulation of our securities and futures markets. This new framework should include much clearer regulatory objectives and strengthened supervisory and investigative powers for the SFC, as well as the establishment of an independent Market Misconduct Tribunal. We need, as well, to bring in new regulations on internet trading and to streamline the licensing regime for market intermediaries. In the next few months, the Financial Services Bureau and the SFC will consult the public and the market further on these ideas. To implement this major reform, I expect to introduce the necessary legislation into this Council before the end of this year. 50 Third, we need to modernise the structure governing our exchanges and their associated clearing houses to make them more efficient, more market driven and better able to respond to global competition. This would best be achieved through demutualising the exchanges and clearing houses, consolidating them into a single market operator, which will eventually operate in the form of a listed commercial entity. This move will separate ownership from trading rights and enhance competition. It should in turn lead to greater market innovation and cost efficiency. These proposals carry profound, long-term implications for our markets. Their implementation demands vision and commitment from market leaders, the Administration and the legislature. A Policy Paper being published today will give full details of the proposals. It will set out clearly the major milestones for the reform and the timeframe in which I expect it to happen. The first and most critical step will be for the two exchanges to agree to arrangements for their demutualisation and merger within seven months. I have asked the Secretary for Financial Services and the Chairman of the SFC to follow up with the exchanges and the clearing houses immediately and to prepare the necessary legislation. 51 These reforms are substantial and their implications far-reaching. Some of the proposals are controversial and I do not underestimate the difficulty and resistance ahead. In proceeding we need to balance the interests of various stakeholders. However, the status quo is not an option for Hong Kong. We must be prepared and be committed to confront and overcome the challenges we face. I strongly believe that the reforms I have just outlined will prepare fertile ground on which our securities and futures markets will continue to flourish. Our mission to excel as an international financial centre must prevail.
52 Insurance, and in particular life insurance, has experienced rapid growth in the past decade. This trend is expected to continue as the penetration rate of life insurance increases with the changing attitudes of society and upon the implementation of the Mandatory Provident Fund Scheme. 53 To enhance the standards of service in Hong Kong and to assure the public of the quality of insurance intermediaries in protecting their interests, we will implement an Insurance Intermediaries Quality Assurance Scheme. This Scheme will require intermediaries, including insurance agents and brokers, to be adequately trained and qualified through publicly held examinations. This will be a condition for registration or authorisation. Renewal of the registration and authorisation will be subject to further professional development programmes. I have asked the Commissioner of Insurance to work closely with the insurance industry on the detailed qualification procedures. The first public examination will be held in the third quarter of 1999, and the Scheme will be fully implemented in early 2000.
54 High value-added and competitive industries are an integral part of a healthy economy. Within the framework of a free market where intervention is kept to a minimum, it is the rightful role of the Government to provide an appropriate environment and suitable infrastructure to promote, facilitate and support our manufacturing and service industries. In his Policy Address last October, the Chief Executive set out the target of developing Hong Kong into an innovation centre for Southern China and beyond, and put forward specific initiatives to achieve the target. 55 Furthermore, we are undertaking a fundamental review of our strategy and policies for attracting foreign investment into Hong Kong. The review will look at how best to promote Hong Kong internationally and how to improve the administrative structure within the public sector for handling foreign investment. We are consulting widely with the business community, existing and potential inward investors and other local stakeholders. The review will be completed in three months. 56 Human capital is a critical ingredient in enhancing competitiveness and promoting the development of technology-based industries. In addition to implementing the initiatives outlined in the Policy Address, the Government will set up a special Task Force to review Hong Kong's immigration policy critically to facilitate the inflow of talent. In particular, the Task Force will consider how best to remove restrictions on scientists and highly-skilled technologists from the Mainland entering Hong Kong to work. The Task Force will bring together representatives from the Security Bureau, the Education and Manpower Bureau, the Trade and Industry Bureau, the Immigration Department and the Industry Department. It will complete the review and put forward implementation proposals within six months. In doing so, the Task Force will take into account the recommendations of the Commission on Innovation and Technology, and ensure that our proposals will not affect the immigration policy of the Mainland. 57 There is no question that, for Hong Kong to meet the challenges of the 21st Century, it must adapt to the new forces of the Information Age. Technological advances such as digitalisation and broadband networks are introducing new ways of doing business, transforming traditional markets and altering existing competitive advantages. The lesson is simple. Let us look at the facts. Internet users world-wide grew from 40 million in 1996 to more than 100 million in 1997, and are expected to increase further to 150 million in 1998. Internet traffic doubles every 100 days. Analysts are forecasting total electronic transactions for both business-to-business and retail of over US$400 billion by 2002. The growth rate is 40 times that of global GDP. 58 To respond to these mega trends, we must first of all identify our strengths and develop our own niche. We should exploit the strengths of our sophisticated telecommunications network, strong intellectual property rights protection regime, and the progress we have made in making electronic transactions secure. These have given Hong Kong an edge in developing information services. Second, having identified information services as our target, we must look for a development in this area which will upgrade our existing economic activities, create new products, and expose them to the electronic world market. Third, we must race against time. The speed with which the information technology sector is advancing and the emphatic efforts of practically all of our competitors in trying to carve out their own corners of the market demand a quick and decisive response. 59 With these considerations in mind, the Government proposes to develop a "Cyberport" in Hong Kong. The Cyberport will provide the essential infrastructure for the formation of a strategic cluster of information services companies. These companies would specialise in the development of services and multi-media content to support businesses and industries ranging from financial services, through trading, advertising and entertainment to communications. Already we can trade stocks, buy insurance and book air-tickets on-line; imagine that you can preview your travel destination, or even "walk" into a hotel room before making a reservation. These are but a few examples of the products that may be developed at the Cyberport. 60 A successful Cyberport will need to provide:
61 The Cyberport development will have to rely largely on the expertise and entrepreneurial spirit of the private sector. It would not be right for the Government to design and construct it on its own as only the market knows what is needed for it to flourish. In order for Hong Kong to make a head-start on this project, we have entered into detailed discussions with the company from whom the idea originates. We will look to them to spearhead the project as partners with Government as well as becoming one of the anchor tenants. I am extremely pleased that this venture has already attracted a number of international companies to express their strong interests in also becoming anchor tenants of the Cyberport. 62 The Cyberport will be located at Telegraph Bay, Pokfulam. It will be a $13 billion development, mostly from private investment, for commissioning in phases starting in 2002. It will generate more than 12,000 jobs in Hong Kong. Some 4,000 jobs will also be created in the construction industry while it is being built. But the benefits will not stop there. Smaller local companies will benefit greatly from working in close proximity with market leaders through the exchange of ideas and expertise in the latest technological advances and market trends. The Cyberport will also generate demand for support services such as accounting, legal and other back-office functions. Most important, the Cyberport will provide quality products to upgrade our current economic activities and enable us to reach out to the limitless cyber market. 63 Tourism has long been a mainstay of the Hong Kong economy. In 1998, total travel and tourism receipts amounted to $55 billion, contributing 4 per cent of our GDP. 64 The Government, together with the Hong Kong Tourist Association and the industry, are pursuing a number of important measures to consolidate our position as Asia's most popular tourist destination. As competition intensifies and tourists become more sophisticated and demanding, we realise Hong Kong cannot rest on its laurels. We are therefore pressing ahead with a number of new initiatives -
65 What I have outlined is a worthy package to enhance the appeal of Hong Kong to our visitors. However, if Hong Kong could boast a major new attraction, something spectacular and world class, we would be able to attract large numbers of regional and international visitors who would not otherwise come here. One obvious possibility would be a prestigious theme park. 66 The Walt Disney Company of the United States is the world's leading operator of theme parks, and runs successful operations in California, Florida, Paris and Tokyo. Members will be aware from the media that the Government has for some time been engaged in preliminary discussions with the company over a possible investment in Hong Kong. 67 Our assessment is that the development of a Disney project in Hong Kong would bring substantial economic benefits. It would create thousands of new jobs within the theme park itself. Many of these jobs would be well suited to young people just starting work, or the middle-aged left unemployed by economic restructuring. In addition, by attracting new visitors to Hong Kong, by inducing existing visitors to stay longer, and by providing attractive new activities for local residents, such a theme park would help boost the economy and indirectly create many thousands of other jobs. And as visitors to Disney theme parks will know, the company is renowned for its innovation and use of technology. 68 Let me now report on the progress of our discussions. The two sides have reached a common understanding. We have confirmed in correspondence that, having identified a site and clarified our respective strong intention to move forward, we should now commence intensive negotiations with a view to determining, by 30 June 1999, whether a Disney project can be brought to fruition in Hong Kong. Because of the commercial sensitivity of the negotiations, it will not be possible to disclose contents of the discussions until we have reached a joint conclusion. However, I would like to make clear that the site we have in mind is on reclaimed land at North Lantau. 69 If the outcome of the negotiations is positive, we envisage signing a comprehensive project agreement later this year. Our target then would be to start work within a year to bring the first phase of the development to completion by the middle of the decade.
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I am fully aware of and indeed share the public's excitement at the prospect of seeing Mickey and his friends in Hong
Kong. However, I must caution that while we have made the first important steps, there is still much ground to cover.
Much hard negotiating lies ahead. I assure Members that the Government is determined to bring this project to fruition
provided mutually acceptable terms can be agreed. We will further advise Members as soon as we are in a position to
do so.
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I now turn to the public sector. At no time has the public sector ever retreated from the quest for improvement. Through
a range of Public Sector Reform initiatives, the public service has become even more open and accountable. It has
committed itself to cost-effectiveness and value for money and to cultivating a result-oriented and customer-based
culture. I firmly believe that, like the rest of the community, the public sector should take full advantage of the recession
to strengthen its fundamentals. This will help sharpen Hong Kong's competitiveness.
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The Chief Executive announced in his 1998 Policy Address that the public sector would embark on an Enhanced
Productivity Programme (EPP). Specifically, to ensure that we reap early benefits from enhanced productivity, we
required departments and agencies to undertake new or improved services in 1999-2000 without giving them additional
resources. I am impressed by our public servants' responsiveness to EPP and their enthusiasm in coming up with
productivity gains of over $800 million in 1999-2000. The majority of these productivity gains will be used to improve
public services. Let me quote a few examples -
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This is just a selection of the new or improved services which we will be introducing in the coming financial year as a
result of the gains made under the EPP. We are publishing today a booklet setting these out in more detail.
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EPP is not a slogan. It signifies the public sector's concerted efforts to secure lasting and sustainable improvements.
There are specific targets to achieve at every stage of EPP. By 2002-03, managers are required to reduce operating
expenditure by a total of 5 per cent without prejudicing the quality of services to the public. Concurrently, we will seek
more fundamental reforms in the management and delivery of public services.
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We are committed to reforming the civil service system to cater for the ever-changing needs of Hong Kong and to take
up the challenges before us. We will ensure that arrangements for recruitment, appraisal, reward and punishment as well
as remuneration and retirement protection are reasonable and flexible, and in tune with good management practices both
in the private sector and elsewhere. The Chief Executive accords a high priority to these reform measures, and has
instructed the Chief Secretary for Administration and myself to supervise progress.
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I will deal with the 1999-2000 pay adjustment for the civil service in a later section. Let me now outline the issues we
are tackling regarding civil service salaries and conditions of service. At the moment, 189,000 civil servants and another
140,000 employees of Government-subvented organisations are subject to the civil service or equivalent pay scales.
Together, their salaries and benefits account for two-thirds of total public recurrent expenditure. We need to pay public
servants reasonably and sufficiently in order to induce suitable talent to join the service. But we must also prevent civil
service pay outstripping private sector pay. Nor should we allow the growing head-count and rigid conditions of service
to snowball into an unbearable burden on the public purse. To prevent this, we are taking a number of measures.
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First, the Standing Commission on Civil Service Salaries and Conditions of Service (the Standing Commission) is
conducting a detailed Benchmark Review to ensure that civil service pay at the entry point remains in step with the
equivalent pay levels being offered in the private sector. When the outcome of the review is available in mid-1999, we
will see whether the civil service entry pay for new recruits has to be adjusted. If the review reveals significant
discrepancies between public and private sector pay levels, we may have to follow up with an overall pay level survey to
ascertain the right level of civil service pay.
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Apart from salaries, we need to critically re-examine the justifications for various job-related and non-job-related
allowances paid to civil servants against present day circumstances and practices in the private sector and elsewhere.
We shall take immediate steps to formulate a new set of fringe benefits for new recruits, covering benefits such as
housing, leave, local education allowance and medical benefits. We shall tighten the rules governing the payment of
overtime and acting allowances. And we shall invite the Standing Commission and the Standing Committee on
Disciplined Services Salaries and Conditions of Service to undertake a comprehensive review of all types of job-related
allowances and the principles and practices which apply to them.
79
With contributory retirement protection schemes becoming the worldwide norm and with the coming into force of the
Mandatory Provident Fund Scheme, we recognise the need for reviewing the civil service pension scheme. We will
commence a consultancy study as soon as possible with the aim of putting forward proposals early next year for a new
retirement protection scheme for new recruits. In the process, we will assess carefully the full impact of changing this
distinguishing feature of civil service employment conditions on the overall morale and stability of the civil service.
Besides bearing in mind the interest of cost efficiency, we must provide adequate retirement protection for civil servants
who devote their entire working lives to serving the community.
80
We will re-design the civil service appointment policy to allow for greater flexibility in hiring and firing. The objective
is to help the civil service to choose and retain the best. In this connection, we will also simplify the existing disciplinary
system and termination procedures, and promote greater awareness within the management of the importance of
enforcing the high standards of discipline expected of the civil service.
81
When we are confident that we have in place an appraisal system which can be used effectively to determine
performance pay, we will, as a longer term objective, examine the feasibility of linking salary adjustments to
performance. This is a normal practice in the private sector but, in heading for this, we must not lose sight of the
unique job nature of much of the civil service.
82
We will hold a firm grip on the size of the permanent civil service by considering alternative recruitment practices. To
enhance flexibility in the deployment of human resources and in the interest of cost efficiency, we have already given
Heads of Departments much greater discretion in employing non-civil service contract staff, with more flexible pay and
conditions that are more akin to those in the private sector.
83
Given these wide-ranging reforms, we will institute a general freeze on hiring into the permanent civil service, including
hiring to fill new posts or vacancies. Exceptional recruitment for essential services will have to be justified on a
case-by-case basis. This measure will reduce the permanent civil service strength by around 8,000 by the end of
1999-2000. This should not affect employment opportunities as Heads of Departments may still recruit non-civil
service contract staff or temporary staff to carry out certain front-line functions. The Mode of Providing Public Services
84
Public services are wide-ranging and diversified, very often manpower-intensive. To achieve best value for money in
the use of public resources, it is not enough merely to look at the cost of the public servants delivering the service. A
fundamental re-think of the mode of delivering the service is essential.
85
We have a track record of letting the market, through its enterprise and efficiency, come up with the most economical
solution to deliver a public service. We have the Mass Transit Railway Corporation (MTRC) and the Kowloon-Canton
Railway Corporation (KCRC) running rail systems which are among the most efficient in the world; we have tunnels
built one after another through Build-Operate-Transfer contracts; we have waste facilities installed and managed through
Design-Build-Operate contracts; and we have contracted out the management of Government tunnels, carparks and office
buildings. I want to see this well-tested private sector participation go much further.
86
The Director of Social Welfare will shortly contract out, as a pilot scheme, the provision of welfare services, starting with
the home help service to the elderly. Instead of allocating service units to individual Non-Government Organisations
who will then have to operate under rigid subvention rules and procedures, we will open up welfare services for
competitive bidding, on a cost and quality basis. In this connection, I am pleased to note that the Director will set up a
Contract Management Unit in his department. I am even more pleased that he will be funding this unit through
productivity gains which he has identified.
87
Water supply is another suitable candidate for some form of private sector participation. Many other cities around the
world have allowed private sector participation in the supply of water. This has instilled greater cost consciousness and
a market-oriented culture in the service providers and allowed them greater operational flexibility outside the government
system. We have commissioned a consultancy study to look at a variety of options for private sector participation in the
provision of water supply services. The study will be completed in May. The Government will share the findings of the
study with the community and this Council. In deciding on the way forward, we will take into account public and staff
interest, and the long term cost-efficiency of water supply.
88
Another form of private sector participation is to fully corporatise suitable government services. Corporatisation will, in
particular, offer the opportunity to bring private sector management into traditionally government-run activities. Some of
these government corporations may, in due course, be earmarked for privatisation. I am determined to move ahead
quickly. We aim to bring forward specific proposals for Members Consideration as soon as practicable. One such
proposal is ready. Let me explain it in detail.
89
Hong Kong rightly prides itself on its long-held free market philosophy of encouraging the private sector to maximise
its participation and investment in our economy. The evidence of this is widespread in our daily life. There are,
however, instances in which private sector investment at the outset has not been feasible because the intensive upfront
capital investment together with the long payback period simply do not have the right appeal to investors. Our answer
to this has been for government-owned corporations to build their projects with equity investment from the Government
but to operate them on a commercial basis, and subject to many private sector disciplines.
90
An outstanding example of the success of this approach is the MTRC. The MTRC has built and operated a mass transit
railway system which is second to none. It has recently completed a world-class airport railway and is embarking on a
further extension of the mass transit railway system to the rapidly growing new town of Tseung Kwan O. The efficiency
of the MTRC's operations has laid the foundations for major achievements of this kind over the years, while at the same
time keeping fares in line with inflation. Financially, the fundamentals of the Corporation are solid.
91
The original reasons for 100 per cent government ownership of the MTRC are no longer valid. I therefore propose to
privatise a substantial minority share of the MTRC through a public offering. The Government will remain the majority
shareholder.
92
An offering of this nature will provide the people of Hong Kong with an unrivalled opportunity to participate in the
ownership of a successful and profitable public corporation. The introduction of private ownership will reinforce the
MTRC's commitment to competitiveness and efficiency. It will broaden the Corporation's access to funds and reduce
its reliance on Government equity injection or loans for future development. The introduction of the MTRC as a
company listed on the local stock exchange will strengthen the market and enhance Hong Kong's attractiveness to
investors. In addition, the proceeds from the sale of this stock will also provide a useful boost to our finances over the
medium term.
93
Privatisation of the MTRC will not, however, take place overnight. We need to strike a sensible balance in our regulatory
framework between the different interests of investors, employees and commuters, and to ensure in the process no
diminution of safety or service standards. And we need to wait until the market is right before we sell any shares. We
will consult and secure Members' support as well as that of the community. When successfully implemented, this
ground-breaking initiative will become the benchmark for privatisation, where appropriate, of other government-owned
assets in future. We will introduce a bill for this purpose into this Council within the 1999-2000 financial year.
94
Just as we are making plans for the partial privatisation of the MTRC, the ownership of the Cross Harbour Tunnel will
revert to the Government on 1 September when the current franchise expires. We will contract out the management of
this tunnel for the next few years while we consider the optimum longer term arrangements.
95
Let me now turn to the management of our public finances. If I had to choose one phrase to characterise the fiscal
policy which Hong Kong has successfully followed for many years, that phrase would be "living within our means".
We have never indulged in profligate spending. We have almost invariably covered our expenditures with our revenues.
In this way we have avoided the need for borrowing. Instead, we have accumulated substantial fiscal reserves which
over the past year or so have provided us with the strength both to resist the attacks on our currency and to ride out the
economic difficulties.
96
The International Monetary Fund (IMF), after its visit last October, commended Hong Kong for having gained an
almost unrivalled reputation for fiscal prudence. It is vital to our economic well-being that we maintain that reputation
so as to retain the confidence of the international financial community and overseas investors.
97
The international financial community draws great comfort from the Basic Law provision which requires the government
to "follow the principle of keeping 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" (Article 107). The Basic Law also requires us to decide on taxation matters by "taking the low tax policy
previously pursued in Hong Kong as reference" (Article 108).
98
Developing budget proposals for the coming financial year has been no easy task. Whatever I do must be consistent
with the constitutional provisions of the Basic Law. I must also stand firm by our established fiscal principles to help
maintain international confidence. Yet I must formulate a sound strategy to cater for the current needs of Hong Kong.
In doing so I must pay due regard not only to our present economic circumstances but also to our economic prospects in
the immediate future and over the medium-term. And I must weigh carefully the way in which my budget proposals will
affect not only our finances but also our prospects for economic recovery.
99
I have concluded that, hard as I and my colleagues may strive, a budget deficit in 1999-2000 is unavoidable. Let me
explain why.
100
First of all, I have funded all the initiatives and improvements to services announced by the Chief Executive in his
Policy Address last October. After taking this into account, I estimate total government spending in 1999-2000 will
amount to $242 billion. And without any revenue proposals, I estimate total government revenue will amount to $208
billion. In short there is a gap of $34 billion which would need to be bridged if we were to bring the budget into
balance. A gap of this magnitude could only be bridged if we opted for either substantial tax increases or swingeing cuts
in government expenditure.
101
On the one hand, substantial tax increases would hit both businesses and individuals hard. Such a step would inevitably
lead to further declines in consumer spending and private sector investment, to further business retrenchment and
undoubtedly increased unemployment. The economy, rather than starting to recover, would be driven into deeper
recession. On the other hand, swingeing cuts in government expenditure would mean that much-needed investments in
our physical infrastructure would be abandoned or seriously delayed. We would have to lower the level and standards of
both government and government-subsidised services. We would have to renege on a wide range of our policy pledges
and commitments. That would deal a direct blow to people's livehood and weaken investors' confidence. In the end,
stringent measures, on either the expenditure or revenue side, of the magnitude needed to achieve a budget balance could
well prove fiscally counter-productive as well as economically disastrous.
102
In these circumstances, a deficit budget in the short term is entirely consistent with the provisions of the Basic Law,
provided that it is set in the context of a return to balanced budgets over the medium term. From a macro-economic point
of view, returning to a fiscal balance over the medium term is prudent and rational. It would be inflexible and
unreasonable to try to achieve a strict balance year after year.
103
In our consultations, Members of this Council have made it abundantly clear that they share this view. From the wide
spectrum of advice which I have received it is apparent that this is also the view of the community at large. My budget
strategy is based on the premise that we should ensure our finances are set on a healthy footing over the medium term
while, in the short term, fostering the prospects of economic recovery.
104
In putting our medium-term finances on a healthy footing we will need to exercise careful control over the growth in
government expenditure. One of our fundamental budgetary guidelines is to ensure that, over time, government
expenditure grows at a rate no faster than the economy as a whole. In pursuit of this guideline we have, for many
years, planned the growth of government expenditure in line with the forecast trend growth of GDP.
105
Our spending plans for 1998-99 were formulated before the full severity of the economic downturn became apparent.
They were based on a forecast trend growth rate of 5 per cent. In comparison, the economy in 1998 is expected to have
shrunk by 5.1 per cent. In addition, our spending plans for 1999-2000 have been drawn up based on a forecast trend
growth rate of 3.5 per cent. This also far exceeds the forecast growth in 1999 of 0.5 per cent. This means that over the
two years, 1998-99 and 1999-2000, we will have planned our expenditure growth based on a combined trend growth
rate of around 8.5 per cent while at the same time the economy will have contracted by more than 4.5 per cent.
106
This is the result of our conscious decision to maintain our spending plans during the economic downturn rather than
cut back on spending and drive the economy further into recession. As the economy picks up, over the medium-term
we will need to gradually redress this imbalance if we are to bring the growth in expenditure back in line with the growth
of the economy over time. I will have more to say on this later on.
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| Comparison of Cumulative Growth in Government Expenditure With Cumulative Growth in GDP since the introduction of the Medium Range Forecast
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107
Against growing demands for social services and the objective of keeping the growth of expenditure over time in line
with the growth of the economy, the community as a whole must recognise the need to prioritise the different sectors of
government spending. For 1999-2000, education, health and social welfare account for exactly half of total recurrent
public spending, at 21.3 per cent, 14.6 per cent and 14.1 per cent respectively. In the past five years to 1998-99, we have
increased recurrent spending in these areas in real terms by 28 per cent for education, 45 per cent for health and 103 per
cent for social welfare, compared to an overall increase of 28 per cent. This significant growth in expenditure on welfare
over the years has increased the share of social welfare recurrent spending from 8.7 per cent in 1994-95 to its current
14.1 per cent. Under our existing policies, demand for services and support in all these areas is bound to increase owing
to rising unemployment and an ageing population. An anticipated large inflow of people from the Mainland who have
right of abode in Hong Kong creates added pressure. The Task Force chaired by the Chief Secretary for Administration
is assessing the practical implications of such an inflow for Hong Kong. When we complete the assessment, we will
make suitable adjustments to the allocation of our resources. However, there is unlikely to be any significant impact on
expenditure in 1999-2000.
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108
Whilst these sectors will press for higher efficiency and productivity, we would only be able to meet the ever-growing
demands within our overall expenditure constraints by re-examining policies and re-adjusting spending priorities.
The modifications to the Comprehensive Social Security Assistance (CSSA) Scheme which aim at removing
dependence on CSSA and encouraging able-bodied recipients to rejoin the workforce are introduced with this
objective in mind. We will also look at other aspects of the CSSA Scheme to ensure equity in the use of public
resources. We cannot afford much longer double-digit growth in welfare spending each year. In health care, we can
no longer defer a serious and purposeful
discussion on the issue of health care financing. We cannot ignore the burden on the public purse of a
quality, accessible and virtually free public hospital service. I hope the community will take an active
part in the deliberations on the subject when we shortly release the consultancy report on Hong Kong's
Health Care System by the Harvard University. In line with the Chief Executive's
pledge for quality education, education must be a spending priority. Investment in our younger
generation is the only way to preserve Hong Kong's competitiveness.
109
This process of policy review must not become an excuse for indiscriminate cuts in public spending. My Budgets, and those of my predecessors, are characterised by a commitment to helping those most in need. This will continue
to be our guiding principle. Indeed, in 1999-2000, I have budgeted for recurrent spending of more than $29 billion on social welfare. This represents a growth of 13.6 per cent in real terms.
110
For fiscal reasons, we have decided to freeze civil service pay in 1999. In accordance with the established practice, the
Standing Commission is conducting a Pay Trend Survey of the private sector, which will be completed in May. When
the outcome of the Standing Commission's pay trend survey of the private sector and the Commission's recommendations
are known, we may consider whether there is a need to go further than a freeze. In this regard, I am encouraged by an
open and honest exchange of views with the representatives of the four civil service staff consultative councils in January.
They appreciated that the public expects the civil service to strive constantly to achieve greater efficiency and improve
the quality of service. They were also prepared to make sacrifices in the interest of the economy and share the pains of
the recession with the community.
111
On the revenue side, we have been fortunate in recent years in being able to cut tax rates, increase tax allowances and
introduce new allowances and deductions to "return wealth to the people". As a result, the majority of our workforce
pays no salaries tax.
112
This has led some professional bodies and academics to criticise us for reducing the size of the tax net. They have
also suggested that our tax base is too narrow and that we should explore alternative sources of taxation to provide a
more stable source of government revenue.
113
I appreciate their concern and understand their arguments. But let us be quite clear what changes to our tax system
would mean. Widening the tax base means introducing new taxes. Enlarging the tax net means that people who do not
now pay taxes would start to do so. Any such proposal would clearly prove controversial.
114
We pride ourselves in Hong Kong on our low, simple and predictable tax regime. A predictable tax environment is an
important consideration for businesses when deciding whether to set up or expand their activities in Hong Kong. We
should not embark on major changes to our tax system unless we are convinced that the benefits of doing so far outweigh
the disadvantages. Although we have done some work on a new tax with a wide net based on consumption, I do not
believe this is the right time to pursue it.
115
There are also people who have suggested that given the size of our reserves we can provide yet more generous tax
concessions and boost our spending even further. I beg to differ.
116
Our fiscal reserves gave us the credibility we needed last year to defend our currency and to prevent Hong Kong
people's confidence being undermined by manipulative activities in our securities market. That experience was enough,
I believe, to justify in full the policy we have pursued over the years of building up our fiscal reserves.
117
Without healthy reserves, we would not be able to maintain government spending programmes in the face of temporary
fiscal deficits. We must maintain our investment programmes for sound economic reasons. We will still be living within
our means provided we use our reserves judiciously and on a short-term basis. But we must never use them to prop up
business sectors or individual companies which are no longer profitable. This sort of policy creates a subsidy, however
well-hidden behind political rhetoric. And subsidies are the ruin of competitiveness.
118
What we must do is continue with the policies that have served us so well for so long. We must continue to use our
reserves for the purposes that they are intended, namely -
119
This view is also supported by the IMF who commented last October that "While questions have been raised in the past
as to whether the accumulation of fiscal reserves has been excessive, recent economic developments have confirmed the
wisdom of these policies. Hong Kong's high fiscal reserves have played an important role in sustaining confidence in
financial markets; and they have also significantly increased the authority's room for manoeuvre in the present economic
situation.?
120
It is the existence of these reserves which gives us the fiscal strength to ride out the impact of the economic downturn on our finances. That impact has been felt on our revenue collections.
121
In 1998-99, we suffered an across-the-board reduction in revenue. Our revenue from land transactions will be $32.2
billion lower than originally estimated, largely as a result of the decision taken last June to suspend land sales by auction
and tender and to put on hold the provision of sites to the Hong Kong Housing Society for sandwich class housing.
There are also significant shortfalls in profits tax of $3.8 billion, in stamp duty of $3.3 billion, in bets tax of $2.3 billion
and in Rates, duties, motor vehicle taxes and fees and charges totalling $4.4 billion.
122
Fortunately, these shortfalls have been partially offset by an enhanced yield from the investment of our fiscal reserves
with the Exchange Fund. This windfall is a by-product of our incursion into the stock market last August and the
subsequent rise in the Hang Seng Index. As a result, the investment earnings on our fiscal reserves in 1998-99 are now
forecast to be $36 billion, $9.3 billion more than originally estimated.
123
Taking all these factors into account our revenue will be $220.6 billion. This is $38.4 billion lower than originally
estimated.
124
On the expenditure side, total expenditure is now expected to amount to $245.1 billion, $3.1 billion lower than originally
estimated. This is made up of a number of pluses and minuses.
125
On the General Revenue Account we have spent $4.2 billion less than originally anticipated. This arises largely from
much reduced Pensions payments as a result of a smaller than expected number of retirees in 1998. Spending from the
Capital Works Reserve Fund was $4 billion lower than originally estimated, partly due to some modest slippage and
partly as a result of lower land compensation values reflecting the impact of the economic downturn. The decision
taken in June last year to suspend the provision of sites to the Housing Society for sandwich class housing resulted in
reduced payments from the Loan Fund of $6.8 billion.
126
These underspendings have been largely offset by three major items: the payment of $3.4 billion to Hong Kong Telecom
International Ltd. for early surrender of its exclusive telecommunications licence; $2.6 billion to the two municipal
councils to compensate them for the loss of revenue as a result of the Rates refund given as part of the package of special
relief measures announced last June; and the injection of a further $6 billion equity, which was originally scheduled for
April 1999, into the KCRC for the West Rail project.
127
Total expenditure of $245.1 billion and total revenue of $220.6 billion would result in a deficit of $24.5 billion. But
one of the tax concessions, which I shall be announcing shortly, will increase this figure.
128
The reductions which we have seen in our revenue in 1998-99 will not reverse overnight. Not surprisingly the revenue
which we collect is dependent on the overall performance of the economy. With forecast economic growth of 0.5 per
cent in 1999 our revenues will remain flat. In addition there are two further factors which will reduce our revenue
collections in the coming year. First, we will start to bear in 1999-2000 the full cost of the generous package of tax
concessions introduced in the 1998 Budget. Second, we will feel in the next financial year the full impact on our Profits
Tax collections of reduced business profitability in 1998.
129
These factors partly explain the gap between our expenditure and revenue (before revenue proposals) which I have
already mentioned when discussing the prospect of a deficit budget for the coming financial year. The other reason is,
of course, our decision to hold fast to our expenditure plans and to provide the funds for all of the improvements and
initiatives announced in the Chief Executive's Policy Address last October.
130
Government spending in 1999-2000 will total $241.6 billion. Within this total our recurrent expenditure will grow by
$12.8 billion over the revised estimate for 1998-99 to $179.7 billion. This will enable us to meet the increased demands
placed on many of our services as a result of the economic downturn as well as introduce new and improved services,
particularly in the areas of social welfare, education and health. Despite the economic downturn, the draft estimates of
expenditure published last Friday provide for an impressive list of service improvements and, in particular, for substantial
investment in our physical infrastructure.
131
In 1999-2000, after taking into account the range of revenue proposals which I will outline shortly, I am forecasting a
deficit of $36.5 billion or 2.8 per cent of GDP. As a consequence I expect the fiscal reserves to fall to $389 billion by
the end of the coming financial year.
132
I said earlier that I believed a deficit was acceptable in 1999-2000 provided this was set in the context of a return to fiscal
balance over the medium term. My Medium Range Forecast which is published as an appendix to the printed version of
this Speech provides for just such a return to fiscal balance over the medium term. The Forecast is based on a trend
growth rate of GDP of 3.5 per cent. This is a significant reduction from the trend growth rate of 5 per cent which we
have been following for much of the present decade. Attainment of even this reduced forecast will hinge on the
economy being able to sustain its upswing from the latter part of 1999 onwards; to around 3.5 per cent to 4 per cent in
2000 and to appreciably above that in 2001 and 2002. This in turn will depend on the external economic and financial
situation turning progressively more favourable.
133
This reduced growth rate has significant implications for the growth in government expenditure over the medium term. I
have referred earlier to the need to redress the imbalance between the growth in government expenditure in 1998-99 and
1999-2000 and the contraction in the economy over the same period. To do this, I have made allowance in my forecast
for our recurrent and capital works expenditures to grow by only 3 per cent in 2000-01 and 2.5 per cent in the following
two years. Even this reduced level of growth will not bring the cumulative growth in expenditure fully back in line with
cumulative economic growth by the end of the forecast period. We may well need to maintain a similar degree of
restraint over the growth in expenditure for a further two years after 2002-03. This underscores the need for us to achieve
the savings targeted under the EPP and to re-prioritise the different areas of government spending.
134
On the revenue side my forecast assumes the receipt of privatisation proceeds of $15 billion in each of 2000-01 and
2001-02 from the floating of a partial stake in the MTRC.
135
In 2000-01, the combined effect of restraining the growth in government expenditure, of the receipt of $15 billion in
privatisation proceeds and of my package of revenue measures will not be quite sufficient to restore our finances to the
black. For that year I am forecasting a modest deficit of $5.6 billion. In the context of a combined total of expenditure
and revenue in 2000-01 of around $500 billion, this can be considered broadly balanced. From 2001-02 onwards, our
finances will be back on a healthy footing. I forecast surpluses of $8.3 billion in 2001-02 and $14.5 billion in 2002-03.
136
As a consequence, I expect our fiscal reserves to fall from $458 billion at 1 April 1998 to a low of $383 billion at 31
March 2001 before picking up again over the next two years to a level of $406 billion at 31 March 2003, the end of the
forecast period. This leaves the fiscal reserves within the guidelines set out in the 1998 Budget Speech* , albeit at the
lower end of the range.
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137
In recent years, successive Budgets have offered generous salaries tax concessions. We have increased allowances at
a rate far higher than inflation. For example, in my previous three Budgets, we have increased basic allowances by a
cumulative 36.7 per cent compared to inflation over the same period of 15.7 per cent. We have also reduced the
marginal tax rates substantially and widened the marginal tax bands. Furthermore, we have introduced new allowances
and deductions for mortgage interest, for training expenses and for taxpayers incurring residential care expenses for
elderly dependants. All these changes have led to massive reductions in the salaries tax burden.
138
In 1998 the economic adjustment has brought inflation down to a new low, even turning negative at the end of the year.
At the same time, many employees have suffered from pay freezes or even pay cuts. Their salaries tax liabilities will be
reduced accordingly. Against this background there is no justification for further salaries tax concessions in 1999-2000.
Accordingly, I propose no change to salaries tax rates or allowances.
139
In the 1998 Budget we reduced the rate of corporate profits tax to 16 per cent. Our profits tax rate is among the lowest
in the world. I propose no change to the rate of profits tax. This is consistent with the views expressed by many
Honourable Members and professional bodies.
140
Many of you may find the decision not to introduce further salaries tax concessions disappointing. You will be pleased
to know that I am not turning a blind eye to the financial difficulties facing the community. To provide relief to
individuals, families and businesses, I propose to rebate by 10 per cent the 1997-98 final assessments of profits tax,
salaries tax and property tax. The one-off cost will total $8.5 billion. The vast majority of taxpayers have already settled
their final assessments for 1997-98. They will be receiving a refund in the next few weeks. We will send out more than
1.5 million cheques before the end of the current financial year on 31 March. The minority of taxpayers who have not
yet finalised their 1997-98 tax payments will also see their ultimate liability reduced. This will bring the deficit for this
financial year to $32.3 billion.
141
This rebate will not only offer immediate and direct help to the individuals and businesses concerned, but also provide
a modest boost to consumer spending and corporate liquidity; important steps on the road to economic recovery.
142
Last year, I announced a freeze on most government fees and charges. I said that the moratorium would last for one
year. On that occasion, I emphasised that the freeze was an exceptional measure to cater for the needs of an exceptional
time. But I stressed that we remained committed to charging fees based on the user pays principle. Only by adhering to
this principle are we able to meet the requirement under the Basic Law to maintain a low tax policy.
143
At present, our fiscal position is such that a decision to extend the freeze cannot be taken lightly. Neither should we
give up the user pays principle. But, since our economy is unlikely to pick up until the second half of this year, I have
decided to extend the moratorium for another six months. In the meantime we will seek the views of Members of this
Council and try to reach a consensus on the level of increase and the priority for adjusting different fees and charges
upon the expiry of the moratorium.
144
Last November, the Government announced that we would conduct a general revaluation of the rateable values of
properties to take effect on 1 April 1999, one year earlier than previously planned. We have also decided that, in future,
a general revaluation will be conducted annually instead of every three years as before. This ensures that rateable values
will better reflect prevailing market rentals. This will be fairer to ratepayers and will reduce unnecessary disputes between
the public and the Rating and Valuation Department. Since rents have fallen considerably since mid-1996 when the last
general revaluation exercise was conducted, bringing forward the general revaluation will reduce the burden on most
ratepayers. The new measure will also reduce the burden on those required to pay Government rent, which is calculated
as a percentage of the rateable value.
145
In my 1998 Budget, I announced that the overall Rates percentage charge would be reduced from 5 per cent to 4.5 per
cent for one year. On that occasion, I emphasised that Rates represented the most widely based and one of the most
secure source of revenue. We must therefore be extremely cautious when considering adjustments to Rates. Last year's
concession was made to benefit the greatest number of individuals and businesses. It was also in line with our policy of
not raising more revenue than necessary.
146
In 1999-2000, our overall fiscal position, and particularly our operating account, will show a substantial deficit. The
overall Rates percentage charge needs to revert to 5 per cent so as not to erode further a reliable stream of revenue.
147
For the vast majority of ratepayers, the effect of allowing the Rates percentage charge to revert to 5 per cent will be more
than offset by the effect of bringing forward the general revaluation. The rates payable in the next financial year will be
lower than in 1998-99 for 80 per cent of properties.
148
I am well aware that Rates are the taxes with the widest impact on the community. They are paid by individuals and
businesses alike. Within the very tight fiscal constraints I am facing I have tried hard to find room to further relieve the
burden on ratepayers. After careful consideration of our overall financial position, I have decided to grant a one-off
concession of 50 per cent of the Rates payable for the July to September quarter. This will allow reasonable lead time
for the Rating and Valuation Department to make the necessary administrative arrangements. This one-off concession
will save ratepayers $1.8 billion in 1999-2000.
149
A large proportion of the revenue from Rates goes directly to the two municipal councils. The effect of the general
revaluation and the 50 per cent reduction in the July to September quarter will mean that the two councils will suffer a
significant reduction in their Rates revenues. We will need to make suitable arrangements with the two municipal
councils as the need arises.
Merchant Shipping Registration and Related Fees
150
The shipping industry accounts for 1.7 per cent of our GDP and employs over 50,000 people. At present, the total
tonnage of ships registered in Hong Kong amounts to over 6.2 million tons. To strengthen our status as an international
shipping centre and enhance our regional competitiveness, I propose to reduce merchant shipping registration and related
fees as follows -
Through this package of measures, we hope to increase the total tonnage of ships registered in Hong Kong to 10 million
tons in three years, thereby creating 15,800 additional jobs.
151
I also propose to halve the charge for re-export declarations from 0.05 per cent of the value of the article declared to
0.025 per cent. This will align the declaration fee levels for imports, domestic exports and re-exports. This will cost
$270 million in 1999-2000 and $1.2 billion over the period of the Medium Range Forecast.
152
One of the special relief measures introduced last June was a reduction in diesel duty from $2.89 per litre to $2. This
special relief measure will expire on 31 March 1999. In view of our forecast economic performance in 1999, I propose
to extend this special relief measure by one more year until 31 March 2000 at a one-off cost of $590 million.
153
The Government is concerned about the incidence of smuggling and illegal sale of diesel in Hong Kong. We will step
up enforcement against such illegal activities.
154
To fulfil the policy commitment of improving air quality by requiring all new taxis to operate on LPG fuel from the end
of the year 2000, I am quite prepared to exempt auto-LPG from the payment of duty. But I am also concerned that the
commercial price of LPG should not be unreasonably high as this may create room for smuggling and the illegal sale of
LPG. If this happens, public safety will be at risk.
155
To promote the development of the local financial markets, I propose -
We also intend to grant stamp duty exemption for transactions undertaken by stock futures market makers for hedging
purposes. This will be subject to the working out of a satisfactory monitoring mechanism with the two exchanges to
prevent abuse of the concession.
156
To encourage same-day transit passengers with an extended stopover to make use of the few hours of their stay to visit
and to shop in Hong Kong, I propose that those who arrive and depart from Hong Kong within the same day should be
exempt from the payment of air passenger departure tax. This new measure will encourage more same-day transit
passengers to make the best of their brief stay in Hong Kong and their spending will contribute to Hong Kong's
economy. The cost of this concession will be minimal.
157
Under our present system, life insurance proceeds are subject to estate duty if paid in Hong Kong. However, if payment
is made outside Hong Kong, the proceeds are exempt. Many of the larger international insurance companies attract
clients by providing services which enable the payment of life insurance proceeds outside Hong Kong, so that the
beneficiaries will enjoy the tax exemption. Most small-scale insurance companies incorporated locally are unable to
provide the same service because of cost constraints. I propose to exempt life insurance proceeds from estate duty
irrespective of where they are paid. This will accord equal treatment to all life insurance policy holders and their
beneficiaries. It will also help level the playing field for the insurance industry.
158
To enhance convenience for all businesses and to reduce business costs, I propose to offer, as an option to the present
annual certificate, a three-year business registration certificate at a cost of $5,200. This offers a significant saving when
compared with the current cost of $2,000 for renewing certificates on an annual basis.
159
We have recently held a round of preliminary talks with the Netherlands Government about the conclusion of a double
taxation agreement with them. We expect to go forward with this, and with other prospective partners, over the coming
months, to ensure that exposure to double taxation is kept to a minimum. The conclusion of such agreements will provide
an added incentive for overseas companies to do business in Hong Kong.
160
Article 107 of the Basic Law imposes on the Government an obligation to strive to maintain a balanced budget. In view
of the budget deficit and our forecast of Hong Kong's economic performance in the short term, we clearly need to
increase revenue on a selective basis. Only then can we regain fiscal balance over the medium term and at the same
time, afford the special relief measures that I have already outlined. This is a painful but necessary decision. It is one
we cannot avoid. I put forward the following proposals.
161
First, I propose to adjust the stamp duty rates and banding on property transactions as follows -
163
Purchasers of property costing over $3 million and up to $4 million will have to pay between $7,500 and $10,000 more
in stamp duty. They are mostly middle-income individuals or families. For them, the extra amount of stamp duty may
not be a small sum in absolute terms, but this sum is insignificant when compared to the amount saved as a result of the
fall in property prices over the last year or so.
164
Purchasers of property costing more than $6 million will feel the impact of the adjustments most. Relatively speaking,
they are also the group in our community who can best afford to pay the higher cost involved.
165
Since speculative activity in the property market has abated, I propose that the payment of the stamp duty due on the
purchase of a residential property be deferred until the assignment of the property is executed. We will make sure that
speculators cannot benefit from this change. As payment of stamp duty will not be required immediately following the
signing of the sale and purchase agreement, genuine home buyers should find it slightly easier to cope with the initial
outlay when purchasing a property. If, for whatever reason, the sale and purchase agreement is subsequently cancelled
or rescinded, the property buyer will no longer have to suffer the loss of the stamp duty already paid.
166
Deferring payment to the assignment stage will lead to a cash-flow loss in 1999-2000. As a result, I expect these
adjustments to reduce revenue by $0.8 billion in 1999-2000 but to bring in additional revenue of $5.9 billion over the
period of the Medium Range Forecast.
167
Next, I propose some modest increases in betting duty. When compared with other types of tax, betting duty has the
least direct impact on people's livelihood. It is truly an optional tax. In order to raise additional revenue, I propose to
adjust betting duty rates as follows -
Together these changes to betting duty will bring in additional revenue of $2 billion over the period of the Medium
Range Forecast.
168
By developing a clean and professional racing industry, the Hong Kong Jockey Club provides a popular form of public
entertainment which has become an integral part of the social life of many Hong Kong people. Its significant
contributions to charity are laudable. The Government will work closely with the Club to take all possible measures to
combat illegal betting and other activities designed to evade betting duty, both to protect public revenue and to safeguard
the financial ability of the Club to continue its widespread support of charitable activities.
169
The ownership of the Cross Harbour Tunnel will revert to the Government when its present franchise expires in
September 1999. At that time, all the revenue, net of operating expenses, will become part of the Government revenue.
The cost of using the Cross Harbour Tunnel has remained unchanged since 1984. I propose to abolish the present tunnel
tax but in the process increase the tolls, from the date the Tunnel reverts to Government ownership, as follows -
To avoid increasing the operating costs of the transportation industry and related trades, the Cross Harbour Tunnel tolls
for all other types of vehicles (including taxis) will remain unchanged. These proposed increases will bring us additional
revenue of $120 million in 1999-2000 and $840 million over the Medium Range Forecast period to 2002-03.
170
I also propose to increase the Lion Rock Tunnel toll from $6 to $8. The adjustment will apply across the board to all
types of vehicles using the Lion Rock Tunnel. It will bring in additional revenue of about $60 million a year.
171
Apart from generating additional revenue, the proposed increase in the tolls of the Cross Harbour Tunnel and Lion Rock
Tunnel will also encourage drivers to switch to other tunnels, thus improving traffic conditions and reducing congestion.
172
Since 1994, we have been charging a maximum of $2 for every 15 minutes for on-street parking. I propose to increase
the maximum charge to $4 for every 15 minutes. This will bring the maximum hourly rate for on-street parking to $16.
Given the scattered distribution of parking meters, the increase in meter charges will have to be implemented in phases.
The new fee will be implemented in the busiest districts initially, to be followed in other areas within six months.
With this increase, the hourly rate for on-street parking will still be lower than the levels charged by car parks in busy
areas during peak hours. This measure is expected to bring in additional revenue of $190 million in 1999-2000 and
$980 million over the period of the Medium Range Forecast.
173
Fixed penalties for traffic-related offences were last adjusted in 1994. I propose to adjust them by 26.5 per cent in line
with cumulative inflation since 1994. The primary objective is to maintain the deterrent effect of these fixed penalties.
The adjustment I propose will not change the policy intent for introducing these fixed penalties, nor will it affect the
relativity of the different types of penalties in this category. While increasing the deterrent should reduce the number of
offences committed, I also expect a modest increase in revenue in the region of $140 million a year.
174
I must emphasise the importance of the revenue raising measures which I have just outlined. Without them, and the
proceeds from the partial privatisation of the MTRC, our finances, over the medium-term, would remain in a much more
fragile state. We would face a deficit of $24 billion in 2000-01 and a further deficit of $12 billion in 2001-02; a total of
four successive years of deficits. And the surplus in 2002-03, the final year of the forecast period, would be halved to
$7.3 billion. This is an outlook which could well put at risk our reputation for fiscal prudence and which, in turn, could
damage international investors' confidence; a costly prospect.
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175
This year I will not be proposing any increases in excise duties, but I wish to draw attention to the increased flouting
of the law by many smokers. For many years, the government has been pursuing an anti-smoking policy in the interests
of public health. However, statistics reveal that the sale of duty-paid cigarettes has been on a falling trend since 1992
without a corresponding decline in the total number of smokers. The smuggling and illegal sale of contraband cigarettes
accounts for this gap. Fuelled by the economic downturn, such illegal activities have become even more widespread.
I believe that increasing tobacco duty will only enhance the attractiveness of contraband cigarettes and provide further
impetus to smuggling and illegal sale. It would be counter-productive in revenue terms and would contribute little to
furthering our anti-smoking policy. Worst of all, it would further erode public respect for the rule of law. This is clearly
unacceptable. We need to rethink how best to achieve our revenue and health policies rationally. We will consult the
Hong Kong Council on Smoking and Health on the way forward. For the time being, tobacco duty will remain
unchanged.
176
A fair tax system depends on profits and income earners making their proper contributions towards the public coffers
according to law. The Inland Revenue Department has continued with its efforts to combat tax evasion. In the last three
years, the Department completed the investigation of 5,400 cases and recovered back taxes and collected penalties in the
order of $6 billion. These figures show there is room to do more. We will step up tax enforcement further with the
addition of another field audit team in 1999-2000.
177
That concludes my revenue proposals. More details of their effects are contained in the supplement to the printed
version of this Speech. Almost all of my proposals will take effect from 1 April this year. The exceptions are -
178
Starting from this year, we will adopt a new approach of combining those of my revenue proposals which need to be
effected through legislative amendments in one omnibus Revenue Bill for consideration by the Legislative Council.
This approach has the advantage of allowing Honourable Members to consider all my revenue proposals as one complete
package, and facilitates Members' evaluation of their fiscal effect in overall terms. It underlines the importance of
dealing with the revenue proposals in the Budget in their entirety, and not selectively.
179
Before I come to my concluding remarks I would like to deal with one other revenue-related issue. One which has been
the subject of much speculation in recent weeks. That is the question of departure taxes. At present, passengers
departing through Hong Kong International Airport are subject to a $50 air passenger departure tax. People leaving by
sea through our marine ferry terminals to the Mainland and Macau pay a passenger embarkation fee of $18. However,
those departing Hong Kong by ocean liners or through the land crossings are not required to pay any form of departure
charge. This is inequitable.
180
I believe that, in principle, charging a modest land or sea departure tax is justified. It would remove the inequity if people
departing Hong Kong paid a departure tax irrespective of their mode of travel. And, most important, such a tax would
yield significant revenue; a much needed boost to our medium-term finances.
181
However, when I and my colleagues discussed the possible introduction of such a tax, we were all conscious of the need
to implement it in a way which was simple to administer and which did not cause disruption to traffic crossing to or from
the Mainland. Neither should we penalise people such as children crossing the boundary for schooling or truck drivers
crossing the boundary for business. It was soon clear that we would not be able to proceed without involving the
various transport operators and that resolving the practical difficulties involved could take some time.
182
For obvious reasons, I could not embark on such discussion in advance of the Budget. I now propose to open discussions
with the various transport operators and other concerned parties on the feasibility of introducing this revenue-driven
proposal. We will also discuss our ideas with the relevant panel of this Council.
183
I say revenue-driven proposal quite deliberately. We have no wish to deter Hong Kong people from visiting the Mainland,
whether it be on business, to visit relatives, for shopping or for other purposes. On the contrary, ever increasing
cross-border flows are good for Hong Kong and for the Mainland. I have already referred in this Speech to the need to
remove immigration restrictions on Mainland scientists and skilled technologists, and to the Chief Executive's vision of
our becoming an innovation centre for Southern China. With the co-operation of the Mainland authorities, we have
extended the operating hours of the Lo Wu and Lok Ma Chau crossing points and facilitated the introduction of a shuttle
bus service between Lok Ma Chau and Huang Gang. In addition, we will spend $800 million to expand facilities at Lok
Ma Chau. We have also asked the KCRC to submit proposals on the Sheung Shui to Lok Ma Chau rail spur line. All
aimed at easing conditions for a greater flow of goods and people. It is precisely the anticipated growth in the flow of
goods and people that makes the land and sea departure tax attractive: it is likely to prove a reliable and growing source
of revenue.
184
1998 brought the worst economic setback our present generation has ever seen. This is the first recession we have
experienced since we began our economic take-off in the 1960s. But there are signs that we have passed the worst of the
crisis, that our performance will show a growing momentum of improvement in the years ahead.
185
Because of the usual time lag, the official statistics will continue for some time to be gloomier than the real pick-up in
our performance. We will still be more conscious of the continuing pain of the adjustment than our improving
performance. But the reality is that Hong Kong is battling successfully to return to economic health.
186
In typical Hong Kong style, the community has faced up to the economic downswing with determination and resilience.
The Government has stood fast in defending the stability of the Hong Kong Dollar and the linked exchange rate as well
as the integrity of the financial markets. It has not shunned from taking difficult but necessary actions. The combined
efforts of every sector and every individual have allowed Hong Kong to come through a severe test. We have proposed
in this Budget making good use of our reserves by granting additional tax concessions. But we will have to introduce
some moderate revenue raising measures to bring our finances back to the black in 2001-02.
187
1998 was a hard year, and 1999 will not be an easy one even without the inevitable Y2K problems. The challenges
brought about by the adversity of last year also yield new opportunities. History has proved that Hong Kong people
will not shrink from these challenges. They will take full advantage of this window of opportunity. This is why the
Administration has decided to marshall its greatest efforts within the available resources and embark upon a number
of major initiatives all in the coming year, including -
188
These are bold initiatives. Together with our solid foundations built over years of hard work, they will take Hong Kong
to new economic heights in the new millennium. And we can press onward with new strengths.
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