The coming fiscal year's Budget will cover the period from April 1, 2000 to March 31, 2001 and be presented to the Legislative Council on March 8. It will be the current Financial Secretary's fifth Budget, and he has agreed to speak to the business community on key aspects of the Budget at a special Chamber luncheon for March 20.

In its own Budget submission to the Financial Secretary, delivered to the Government in early November, the Chamber sought a wide range of tax concessions on behalf of the business community. Given the difficult Budget circumstances, however, it stressed they need not be granted in one Budget year. They will continue to be pursued in future years.

Fortunately for the Financial Secretary, the local economic rebound from the recession of 1998 and the share market surge of 1999 has helped make the framing of the 2000-2001 Budget somewhat easier than it might have otherwise been. So, too, has the more recent improvement in the property market and land premiums.

Once the process gets properly underway, his revenues will also be enhanced in a "one-off" fashion by the partial floatation of the Mass Transit Railway Corporation. Unlike the proceeds of the TraHKer Fund, which go back to the Exchange Fund, proceeds of the MTRC float will go straight into general revenue.

This should all help ease the revenue strain caused by the onset of the Asian financial crisis. The problem for the Financial Secretary, however, is that general Budget revenue tends to lag behind economic recovery. This makes it a bit of a guessing game about likely revenues in the 2000-2001 fiscal year.

On the other side of the Budget ledger, he is faced with considerable spending commitments, in terms of ongoing infrastructure projects, equity commitments (including the Disney project) and recurrent social spending. These demands have grown considerably in recent years and will need to be accommodated.

The other difficulty for the Financial Secretary in framing the coming Budget is that past Budget decisions have now come back to haunt him. On the spending side, these relate to the infrastructure and other new policy commitments; on the revenue side they relate to the strains caused by the SAR's narrow tax base.

He has already expressed his concerns about the narrowness of the tax base and hinted that action will be needed to address the problem in the forthcoming Budget. Yet taxation specialists have been warning of the problem for years. Flush with funds from land sales, successive financial secretaries have narrowed the tax base by both dropping existing indirect taxes and dropping taxpayers from the tax net, especially salaries.

As a result, the current Financial Secretary is faced with the prospect of considering raising existing taxes and other charges, or seeking some new sources of substantial recurring revenue, perhaps even a broadly based consumption tax in the medium term.

Neither is it a very positive prospect for a Hong Kong SAR well-known and internationally attractive for its low and source-based tax system. It also does little to improve Hong Kong's competitive position and image in the immediate region in the wake of the East Asian financial crisis.

Nor can the Financial Secretary reduce spending easily given existing commitments in terms of both recurrent and capital spending, new policy commitments in education and technological development and increasing demands from various sectors of the community for more rather than less spending programmes.

At the same time, he is required under the Basic Law (and past Hong Kong practice) to balance the Budget over time, avoid deficits and keep the SAR's overall spending growth in line with the nominal growth rate of the local economy. Having run two large Budget deficits, the Financial Secretary knows it is time to get back on course.

The Government has large fiscal reserves built up over the past 20 years from Budget surpluses primarily supplied by buoyant land premium revenues. But the Financial Secretary has designated these reserves for other, broader purposes -- an "operating requirement" for day-to-day cash needs, a "contingency requirement" to offset any economic downturn and "monetary requirement" to underpin exchange rate stability. Details of these were contained in the 1998-99 Budget documents.

For all these reasons, the coming 2000-2001 Budget will be a challenging one for the Financial Secretary. As a result, the Hong Kong public and the business community will have to approach the coming Budget with relatively low expectations in terms of tax concessions and increased spending (except in current priority areas).

In its own detailed submission to the Financial Secretary on the 2000-2001 Budget, the Chamber again expressed its own concerns about the narrowness of the tax base. It also provided a list of suggested tax concessions for business over the medium term.

"Given the still difficult economic and budgetary circumstances, we understand that these concessions cannot be expected in a single year, or perhaps even in the budgets of several years," the Chamber said. "We have, however, included them for your consideration in the belief that some of them may prove attractive in achieving some of the Government's policy aims in the forthcoming 2000-2001 fiscal year. Where these tax concessions cannot be granted immediately, we intend to pursue them over the longer term."

On the issue of broadening the tax base, it said: "We therefore propose that (a) the Government consider reversing the policy of continually narrowing the base for collection of existing taxes (effectively dropping tax payers from the tax net) and (b) open-up the debate on the need for a more broadly-based taxation system."

It went on: "In the past, the Financial Secretary has ruled out certain options as far as taxation is concerned. We believe that all options should be "on the table" as far as discussion and debate are concerned, especially in regard to likely future Government revenue needs and whether existing taxes also need to be reviewed. It is only in this way that the Government and the community can fully debate the issues involved and decide what is best for the future of the Hong Kong taxation system."

Commenting more generally on the Budget situation, the Chamber said it believed the Government should not move too far from the medium term fiscal program already outlined in last year's Budget, including the overall Budget outcomes. "The faster than expected economic recovery evident so far in the 1999 calendar year is welcome, but needs to be carefully nurtured if it is to be sustained," it said.

"The Chamber's view is that the 2000-2001 Budget, like its two predecessors, needs to continue to help boost confidence and provide a sound economic climate in which to extend and sustain the recovery evident in the local economy since the depths of the downturn in the third quarter of 1998. It will need to do so in the face of some ongoing local, regional and global uncertainties."

But the Chamber added that barring any external shocks, the domestic SAR economic background to the 2000-2001 Budget will continue to improve through to its presentation to the Legislative Council in March next year. It warned, however, of the impact of overall Government fiscal policy -- what it called "One System, Two Budgets" -- on the local economy.

"One reason the Chamber would like to see a modest deficit in the 2000-2001 Budget is the extra-budgetary impact of some other financial decisions by Government," the submission said. "For example, in the 1998-99 fiscal year, the Government not only ran a substantial deficit of $23.2 billion, but also injected many more billions of dollars into the local community through its $115 billion in on-market equity purchases in August 1998.

"Although not all of the money from these purchases would have ended up in the SAR's domestic economy (some would have gone to overseas sellers of shares), a lot of it would have, thereby injecting additional liquidity into the local economy," the Chamber said.

"This process of injection of funds into the economy is now being reversed with the new TraHKer investment fund being used to successfully sell off some of the Government's large equity holdings. This has the fiscal effect of taking funds out of the local economy and back into the Government's coffers at a time when continued fiscal stimulus is required."

The Chamber said that further share sales would also have a negative fiscal impact, with the proposed floatation of the part of the Mass Transit Railway Corporation (MTRC) having the effect of moving money from the broader economy into the hands of the Government.

In an economic sense, this sort of activity means that the Government is effectively running two budgets: its normal annual Budget plus the additional "equity" budget, the purchase (in 1998) and then sale of its shareholdings in Hang Seng Index constituent stocks.

The Chamber said the broader economic impact of these equity activities needs to be taken into account in assessing the overall liquidity level in the local economy.

"In these circumstances, the Chamber believes the Government needs to run at least a modest deficit in its 2000-2001 Budget to help overcome the potential negative impact of the large transfer of funds from the sale of government held shares," the submission said. "Looking to the 2000-2001 Budget, we believe that improved economic conditions could make a balanced Budget, perhaps even a modest surplus, possible for the fiscal year.

"However, given the tentative state of the economic recovery, the demands being made on Government resources and the major projects Government has underway to boost the economy, we believe budgeting for a modest deficit is the best option open to the Government in the 2000-2001 fiscal year.

"It would help underpin the current recovery in local confidence and allow for a modest fiscal stimulus, especially in face of the calls on liquidity being made by the Government's sale of its equity interests through the TraHK fund and the public offering in the MTRC," it said.