Medium Range Forecast

177.    The global economy has seen rather low and unbalanced growth in recent years.  External political and economic environment will be complex and volatile in the next few years.  For the medium term, the average growth rate is forecast to be three per cent per annum in real terms from 2018 to 2021, broadly comparable to the trend growth of 2.9 per cent over the past decade; and the underlying inflation rate is expected to average 2.5 per cent per annum.  The medium-term economic forecast is based on the assumption that there are no severe external shocks during the period, and has taken into account the impact on economic growth posed by an ageing population.  That said, as the external environment is laden with uncertainties, we must remain vigilant.

178.    The Medium Range Forecast projects, mainly from a macro perspective, the Government's expenditure requirements from 2018-19 to 2021-22.  It is noteworthy that annual expenditure on infrastructure projects will soon exceed $100 billion, significantly higher than the annual average of about $40 billion as recorded by the previous-term Government.  In fact, this projection has not reflected the substantial commitment which the Government will have to make for a number of land development, highways and railway projects once they are ready for rollout.  Besides, over the medium term from 2018-19 to 2021-22, growth of recurrent government expenditure is estimated to range between 5.3 per cent and 9.8 per cent per annum, consistently higher than the average annual nominal economic growth of 4.5 per cent over the same period.  Sustainability is an issue which deserves our attention.

179.    Regarding revenue, the land revenue estimate for 2017-18 makes reference to the Land Sale Programme and the land supply target of the year.  The medium range forecast on land revenue is based on the average proportion of land revenue to GDP over the past ten years, which is 3.3 per cent of GDP.  Compared with recent years, when land revenue was referenced to its average proportion to GDP in the past 30 years which is 2.8 per cent of GDP, we have taken a more aggressive assumption.  I also assume that the growth rate of revenue from profits tax and other taxes will be similar to the economic growth rate in the next few years.

180.    Based on the above assumptions, I forecast an annual surplus in the Operating Account for the coming five financial years but an annual deficit would surface in the Capital Account as from 2018-19.  There will be a small deficit in the Consolidated Account in 2020-21 and 2021-22.  Fiscal reserves are estimated at $942.9 billion by end-March 2022, representing 30 per cent of GDP or equivalent to 18 months of government expenditure.

181.    The above estimates have not taken into account tax rebate and relief measures proposed by the Government as in previous years.

182.    Taking all these into account, the fiscal position will be broadly-balanced in the next five years.  However, pressure on government expenditure is considerably high in the face of an ageing population, a shrinking workforce, economic volatility and the Government's long-term commitments.  We ought to be prudent and vigilant about the long-term sustainability of public finances.