Budget Strategies for 2018-19

49.    In preparing this year's Budget, I have ensured that adequate resources are provided to implement the various policy initiatives put forth in the Policy Address. I have also adopted the following strategies:

50.    I now turn to three issues on public finances which were frequently raised during the consultation exercise.

Annual Surplus

51.    It is expected that the Government will have an estimated surplus of $138 billion in 2017-18.  As pointed out in my Budget last year, when considering how our annual surplus is to be deployed, I will carefully take into account the source and nature of the surplus, and make optimal allocation of resources in the light of the external and local economic environment, social needs and public expectations.  This year, I will follow the same principle by sharing with the community about 40 per cent of the projected annual surplus, and using the remaining for improving services and investing in the future.

Fiscal Reserves

52.    We have a healthy fiscal surplus, but as a small and highly open economy, Hong Kong is susceptible to changes in the external economic environment.  The linked exchange rate system leaves us limited room to adjust our monetary policy.  Therefore, healthy public finances are vital for Hong Kong as they enable us not only to accelerate our development and expand our capacity when the economy is stable, but also to introduce counter-cyclical measures promptly and effectively in times of economic downturn, thereby stabilising the economy and safeguarding people's livelihood.

53.    As we all know, Hong Kong has a narrow tax base, and our revenue sources are concentrated.  In 2017-18, profits tax, salaries tax, stamp duties and land premium account for about 74 per cent of total government revenue.  Among them, land premium and stamp duties fluctuate the most and they account for 27 per cent and 15 per cent of our total revenue respectively.

54.    Fiscal surpluses in recent years were attributable mainly to the buoyancy of asset markets.  However, experience shows that asset markets can be highly volatile and any downturn will put our revenue and fiscal position under pressure.

55.    When considering the allocation of resources, I often remind myself to take a more forward-looking perspective.  To better care for people in need, the Government has implemented measures proactively for elderly care and support for the disadvantaged over the past few years.  In the face of a rapidly ageing population and fierce competitions from other economies, we need to enhance our economic structure, strengthen healthcare and elderly services, nurture talent, increase land supply and housing, improve labour welfare, and build a caring and just society.  These are significant commitments.

56.    Moreover, the Budget is prepared on a cash basis and mainly reflects the projected cash receipts and disbursements of the new financial year with forecasts for the following four years.  It does not fully reflect our liabilities and committed expenditure, such as the outstanding commitment of over $350 billion for ongoing works projects.  Besides, the financial implications of policy initiatives may not be fully reflected in the Budget of the new financial year because of the lead time required for implementation.

Relationship between Public Expenditure and GDP

57.    In the past, it was a budgetary criterion that public expenditure should be kept at or below 20 per cent of GDP.  One of the considerations was to avoid over-expansion of the Government, which might not be conducive to resource deployment.  Today, while acknowledging the forces and roles of the market, we have to be more proactive in managing public finances in the face of various development needs of society and the economy.  During the period between the 2018-19 Budget and the subsequent years in the Medium Range Forecast, the public expenditure will be slightly higher than 21 per cent of our GDP, but I will ensure that the increase in public expenditure is necessary to meet the actual needs of Hong Kong, and broadly in line with our affordability in the long run.