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Encourage the structural changes now underway in the local economy, including the development of the Enable the Government to achieve budget balance ahead of
the completion of its two studies into its longer-term revenue needs (the Task Force on
the Review of Public Finances) and alternative taxation options (the Expert Committee on
tax reform). ANOTHER YEAR OF CONSOLIDATION? This year 's Chamber submission is predicated on the view that the 2001-2002 fiscal year will be another year of consolidation in the Budget process. We have based this approach on several factors that seem likely to have a significant impact on the drafting of the 2001-2002 Budget. First, the economy has rebounded well from recession, but the improvement has been uneven and overall growth is likely to slow in the coming calendar and fiscal years. Second, the sustainability of the recovery might be questioned given the economic uncertainties evident regionally and globally. Third, this economic situation may continue to restrain Budget revenue growth in the year ahead, thereby limiting the spending options open to the Administration. Fourth, the Government's Budget process is currently subject to the deliberations of the Task Force on the Review of Public Finances. Fifth and finally, any major initiatives on the revenue side of the Budget will be constrained by the study of potential future tax options for Hong Kong by the Expert Committee on Taxation reform.ABOUT THIS SUBMISSION The Chamber 's Budget proposals this year consist of this, the Core Submission, which includes the key comments and recommendations of the Chamber, and two substantial appendices giving further information on two key sections of the submission. The main submission examines the economic and fiscal background to the Budget and the outlook for the 2001-2002 fiscal year, as well as Chamber’s major recommendations for the 2001-2002 Budget.The first appendix (Appendix A) contains details of the Chamber 's ongoing tax proposals, first outlined in last year's submission and updated since then to take account of any changes in tax policy. It is intended that this list of tax recommendations should be a regular feature of future Budget submissions, with its contents being revised as a result of any subsequent Government tax changes, or with the emergence of any new tax issues.The second appendix (Appendix B) consists of the results of the Chamber 's survey of members on government revenue needs and review of tax options. The results of this survey were previously sent to the Treasury Secretary, as head of the Government Task Force reviewing future revenue needs. The survey was conducted in July and August this year. The report on the survey results supplements the brief remarks made under the heading of Tax Reform in the main submission and in Appendix A. The questionnaire used in the survey is provided as an attachment to this Appendix.A BROAD OVERVIEW Where new expenditure or revenue proposals have been suggested in this year's submission on the Government's 2001-2002 Budget, it is because they are regarded as vitally important and concern issues that ought to be tackled as soon as possible. They are, therefore, of limited number and scope. For the most part, the Chamber has tried to avoid raising too many new issues this year as it believes economic and fiscal restraints will make them difficult to implement in the 2001-2002 Budget. The Chamber and its members are concerned that the recovery in the local economy, while robust, has been uneven. Some industries have fared well during the initial recovery phase in the economy; others are still waiting for the benefits to emerge. While company sales and profits are higher in some sectors; they are yet to show any real recovery in others. We believe this uneven nature of the recovery may still be having an impact on the Government's budgetary situation in the current (2000-2001) fiscal year and will continue to do so next year (2001-2002). Looking ahead, there is concern that economic growth will slow during 2001, especially with the emergence of some new global problems that are set to continue into the New Year. These include the sustained rise in world oil prices and the impact they may have on future global demand; the evident slow down in the United States economy and its likely effect elsewhere; and the strength of the US dollar (and, as a result, the local currency). Among other issues, there are also the uncertainties on world financial markets (particularly equity markets) to consider, as well as the potential impact of the Mainland's entry to the World Trade Organisation (WTO). We believe these economic concerns alone will be enough to encourage a cautious approach from Government in setting its Budget parameters for the 2001-2002 fiscal year. (Indeed, the Chief Executive's Policy Address on October 11 this year suggests this will be the case, with limited new spending initiatives being announced in that document.) In addition to these exogenous economic factors, we believe the Government will again have to take into account its own relatively tight fiscal situation in establishing its Budget priorities. This situation seems likely to result in an
increased emphasis on expenditure restraint and, where possible, revenue maximization. The
financial figures available so far this year certainly suggest a continuing tight fiscal
situation, even allowing for gains from Government equity sales and the partial
privatisation of the Mass Transit Railway Corporation (MTRC). This tight fiscal situation - and possible future Budget deficits - seems
likely to continue into the new fiscal year especially if there is a slow down in overall
economic growth, as is currently expected.
The Chamber listened to and closely analysed the Chief Executive, Mr Tung Chee Hwa's Policy Address to the new SAR Legislative Council on 11 October this year. We noted the Chief Executive's welcome recommitment of his Administration to the reform programmes the Government has initiated in recent years. We also noted the limited number of new spending commitments in the Policy Address and took this as an indication of the likely approach in the forthcoming 2001-2002 Budget. Most important of these appeared to be the increase of $2 billion in annual recurrent spending on education and the $2.7 billion to be allocated to programmes for the "poor and needy" over the next two years. There were modest spending allocations elsewhere, but these did not appear to be significant in the overall Budget context. As far as expenditure savings are concerned, we noted that the Government expects further gains of some $2 billion from the enhanced productivity programme within the Civil Service. It is anticipated once these gains have been made that the Government will be saving up to $5.8 billion a year in recurrent expenditure. This should give the Government some greater flexibility on the spending side of the Budget. In our own submission to the Chief Executive ahead of his Policy Address we raised some issues that we believe may be important in underpinning confidence in the economy as a whole and especially some important sectors of it. As a number of these were only mentioned in passing in the Policy Address itself, it could well be appropriate for them to be addressed in the Budget context. They include such things as the need to build overall community sentiment, which has not yet recovered despite the strong economic performance and promoting greater certainty in the residential property market and in regard to the overall land supply situation. They also include human resource development, especially in and for the information technology sector and improving the environment and quality of life. Finally, they also include the need to address business costs and Hong Kong' competitiveness, and to promote the small and medium business sector. All these issues were addressed at greater length in the Chamber's submission to the Chief Executive ahead of his Policy Address and remain relevant. We are prepared to provide a copy of our submission if any of these issues are of interest in preparation of the Government's Budget for the 2001-2002 fiscal year. We have certainly taken the tone and content of the Policy Address into account in preparing this Budget submission for the 2001-2002 fiscal year. ECONOMIC AND FISCAL ISSUES Economic Background Hong Kong 's strong recovery from the recession induced by the East Asian financial crisis is well documented, but sometimes over-estimated, especially when viewed in real rather than current value terms. In the first nine months of calendar 2000 (and therefore the first half of the 2000-2001 fiscal year), the local economy continued its robust rebound from the recession, which had extended throughout 1998 and into the first half of the 1999 year.Real growth in the first quarter of the year 2000 was an exceptional 14.2 per cent on top of the 9.2 per cent expansion recorded in the final quarter of 1999. In the second and third quarters of 2000 (the first half of the new 2000-2001 fiscal year), real economic growth eased slightly, but was a still rapid 10.9 per cent in the second quarter and 10.4 per cent in the third. These rapid real growth rates were, however, coming off the very low base (negative economic growth) seen in the early months of 1999. They also looked more impressive as a result of continuing deflation, which effectively boosted the headline growth rates. Nominal (or current market price) growth was far more modest. It was also apparent that while some sectors of the economy were doing well (especially external trade and machinery and equipment investment), others less well (including some elements of domestic consumption and building and construction investment). The continued weakness in the property market, despite greater recent stability in prices and rents, and flat retail sales, at least in value terms, are particularly notable. Furthermore, the pace of growth may now be beginning to slow as the base of comparison a year earlier becomes ever higher and deflation continues to ease. Growth for the full year now seems likely to average in excess of 10 per cent. This represents excellent growth coming out of recession, but is unlikely to be maintained in the year ahead, especially with some of global uncertainties now emerging (see below). Fiscal Background This uneven nature of the recovery, especially in the domestic sector, appears to have had a direct impact on the Government 's 2000-2001 Budget performance with a large deficit still being recorded in the first eight months of the year. There was also little sign of recovery in revenues (although this could come later in the fiscal year) and outlays were steady, or slightly ahead of, last year. The Government is going to have to rely on "exceptional" gains in the exchange Fund and from the partial privatisation of the Mass Transit Railway Corporation (MTRC) to balance the Budget, or produce a small surplus.Mid-way through the 2000-2001 fiscal year, it appeared the dramatic economic recovery of recent had done little to improve the Government 's underlying Budget situation, although the normal big inflow of revenue in the second half of the fiscal year will change the picture dramatically. The opening six months of the fiscal year show a Budget deficit of $40.6 billion (to September 30, 2000) compared to a broadly similar $41.9 billion in the same period last year. When it is taken into account that last year's number also included an $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.We are aware that the Government can 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. As with the last fiscal 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" $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 questions of what will now emerge from the assessments being made of the Government 's longer term revenue needs (the Government Task Force on the Review of Government Finances study) and whether a broader tax base is needed (also being studied by an outside Expert Committee).We note that any action on broadening the tax base has been ruled out by senior officials for the forthcoming 2001-2002 Budget in March next year. At the same time, there have indications from the Administration that there are likely to be rises in Government fees and charges in the next Budget as the Government attempts to improve its revenue after two years of restraint. The Government 's financial results for the six months to September revealed that revenue for the period was a little less than $66.7 billion, down from slightly more than $68.5 billion in the same period last year. This is somewhat surprising given the recovery in the economy during this period, with economic growth of 12.5 per cent in real terms in the first half of the year. From a Budget perspective, however, it has to be recognized that the recovery has been less impressive in current dollar value terms (with the increase being just 4.4 per cent). The recovery also has been uneven across different economic sectors. Both these factors may have restrained revenue growth.In the first six months of the fiscal year, expenditure by the Government was also restrained. It reached $107.3 billion during the half year compared with $110.4 billion in the same period of 1999-2000. However, the expenditure in the first half of last year did include the $8.5 billion capital injection to the KCRC, which is a "one-off" capital item.At the end of September, the Government 's fiscal reserves stood at $403.6 billion, down from $444.3 billion at the beginning of the 2000-2001 financial year on April 1, 2000, but up on the $392.4 billion level at September 30, 1999. |
