In the Budget, which covers the fiscal year from April 1 this year to March 31, 2000, he went to great lengths to inject some economic confidence into the community and to target key areas of priority in government policy.

By announcing some big developments the prospective Disney theme park and Cyberport, the partial privatisation of the MTR, the merger of the stock and futures exchanges he sought to enhance future confidence in the SAR.

And by allowing increased spending for 1999-2000, an expected Budget deficit of $36.2 billion, immediate tax rebates on tax paid for the 1997-98 financial year and few other tax changes, he also tried to boost immediate confidence.

As some commentators have already remarked, the address itself seemed to be more of a policy statement on behalf of the Government rather than a normal Budget outline, with the bulk of its 188 paragraphs devoted to policy issues.

There was, of course, the obligatory coverage of key elements in the Budget including expenditure and revenue issues and the overall budgetary outcomes, a deficit of $32 billion for the 1998-99 year and $36 billion for 1999-2000.

This, in itself, was recognition that some further fiscal stimulus was required to cushion the local economy's descent into recession and to ultimately give it a push along to positive growth in the near-term future.

But it was in his bigger announcements in his two-hour speech that the Financial Secretary did most to stray from the traditional Budget path by announcing major initiatives aimed at furthering Government policy and lifting confidence.

Securities Markets

In announcing the proposed demutualisation, merger and list of the SAR's stock and futures exchanges, for example, the Financial Secretary was furthering the Government's policy aims of better financial regulated markets and enhancing Hong Kong's role as an international financial centre.

The move has, not surprisingly, drawn widespread applause from international financial houses operating in Hong Kong, although the response from local operators, who have controlled both markets, was something less than warm.

Nevertheless, the initiative, with a little further arm twisting from Government, has already gained the support of both the Stock Exchange and the Futures Market, which is a major step in the right direction.

Demutualising, merging and possible listing of the two securities markets hardly needed to be announced in the Budget, however, as the recent experience of both Singapore and Australia show.

Cyberport

By announcing the proposed development of a high-technology, $13 billion (US$1.68 billion) Cyberport, the Financial Secretary was also pursuing another high priority Government policy objective, the development of the SAR as a high-tech, information technology (IT) centre for China and the region.

The Cyberport, to be located at Pokfulam on the western side of Hong Kong island, is to be a joint private-public sector development, with the private interests being led by Mr Richard Li's Pacific Century group. Mr Li is the second son of one of Hong Kong's richest property tycoons, Mr Li Ka-shing.

According to the Financial Secretary, the Cyberport "will provide the essential infrastructure for the formation of a strategic cluster of information services companies" specialising in the development of services and multi-media content for businesses and industries.

Lending their support in a special announcement on Budget day were a bevy of international IT companies, including Hewlett-Packard, Hua Wei, IBM, Oracle, Pacific Convergence Corporation (a joint venture between Mr Li's Pacific Century Group and Intel), Softbank, Sybase and Yahoo!.

In a later visit to the SAR, Microsoft chief (and reputedly world's richest man), Mr Bill Gates, also threw his company's not inconsiderable weight behind the development of the Cyberport for Hong Kong.

Again, however, it was not something that needed announcing in a Government Budget statement, except as an illustration of the Administration's policy thrust and a confidence booster in what have been difficult economic times.

The proposal does, of course, involve a financial commitment from Government, mainly in the form of the provision of land for the project, but this will have to be the subject of future Budget allocations, in any case, and when it would be more appropriate to include in the Budget.

Disneyland

Likewise, the annoncement of a proposed "Disneyland" style theme park with the Walt Disney Company was hardly the sort of development that needed to be included in a Budget statement, especially at this early stage of negotiations.

But again it was a matter of the Financial Secretary pushing the right policy buttons, especially, in this case, those related to boosting community confidence and showing the Government's commitment to the longer-term development of the local tourism industry, whether from the Mainland or elsewhere.

Hong Kong's high cost base, especially land costs, means that should the Disney theme park go ahead itself by no means certain that there is likely to be a cost in future Budgets, as there will be for the Cyberport.

But there was nothing of a fiscal nature to warrant its inclusion in the 1999 Budget speech, except perhaps for the Penny's Bay reclamation costs, where the proposed theme park is scheduled to be sited.

Given its unique global standing and reputation, the proposal for a Disney theme park in Hong Kong (there are only four elsewhere in the world), was a great button for the Financial Secretary to push to bring a lighter touch to a Budget formulated in otherwise grey economic times.

Privatisation

More relevant to the 1999-2000 Budget and the years immediately following was the Government's announcement of the partial privatisation and stock market listing of the Mass Transit Railway Corporation (MTRC), one of the most successful Government-owned business operations in the SAR.

Again, the Financial Secretary was pushing the right policy buttons with this initiative, this time the ones marked "deregulation", "privatisation" and the "development of the local equity market".

But in this case at least, the announcement of the proposed sale of a minority shareholding in the MTRC was a relevant inclusion in the Budget speech as it will have a direct impact on future Government revenues and, therefore, on the size of future Government surpluses or deficits.

While the partial privatisation of the MTRC is likely to be the biggest undertaken by the Government (at least for the foreseeable future), the Financial Secretary also hinted at the sale of other Government businesses in the near-term future, particularly the supply of water.

Civil Service Reform

Further details of the Government's proposed reform of the Civil Service, including entry and exit requirements, pay and fringe benefits, disciplinary procedures, performance management professional training and personal development, came in the week immediately after the Budget, but the initial announcement of far-reaching reform was contained in the Budget itself.

As a major cost item in every Budget year, the remuneration and other benefits paid the Civil Service are a key Budget matter, and therefore the early outline of the reforms in the 1999-2000 Budget is understandable.

Their inclusion in the Budget did, however, serve to underline the Government's and the Financial Secretary's commitment to making the public sector of the economy more cost efficient and effective, more productive and accountable.

At a time of economic downturn, when there has been growing public concern about the costs of the Civil Service, its internal operations and the level of service it provides, there was clearly a community message to be put across.

Again, the Financial Secretary was pushing the right buttons as far as the community is concerned. He re-emphasized this point by also announcing a freeze on Civil Service salaries for the 1999 calendar year.

Tax Rebates

Another innovative approach taken by the Financial Secretary in the 1999-2000 Budget was the announcement of a 10 per cent rebate on all profits, salaries and property taxes paid during 1998 in relation to the 1997-98 Budget year.

While such rebates are far from unique elsewhere, especially in Hong Kong's great rival, Singapore, where they have become a regular feature of the annual budgets, they are totally new to the SAR.

In announcing the wide-ranging rebates, the Financial Secretary was again pushing the right buttons, directing his attention this time to those marked "economic boost" and "consumer confidence".

As the 1997-98 fiscal year was, however, a boom year for corporate profits, especially in the property sector, most of the benefits of the 10 per cent tax rebate will go to companies (especially property companies) and the return to most individual tax payers will be limited.

The tax rebates, while welcome, are therefore unlikely to have much of an impact on overall consumer spending and economic growth. In any case, less than half the workforce in Hong Kong pays any tax at all, so that the overall impact on the community is reduced.

Fiscal Situation

The overall fiscal situation outlined by the Financial Secretary in his 1999 Budget speech was fairly much as expected with the Government trying to maintain spending during the economic downturn, maximising existing revenues where possible and forecasting three years of deficits.

But there were a couple of surprises, the first being the fact that the 1998-99 deficit (before tax rebates) was much smaller than expected and the second being the increase in public spending to 21.5 per cent of Gross Domestic Product (GDP) in 1999-2000, the highest since the early 1980s.

Initial estimates from the Government put the 1998-99 deficit at $24.5 billion (final accounts will not be completed until later this year), but the announcement of the 10 per cent tax rebate will result in the total deficit for the year expanding to some $32.3 billion.

Before the announcement of the tax rebate, total revenue was some $220.6 billion for the year ($38.4 billion lower than originally expected mainly due to the suspension of land sales during the year) and total expenditure was $245.1 billion (a modest $3.1 billion below original estimates).

The tax rebate will, however, have the effect of reducing revenues further by some $8.5 billion.

For the 1999-2000 fiscal year, total Government spending is put at $241.6 billion and total revenue at $205.1 billion, producing a deficit for the year of $36.5 billion. Total public spending will be $290.1 billion or 21.5 per cent of GDP.

The large deficit for the 1999-2000 year reflects the Government's increased spending in a bid to offset the economic downturn and lower revenues due to the weaker tax base (a result of expected lower profits and salaries taxes and other taxes and charges and stamp duties).

It also reflects the fact that the Financial Secretary in his 1999-2000 Budget only tinkered with the revenue side of the Budget, leaving the major sources of revenue largely untouched in terms of percentage rates, although some smaller taxation sources, as well as property rates, did see some changes.

Economic Situation

The overall weakness in the local economy, and the impact of the East Asian financial economic crisis on the SAR, were all too apparent in the economic forecasts in the 1999-2000 Budget.

Looking back over the 1998 calendar year, the Financial Secretary indicated the economy had declined by 5.1 per cent for the full year after growing by a rapid 5.3 per cent in the all-important 1997 year of return to Chinese sovereignty.

The economy did, however, apparently reach its nadir in the third quarter of last year when it slumped by 7 per cent. In the first two quarters of the year, it contracted by 2.6 per cent and 5.1 per cent respectively, while in the final three months of the year it would have declined by some 5 per cent.

Looking ahead, the Financial Secretary predicted that the local economy would grow by 0.5 per cent in this (1999) calendar year. He also indicated that in the medium range forecast period (through to 2003), the economy would grow by an average 3.5 per cent (at least as far as Budgetary purposes are concerned).

If there is one potential weakness of real concern in the 1999-2000 Budget it is the reliance on growth of 0.5 per cent to achieve the forecast Budget outcomes. While modest growth, it is a forecast at the top end of the range of those made by economists in the private sector.

Moreover, the Government is relying completely on a recovery in private sector consumption to produce all of this growth (it is expected to increase 2.5 per cent for the year), with external trade and investment expected to continue to be negative.

Were there to be another crisis regionally and globally and the local economy was hit, the predicted growth rate would not be achieved. As a result, the Budget forecasts would prove to be totally unachievable (as they proved to be in the 1998-99 year when the Asian crisis hit Hong Kong ever harder).

In such circumstances, the 3.5 per cent medium range growth forecast, already suspect, would also be difficult, if not impossible to attain. It is these economic forecasts which are the most optimistic and therefore most vulnerable content of the 1999-2000 Budget.

Chamber Reaction

In its own immediate reaction to the Budget, Hong Kong General Chamber of Commerce said the Financial Secretary had attempted to be innovative and to boost confidence in his 1999-2000 Budget despite the financial constraints imposed by substantial Budget deficits and a relatively weak economy.

But it added that "whether he succeeds or not in his aims may depend on events outside his control".

"In particular, the ability of the economy to grow 0.5 per cent this year and an average 3.5 per cent over the medium term may be in doubt if economies like the US, Europe and the Mainland see slower growth this year," the Chamber said.

"The major announcements in the Budget the negotiations with the Walt Disney Company on a theme park for Hong Kong, the proposals for a Cyberport and the planned privatisation of the MTRC are exciting initiatives.

"But they well do nothing to boost growth immediately and it is yet to be seen whether they will proceed as smoothly as the Government obviously hopes.

"More important in the short term will be the proposed 10 per cent rebate on profits, salaries and property taxes, the extended freeze on government fees and charges and the decisions not to raise salaries and profits taxes.

"Together with the projected deficit for the 1999-2000 fiscal year they should provide a modest fiscal stimulus to the local economy and provide some limited relief to the local business community particularly some small and medium sized business hit hard by the 1998 recession," the Chamber said.

"Even with these measures, however, the year ahead is going to be a difficult one for the local business sector, the Government and the whole community as the economy continues to struggle to emerge for the economic downturn.