Mid-way through the 2000-2001 fiscal year, the SAR's apparent dramatic economic recovery appears to have done little to improve the Hong Kong Government's Budget situation.

Latest figures for the opening six months of the fiscal year show a Budget deficit of HK$40.6 billion (to September 30, 2000) compared to a broadly similar HK$41.9 billion in the same period last year.

When it is taken into account that last year's number also included an HK$8.5 billion capital injection to the Kowloon-Canton Railway Corporation (KCRC), the situation is actually worse this year than it was 12 months ago.

The government can, of course, count on a huge inflow of tax revenue in the second half of year, especially in the final three months to March 2001, when most tax is usually collected.

Furthermore, this year there should be improved revenue from both Profits Tax (due to the business recovery in the last six months of 1999-2000) and Salaries Tax (due to increased levels of employment, although there has been little in the way of wage increases).

Even so, the figures, for the first half of the 2000-2001 fiscal year suggest the government is going to again need "exceptional" gains this year to produce a balanced Budget, or perhaps a surplus.

Fortunately, these "exceptional" revenue items should be available.

Like last year (1999-2000), there should be additional profits (that is, revenue) from the further sale of some of the government's private sector share holdings acquired by the Exchange Fund in August 1998 during the government's share market intervention.

Because of the increase in share market gains since then, the government is sitting on huge unrealised (and some realised) gains here to bolster its revenues, as it did in 1999-2000.

In addition this year, the government will include in revenues the "one off" HK$9 billion or so raised in the partial privatisation of the Mass Transit Railway Corporation (MTRC) to help balance the books.

But leave out these "exceptional" items and the government would probably be again facing a Budget deficit this year and this is one reason why the figures for the opening six months do not look so attractive from a fiscal perspective.

They also raise the question of whether there still ought to be concern about the government's longer term revenue needs (now subject to a Government Task Force study) and whether a broaden tax base is needed (also being studied by an expert committee).

Both the Financial Secretary Donald Tsang Yam-kuen and the Treasury Secretary Denise Yue have recently ruled out any action on broadening the tax base in the forthcoming 2001-2002 Budget in March next year.

But both ?and other senior policy secretaries ?have indicated there are likely to be rises in fees and charges in the next Budget as the government attempts to improve its revenue after two years of restraint.

The latest government figures for the financial results to September show that revenue for the six months was a little less than HK$66.7 billion, down from slightly more than HK$68.5 billion in the same period last year.

This seems surprising given the recovery in the economy during this period (up 12.8 per cent in real terms in the first half of the year), although it has to be recognised that the recovery has been less impressive in current dollar value terms (with the increase being just 4.4 per cent).

It has also been uneven across different economic sectors and both these factors may have restrained revenue growth. All this reflects the external driven nature of the recovery, with foreign trade being by far the fastest growing component of GDP.

In the first six months of the fiscal year, expenditure by the government was also restrained. It reached HK$107.3 billion during the half year compared with HK$110.4 billion in the same period of 1999-2000.

However, the expenditure in the first half of last year did include the HK$8.5 billion capital injection to the KCRC, which is a "one-off" capital item.