Budget Speech

Public Finance

Deficit Budget

164. As an open economy with a relatively narrow tax base, Hong Kong's government revenue is susceptible to changes in the economic environment.  The ageing population also poses pressure on public expenditure.  Though I have great confidence in Hong Kong's fundamental strengths and long-term prospects, we must, in the face of an economic downturn and the aforesaid challenges, exercise extra prudence in managing public finance.

165. Our fiscal reserves are the fruits of the economic development of Hong Kong and the hard work of our people over the years.  They enable us to adopt a deficit budget amid the prevailing economic downturn and launch counter-cyclical measures to support the economy and relieve people's burden.  In the past year, we have increased government expenditure substantially to combat the epidemic and roll out relief measures, which resulted in our fiscal reserves dropping sharply in two years from the equivalent of 23 months of government expenditure to 13 months.

166. Although I forecast an improvement in revenue for the next financial year, I expect that the fiscal deficit will be $101.6 billion, accounting for 3.6 per cent of GDP, due to the counter-cyclical fiscal measures and the continued increase in recurrent expenditure.  In other words, Hong Kong will record a deficit for a number of years after achieving a surplus for 15 years.  As shown in the Medium Range Forecast (MRF), the Operating Account is projected to be in deficit for five consecutive years.  The operating deficit for 2021-22 will be more than $140 billion mainly due to the counter-cyclical measures while the operating deficit for the remaining four years will range from $22.4 billion to $40.7 billion.  The Consolidated Account is also expected to record a deficit for four consecutive years.  The above forecast has not yet taken into account any tax rebate or relief measure that the Government may implement in the future.

167. The deficits are mainly caused by the fact that the rise in government expenditure is outpacing the increase in government revenue, especially in terms of recurrent expenditure.  Recurrent expenditure of the Government increased from about $150 billion in 1997-98 to about $470 billion in 2020-21, representing a more than three-fold increase.  The significant rise in government expenditure in recent years is for enhancing services or investing for the future.  However, as emphasised in my last Budget, government expenditure should enter a consolidation period, and the long-term financial commitments should also be commensurate with the increase in revenue.

168. As a number of measures announced in this year's Budget will have a bearing on the new financial year and the MRF, I would like to offer some explanations here.

169. To optimise the use of fiscal reserves for seeking a better return to meet future needs, the Government set up the Future Fund in 2016 to make longer-term investments for a period of ten years.  The investment return of the Fund forms an integral part of public financial resources, and has accumulated a return amounting to nearly $100 billion.  While the Government has all along been disclosing the rate of return of the Future Fund, the investment return yet to be brought back has not been reflected under the cash-based government accounts.  Starting from 2021-22, I will reflect the cumulative investment return of the Fund in the Operating Account on a progressive basis, with $25 billion brought back in the first year.

170. The 2021-22 Budget has also included $23 billion brought back from the Housing Reserve and the annual proceeds of about $35 billion from the expansion of the Government Green Bond Programme as mentioned earlier.  The sums raised under the Government Green Bond Programme will provide funding for green projects under the Capital Works Reserve Fund but will not be used to finance operating expenditure, and hence will not undermine public finance discipline.  The issuance of bonds cannot bolster our real financial strength as it ultimately requires the repayment of principal and interest.  Nonetheless, the issuance of additional green bonds for financing eligible projects can definitely relieve the Government's fiscal pressure arising from the need to use existing resources to meet capital expenditure.  This is a reasonable and appropriate approach in the light of the current low interest rate environment, and is also conducive to the development of Hong Kong's bond market. 

171. The above measures of bringing back the Future Fund's investment return and the Housing Reserve and issuing additional green bonds will ensure that our fiscal reserves can be maintained at a relatively robust level despite deficit budgets in the next few years.  They would enhance confidence in Hong Kong's fiscal strength and is conducive to maintaining our financial stability.  However, in the long run, the key to maintaining healthy public finances is to follow the principle of keeping expenditure within the limits of revenue and ensure that the growth of expenditure is commensurate with economic growth.  In the face of the challenges of fiscal deficits, we should not only reduce expenditure but also increase revenue.