APPENDIX A MEDIUM RANGE FORECAST 1999-2000 TO 2003-2004
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| INTRODUCTION The Medium Range Forecast (MRF) is a projection of expenditure and revenue for the forecast period based on the forecasting assumptions and budgetary criteria outlined in Section I of this Appendix. 2 The MRF is presented in three sections: (I) Forecasting assumptions and budgetary criteria. (II) The MRF for 1999-2000 to 2003-2004. (III) Commentary on the MRF in relation to budgetary criteria. SECTION I - FORECASTING ASSUMPTIONS AND BUDGETARY CRITERIA 3 A number of computer based models are used to derive the MRF. These models reflect a wide range of assumptions about the factors determining each of the components of Government's revenue and expenditure. Some are economic in nature (the general economic assumptions) while others deal with specific areas of Government's activity (the detailed assumptions). These are supported by studies of historical and anticipated trends. General Economic Assumptions Growth in Gross Domestic Product (GDP) 4 There is a clear link between many of Government's major revenue sources and economic growth. For planning purposes the medium range assumption as to annual GDP growth for the current MRF has been set at 4% in real terms. Inflation 5 Over the forecast period the average year on year inflation is assumed to be 2.5%. It is emphasised that this is a trend assumption related to the GDP deflator. Methodology 6 In arriving at the yearly forecasts, account is taken of short-term fluctuations from the trend forecasts. Detailed Assumptions 7 A wide range of detailed assumptions relating to developing expenditure and revenue patterns over the forecast period are taken into account. These include:
Budgetary Criteria 8 In addition to the above forecasting assumptions there are a number of criteria against which the results of forecasts are tested for overall acceptability in terms of budgetary policy. Any significant breach of these parameters results in a review of the underlying programmes and adjustments where necessary and appropriate. 9 The following are the more important budgetary criteria:
SECTION II - THE MRF FOR 1999-2000 TO 2003-2004 10 The current MRF is summarised in the following three tables which indicate the forecast operating position, capital cash flow and consolidated reserves(Note a).
Notes on the Medium Range Forecast (a) Accounting policies
(b) General Revenue Account - Revenue This comprises all receipts to be credited to any of the following revenue heads, namely - Duties For the purpose of the Medium Range Forecast:
(c) General Revenue Account - Expenditure This comprises all expenditure to be charged to the General Revenue Account in accordance with the Appropriation Ordinance, with the exception of the transfers to funds. It includes the day to day operational expenses of government departments together with minor capital purchases of a routine nature. (d) Funds - Revenue This comprises all revenue receivable by the Funds except the transfers from General Revenue Account. It includes - Land Premia The breakdown of revenue to the various Funds is -
(e) Transfers between General Revenue Account and the Funds The transfers between General Revenue Account and the Funds are assessed with regard to the commitments of the Funds and their forecast cash flow requirements. The breakdown of the transfers for 1999-2000 and 2000-2001 is -
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(f) Expenditure on capital projects
This comprises expenditure chargeable to the Capital Works Reserve Fund in respect of the Public Works Programme, land acquisition, capital subventions, major systems and equipment and computerisation.
(g) Loans
These comprise loans made from the Loan Fund, including loans to schools, teachers, students, housing loans, and loans under the special finance scheme for small and medium enterprises.
The forecast of payments from the Loan Fund is -
| 1999-2000 | 2000-2001 | 2001-2002 | 2002-2003 | 2003-2004 |
| $m | $m | $m | $m | $m |
| 8,120 | 9,470 | 13,340 | 7,470 | 6,330 |
(h) Investments
These comprise, in the main, advances and equity investments made from the Capital Investment Fund to trading funds and statutory bodies.
The forecast of payments from the Capital Investment Fund is-
| 1999-2000 | 2000-2001 | 2001-2002 | 2002-2003 | 2003-2004 |
| $m | $m | $m | $m | $m |
| 8,650 | 6,740 | 3,830 | 2,790 | 5,050 |
(i) Aid for disaster relief
This is actual expenditure made from the Disaster Relief Fund for providing relief to disasters that occur outside Hong Kong. Because of the unpredictable nature of disasters, no estimate of future expenditure is made for the forecast period.
(j) Expenditure for Innovation and Technology
This comprises expenditure chargeable to the Innovation and Technology Fund to finance projects to help promote innovation and technology upgrading in manufacturing and service industries.
(k) Fiscal reserves
The fiscal reserves represent the accumulated balances of the General Revenue Account (including the Land Fund) and the Funds. The movement in the fiscal reserves from one year to the next year represents the estimated surplus/deficit for the year.
SECTION III - COMMENTARY ON THE MRF
Expenditure Growth
11 To demonstrate that expenditure growth, over time, does not exceed the trend growth rate in the economy, Government's spending plans should be compared with the budgetary guidelines (Diagrams 1 and 2).
# The guidelines in 2000-2001 have been restructured to allow for real growth of 2.5 % in recurrent expenditure and 3% in capital works expenditure in 2000-2001 over the original estimate for 1999-2000 and to take into account the impact of the reorganisation of municipal services.
Public Expenditure in the Context of the Economy
12 For monitoring purposes, the Government's own expenditure is consolidated with the expenditure of some other public bodies such as the Housing Authority in order to compare total public expenditure with the size of the economy.
13 The results of this comparison are set out in Table 4 and the historical and forecast relationship between GDP and public expenditure is illustrated in Diagram 3. A comparison of cumulative growth in public expenditure with cumulative growth in GDP since the introduction of the MRF in 1986-87 is shown in Diagram 4. GDP figures quoted in Table 4 and used to derive Diagrams 3 and 4 are based on trend forecasts for 2000-2001 onwards.
| Public Expenditure in the Context of the Economy (Note 1) | Table 4 |
| Revised Estimate | Forecast | ||||
| 1999-2000 | 2000-2001 | 2001-2002 | 2002-2003 | 2003-2004 | |
| $m | $m | $m | $m | $m | |
| Operating expenditure | 179,160 | 195,990 | 202,770 | 213,320 | 227,260 |
| Capital expenditure | 43,160 | 47,710 | 56,140 | 54,050 | 57,420 |
| Total government expenditure | 222,320 | 243,700 | 258,910 | 267,370 | 284,680 |
| Add: Other public sector bodies | 56,100 | 43,440 | 39,310 | 41,810 | 44,620 |
| Total public expenditure | 278,420 | 287,140 | 298,220 | 309,180 | 329,300 |
| Gross Domestic Product (calendar year) (Note 2) |
1,230,430 | 1,311,640 | 1,398,200 | 1,490,480 | 1,588,860 |
| Growth in GDP | |||||
Money terms |
-2.9% | +6.6% | +6.6% | +6.6% | +6.6% |
Real terms |
+2.9% | +4.0% | +4.0% | +4.0% | +4.0% |
| Growth in public expenditure | |||||
Money terms |
+4.5% | +3.1% | +3.9% | +3.7% | +6.5% |
Real terms |
+4.0% | +2.9% | +2.5% | +0.6% | +2.2% |
| Public expenditure as a percentage of GDP (at current prices)(Note 3) |
22.6% | 21.9% | 21.3% | 20.7% | 20.7% |
| Note 1 | Public expenditure comprises government expenditure (i.e. all expenditure charged to the General Revenue Account and financed by the Government's statutory funds excluding Capital Investment Fund), and expenditure by the trading funds, the Housing Authority, the Lotteries Fund and the previous Provisional Urban Council and Provisional Regional Council (up to 31 December 1999). Expenditure by institutions in the private or quasi-private sector is included to the extent of their subventions. But not included is expenditure by those organisations, including statutory organisations, in which the Government has only an equity position, such as the Airport Authority, the Mass Transit Railway Corporation and the Kowloon-Canton Railway Corporation. Similarly, advances and equity investments from the Capital Investment Fund are excluded as they do not reflect the actual consumption of resources by the Government. |
| Note 2 | For years beyond the current year, the GDP figures are based on trend assumptions. |
| Note 3 | Caution should be exercised in interpreting these percentages as the public expenditure is estimated on a fiscal year basis while the GDP is estimated on a calendar year basis. |
14 Table 5 shows the sum to be appropriated in the 2000-2001 Budget analysed between operating and capital expenditure and, after including expenditure from the various funds and other public sector bodies. It also shows the derivation of public expenditure for 2000-2001 given in Table 4.
15 The table also illustrates the effect of the budget revenue measures on the overall surplus/deficit position for 2000-2001.
| Relationship Between Government Expenditure and Public Expenditure in 2000-2001 |
Table 5 |
| Components of expenditure and revenue | Appropriation | Government expenditure and revenue | Public Expenditure | |||
| Operating | Capital | Total | ||||
| $m | $m | $m | $m | $m | ||
| Expenditure General Revenue Account: |
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Recurrent account |
193,550 | 193,550 | - | 193,550 | 193,550 | |
Capital account |
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Plant, equipment and works |
1,335 | - | 1,335 | 1,335 | 1,335 | |
Other non-recurrent |
2,435 | 2,435 | - | 2,435 | 2,435 | |
Subventions |
1,155 | - | 1,155 | 1,155 | 1,155 | |
| 198,475 | 195,985 | 2,490 | 198,475 | 198,475 | ||
Transfers to Funds |
5,620 | - | - | - | - | |
| Capital Works Reserve Fund | - | - | 34,880 | 34,880 | 34,880 | |
| Load Fund | - | - | 9,470 | 9,470 | 9,470 | |
| Innovation and Technology Fund | - | - | 870 | 870 | 870 | |
| Trading funds | - | - | - | - | 3,525 | |
| Lotteries Fund | - | - | - | - | 1,090 | |
| Housing Authority | - | - | - | - | 38,825 | |
| 204,095 | 195,985 | 47,710 | 243,695 | 287,135 | ||
| Revenue (before budget revenue measures) | ||||||
| General Revenue Account: | ||||||
Taxation |
117,705 | 1,260 | 118,965 | |||
Other revenue |
36,655 | 3,135 | 39,790 | |||
| 154,360 | 4,395 | 158,755 | ||||
| MTRC Privatisation proceeds | - | 15,000 | 15,000 | |||
| Land Fund (1) | 17,695 | - | 17,695 | |||
| 172,055 | 19,395 | 191,450 | ||||
| Capital Works Reserve Fund | - | 45,010 | 45,010 | |||
| Capital Investment Fund | - | 2,580 | 2,580 | |||
| Civil Service Pension Reserve Fund | - | 845 | 845 | |||
| Disaster Relief Fund | - | - | - | |||
| Load Fund | - | 4,975 | 4,975 | |||
| Innovation and Technology Fund | - | 355 | 355 | |||
| 172,055 | 73,160 | 245,215 | ||||
| Cash surplus/(deficit) before budget revenue measures | (23,930) | 25,450 | 1,520 | |||
| Less: | Effect of budget revenue measures | (1,020) | - | (1,020) | ||
| Cash surplus/(deficit) after budget revenue measures | (24,950) | 25,450 | 500 | |||
| Less: | Advances and equity investments from the Capital Investment Fund (2) | - | (6,745) | (6,745) | ||
| Consolidated Deficit | (24,950) | 18,705 | (6,245) | |||
| (1) | For the purpose of the Medium Range Forecast, investment earnings of the Land Fund are consolidated with the General Revenue Account recurrent revenue. |
| (2) | Advances and equity investments from the Capital Investment Fund are excluded from government expenditure (see also Note 1 to Table 4). |
