Public Finances
129. The Working Group on Long-Term Fiscal Planning was set up last June. Economists and experts from the accounting, tax and actuarial fields were invited to explore ways for our public finances to cope with an ageing population and long-term financial commitments. The Working Group performed a health check on the current state of Hong Kong's public finances and made projections of Government's long-term fiscal position up to 2041-42, having regard to demographic trends, economic growth and prevailing policies. The detailed results will be released next week.
130. According to the Working Group's analysis, Government's overall fiscal position in the short to medium term remains healthy. In the longer term, however, Government must seek to foster economic growth, and align the growth rates of government revenue and government expenditure.
131. With per capita GDP at US$38,000, Hong Kong is now a mature economy. It is highly unlikely that the economy will grow at a rate of eight to nine per cent per annum as it did in the 1970s and 1980s. Over the past three decades, the annual real GDP growth averaged 4.6 per cent. The economic growth momentum is expected to slow down as our population ages, reducing our labour force. The Working Group projects that over the next 20 to 30 years nominal GDP will grow at an average rate of 4.4 per cent per annum; real GDP will grow at a trend rate of 2.8 per cent per annum, which is a notch higher than most other mature economies.
132. The trend growth of government revenue has been on a par with nominal GDP growth over the past three decades. Assuming that the existing tax regime and tax rates were to remain unchanged, and barring any severe external shocks, the Working Group forecasts an average annual trend growth rate of 4.5 per cent for government revenue in the next 20 to 30 years. Towards the end of the projection period, government revenue is projected at 19.8 per cent of nominal GDP.
133. The average annual growth rate of government expenditure since reunification is 4.7 per cent. Taking into account the economic growth trends and demographic changes, the Working Group has made the following three projections based on different expenditure growth scenarios –
| (a) |
if no service enhancement were to be made to the three areas of education, social welfare and healthcare, such that their recurrent expenditure were to be adjusted only for demographic and price factors, government expenditure would grow by 5.3 per cent per annum during the projection period. Because the growth rate of government expenditure exceeds that of government revenue at 4.5 per cent per annum, a structural deficit would surface in 15 years' time; |
| (b) |
if services were to be enhanced further for the three areas by one to two per cent per annum on top of adjustment for demographic and price factors, government expenditure would grow at an average of 6 to 6.7 per cent per annum. In that case, a structural deficit would surface in eight to ten years' time; and |
| (c) |
if services were to be enhanced following the historical trends at about three per cent per annum for the three areas, on top of adjustments for demographic and price factors, government expenditure would grow at an average growth rate of 7.5 per cent per annum. In that case, a structural deficit would surface in seven years' time. |
134. The projection results and analysis of the Working Group spark off a clear warning and call for serious attention. If government expenditure keeps growing and outpacing economic and revenue growth, a structural deficit would be inevitable.
135. The Working Group recommends that Government should implement a combination of measures, including containing expenditure growth, preserving the revenue base and saving for future generations, to cope with the fiscal challenges ahead.
136. We should neither take the problem lightly nor over worry. Our public finances are still in good shape. Our economy will continue to grow in the coming 20 to 30 years. This implies that our revenue will continue to rise and we can still afford expenditure increases. Nevertheless, the growth in public expenditure must be commensurate with that of the economy and government revenue. I believe that as long as we take timely, resolute and effective actions, we can prevent the projected results from surfacing, and avoid subjecting our future generations to irreversible fiscal plight.
|