In the Bulletin

Editorial
September

From the Director
September

Letters
To the Chamber

Cover Story
Go West in China

Investment Incentives

China's Silk Road

Special Feature
The Courier 'e-volution'

Business
Where is Asia Heading?

WTO Watch
The Myriad of   Structures in the WTO

iPerkin
Balancing the SAR Budget

Q&A
Chamber Deputy Chairman Christopher Cheng

Programmes
Benefiting from Protecting IPR

New Designs on Natural Capitalism 

e-Chamber
Facilitating e-commerce

Trading Stocks from Your PC

HK Firms Slow to Embrace e-commerce

Member Profile
E1 Media

ARCHIVES
2000 Issues
1999 Issues

i-PERKIN                                                                   September 2000 Issue

the bulletin


Balancing the SAR Budget

The Hong Kong SAR Government managed to achieve two of its three Budget aims in the first quarter of the present fiscal year (April 1, 2000 to June 30, 2000), but it surprisingly failed to meet its third.

Its recently released first quarter financial results showed it had at least managed to restrain spending and reduce its Budget deficit for the quarter. Revenues, however, remained flat despite the dramatic economic recovery and strong equity market.

A significant deficit is a pretty normal occurrence in the first quarter (when revenues are at their slowest, but spending still has to be maintained) and running a deficit during recovery is appropriate for the present state the economy is in.

The deficit this year is, however, substantially less than in the same three months of last fiscal year and, again, this may be regarded as appropriate in that a year ago the economy was really only in the early stages of emerging from the depth of recession.

What is more surprising is the manner in which the reduced deficit has been achieved, not as most people would expect from improved revenues in a recovering economy, but from reductions in the government??s outlays for the quarter.

The government??s own Budget figures show that in the first quarter of the fiscal year, total revenues were up only 0.8 per cent from last year at HK$37.1 billion compared with HK$36.8 billion a year earlier when the SAR was still in recession.

Expenditure, on the other hand, was down 11.6 per cent from HK$59.5 billion to HK$52.6 billion and the overall deficit for the quarter was thus reduced to HK$15.5 billion from HK$22.7 billion a year ago and fiscal reserves rose to HK$428.7 billion from HK$422.9 billion.

This effectively means that better revenues accounted for a mere 4 per cent of the deficit reduction, the remaining 96 per cent being achieved by cuts in outlays ?V and these were of a capital nature rather than general expenditure.

For its part, the government points out that spending the first quarter of last year was actually boosted by a one-off capital injection of HK$8.5 billion into the Kowloon Canton Railway Corporation (KCRC).

Under the government??s cash accounting system, no distinction is usually made between recurrent and capital spending (or revenue) items, but exclude this capital injection amount and recurrent spending was really just flat on last year.

The real surprise is that government is seemingly not reaping the revenue benefits of an unevenly recovering economy (at least in the opening months of the year).

True, the bulk of tax revenues flow in the latter half of the year (and there is likely to be more corporate profits tax and perhaps salaries tax this year because of the recovery), but the first quarter comparison remains relevant.

There are other issues as well. For example, what does the revenue situation say about the future of the government??s revenue and tax reform review that is now being conducted by a (in-house) government Tax Force and an (outside) Expert Committee?

Last fiscal year, the government emerged with a surplus for the year of some HK$10 billion after predicting a deficit of HK$36 billion, but this was partly achieved by including profits on sales of shares accumulated in the Exchange Fund during its share market "incursion" of August 1998.

What, too, does the apparently slow growth in revenue mean for the government??s attitude to stimulating the property market on which it has relied so much in the recent past for substantial revenue inflow, but which is still suffering price and development weakness after the Asian crisis?

Then there is the question of whether an increasingly demanding community, not just the low-income group, but increasingly the residential property-owning middle class, will be satisfied with government cutbacks on spending on items they regard as important to building a better and economically healthier Hong Kong society?

Now, admittedly, the Hong Kong Government continually argues that it does not have much of a role to play in stimulating the local economy because its own public spending as a share of gross domestic product (GDP) is allegedly relatively low by world standards.

Even so, its role has expanded in recent years, with expenditure??s total share of GDP now above the 20 per cent level compared with the share of around 15-16 per cent up until the mid-1990s.

Restraining government spending to a growth rate in line with the medium term growth GDP is also a long standing policy, as is "striving for fiscal balance." The first quarter outcome is therefore in line with those aims.

Ian K Perkin is the Chief Economist of the Chamber.

?@

?@