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The cross-millennial budget: a breakthrough

In terms of financial management concepts, the cross-millennial budget has quietly broken away from colonial government modes of thinking. The Financial Secretary is no longer stuck with conventional approaches which only focussed on the yearly balance of income and expenditures. He is now ready to take a longer term view and a fuller responsibility for the direction of Hong Kong's future economic development.

This Council should fully support the Government's forward looking stance and applaud its determination to build a more broadly based foundation for the long-term economic growth of Hong Kong. In these rather gloomy times, an optimistic medium-range economic forecast, a few creative ideas for reforming the civil service and the financial markets, the Disneyland project, the cyberport and the intended public listing of the MTRC have all given new hope to the people of Hong Kong. The $8.5 billion tax rebates is a further shot in the arm to alleviate the pain of financial sufferings of millions of citizens.

These thoughtful moves have unsurprisingly become the focus of discussion. After praises have been sung, we must of course determine how best to assist the Government in implementing the proposals, and we can go even further: we should also reflect on fundamental financial principles to see if they have been inadvertently changed in the Budget. We should also look at whether the "gain" of the new policy direction is indeed greater than any possible 'loss'.

The Budget is, a partial policy address.

Some view this Budget as a policy address. In the past, the approach of Government has always been to have the Chief Executive or the relevant Policy Bureau announcing new policies which has been thought-through. Only then are such policies reflected financially in the Budget.

In this perspective, the plans for Disneyland and the cyberport in particular have absolutely no direct relation to Government accounts and to the Budget. It is therefore not surprising that commentators have found it strange that the Financial Secretary has given these items such a high profile treatment in his Budget. It is also not surprising that commentators should ask if this approach is too rushed and whether, in the long run, it will be a "good" thing or a "bad" thing for these projects to be determined prematurely.

Almost as soon as the Disneyland project was announced, the public discussions were over. The public is now confused by the conflicting accounts without proper clarification; all that we can do at this stage is "listen for the noise on the stairs and wait for Mickey to arrive"

Although the cyberport project is relatively more advanced, the substance and the specific terms for cooperation with the private company have yet to be announced. On the surface it appears that a great many problems still have to be solved.

Cyberport: good concept, but method questionable.

As a mega project, the cyberport concept is both attractive and practical. It should not be difficult for this Council to understand the Government's desire to implement this project with all possible speed. But the investment aspect of the project and its economic benefits to Hong Kong must be explained much more clearly.

Moreover, with this project, the Government has not only violated the previous taboo on giving special support to a particular industry, it has also chosen to invest heavily in a specific sector of technology. Further still, it has even made the most subjective choice of choosing a single business partner. What were the objective and fair selection criteria used by the Government in this extremely irregular decision?

Two other aspects of the project need to be clarified.

First, in addition to being "tenants", have the eight multi-national hi-tech companies been required to commit to a certain level of long-term investments before obtaining preferential treatment? How will such arrangements be implemented? How does the Government come to the conclusion that the chosen formula will actually raise the level of Hong Kong's own technology? How does the Government ensure that technology transfer will take place?

Second, how can the Legislative Council monitor the investment costs incurred by the private company selected? Is there any cost ceiling set? Why does the Government not use a fixed sum of capital investment instead of granting land rights? The final cost of granting land rights is much more uncertain and it can far exceeds the present estimated values in a few years time!

Development of technology, require all round approach

The development of technology in Hong Kong is truly a matter of great urgency. What the citizens of Hong Kong are entitled to expect is not just a short-sighted strategy offering great and costly advantages to attract star companies. What is more important is to develop policies that will encourage all sectors of society to get really involved. This implies for example, measures to encourage the import of specialists, development of long-term professional programmes, providing tax incentives for applied technology, and even providing cheap loans and appropriate amounts of capital injections In short, we should favor much more secure, open and fair methods that has a better chance to ensure long-term benefits for our investments.

Huge deficit expected but tax increases moderate.

By now, a huge budget deficit has long been expected but the tax increase measures have been surprisingly moderate. High income earners who drives, aspires for better housing and bet on horses for recreation will bear the brunt of these increases. This group of taxpayers must already be prepared for tax increases psychologically. They just didn't know where the Government is going to hit them. The overall impact of tax increases is slight; there are also rebates, rate reductions in absolute terms to soften the blow. On this score, only few individuals could possibly have good reasons to seriously oppose the Budget.

A limited breathing space to make fiscal adjustments.

The forecast in last year's budget was that the increase in public expenditure would, this year, drop to 1.2 percent. The Financial Secretary has, in fact, heeded recent public opinions and maintained a higher expenditure growth of 3.5 percent. This reflects the fact that at a time of economic recession, the immediate demand for social services may increase rather than decrease. But instead, it will add pressure to a more drastic reduction in expenditures during the next two years in order to broadly balance the budget. We must therefore take full advantage of this year's limited breathing space to control expenditures in preparation of tougher times ahead. If the economic revival forecasted by the Government is delayed, the pressure to control expenditures will be even greater. It is simply vital to have further contingency plans.

Since the beginning of 1998, when the Hong Kong dollar was high and the economy was beginning to show signs of structural decline, I have been calling on the Government to downsize its establishment. I have also called for public corporations wholly-owned by the Government, such as the MTRC, to economize, vigorously control costs and to increase their productivity. These suggestions were intended to preserve and even to increase the value of these public assets through enhanced financial track records. This plan would facilitate their privatisation at an appropriate time. They were also aimed at checking the Government's growing share of GDP, a share which had been gradually increasing (from 18 percent to 21 percent in 1998-99). From a value for money point of view, the use of public resources by the Government should never fall too far behind private enterprises. These concepts and thinking are clearly reflected in this year's budget. This is my main reason for supporting it.

In my speech of March 10 this year, I commented at length the bold civil service reforms proposals. I will not repeat those remarks now. I have also been reported at length by the media on the ideas of listing and privatising publicly-owned corporations to help preserve their value; to offer greater choices of shares for the investors public, these moves will also increase the Government's ability and available options to raise low-cost finance; these corporations would also benefit from the monitoring by professional institutional investors who would help them vigorously guard the full commercial principles and high-efficiency in operation. Today, I hope to use a newer, more comprehensive perspective to suggest to the Government other important concepts of resource allocation and financial management.

Use financial management tools well, and introduce modern concepts.

Like political sensitivity, a clear set of accounting language, is an important tool for management in public finance. Many members of the accounting profession, with years of professional financial training, still find the Government's accounts and its financial methods obscure. For other citizens, this obscurity is taken for granted. In fact, Government accounts, although volumous and complex, need not become an esoteric branch of learning. The problem is that it still uses the oldest and the most rudimentary cash entry methods. For mid-level managers, the approach to resource allocation and its management are still little better than a "spend what you can lay your hands on - use it up, don't save" kind of rule. This approach does not encourage a modern enterprise culture of efficiency, thrift and of broadening sources of funds among civil servants who are routinely spending huge sums from our public purse.

A few simple, but important, examples may be useful:

1. At present, civil service pensions are not included in the accounts. Departmental managers and citizens alike, cannot therefore know the full costs of their departments personnel.
2. The Government does not prepare consolidated accounts. The increasing number of trading funds and independent statutory bodies preparing separate accounts such as the Hospital Authority, the Housing Authority, the Airport Authority and other major public service organisations, together with the possible future listing of a number of these corporation or departments, will make it much less meaningful to merely look at the 'reduced' Governments' accounts in isolation. To make life even more difficult, there is still going to be a great deal of related accounting transactions between the separate accounts of these public bodies, for example, subsidies, dividends, levy collection, management and service fees. Looking at individual accounts separately could be potentially misleading to the readers.
3. The Government's use of land or other non-cash rights as a method of capital injection e.g. the cyberport project, can be a way to by-pass financial approval by the Legislative Council and the Government's audited accounts. We do not prepare balance sheets and cannot reflect non-cash transactions. This can seriously weakens the constitutional role of the Legislative Council in the scrutiny of public finance.
4. The Government income this year includes a sum of $36 billion from investment earnings. Paragraph 122 of the Budget clearly states that "this windfall is a by-product of our incursion into the stock market last August and the subsequent rise in the Hang Seng index." The accounting entries are technically correct, under the Government’s consistent accounting method. But one could seriously question whether it is prudent to declare such a material dividend out of unrealised surplus from a revaluation of quoted shares on hand and to recognise an internal dividend from its wholly-owned HKMA as income. The declaration of such a dividend by a private sector group of companies is likely to be in contravention with the Companies Ordinance.

After years of research, the International Federation of Accountants has issued a full set of exposure drafts on accounting standards for governments. They have captured the hard-earned experiences of developed countries that have adopted the 'Resource Accounting' concepts for many years. These clear and fair accounting standards have provided the modern tools to develop the next generation of international culture in public finance management.

I have discussed this matter on several occasions with the Director of Accounting Services and the Director of Audit. They have both indicated their support to study these standards in principle. As the Chairman, I will also hold preliminary discussions on this subject with my Honourable colleagues in the Public Accounts Committee.

I fully understand that the comprehensive modernisation of the Governments accounting and management methods require time, patience and substantial investment. In the context of the prevailing civil service management culture, it is probably considered a 'revolution': But I firmly believe that this is the right time to raise the issue. It is particularly timely since civil service reforms now encourage exchanges of personnel between Government departments and private organisations. The development of a mutually comprehensible accounting management tools will be of great assistance in facilitating these personnel exchanges. In the final analysis, if there is to be total improvement in the efficient use of resources by the Government, we must not stop at just tackling salaries and wages of civil servants. It may have accounted for about two thirds of public expenditures, but the management of the remaining one third should still be addressed through 'resources accounting' methods.

Other worthy concessions and to prepare for a rainy day.

The accounting profession has also raised many finance-related recommendations concerning other issues.

1. The amount of tax-deductible charitable donations
  The amount of tax-deductible charitable donations should be raised from 10 percent to 20 percent of assessable profits. There has been a significant drop in corporate profits in recent times. Charitable organisations, such as the Community Chest, are running into difficulty with their fund-raising efforts. Raising the upper limit of tax-exempted donations will have little real impact on Government revenue at this time, but it will certainly encourage the flow of more private resources into supporting common public causes. Moreover, the Inland Revenue Department and the Social Welfare Department have, after implementing recommendations from the Public Accounts Committee, jointly strengthened the supervision of charitable organisations. The previous concern of the Government about possible tax avoidance therefore no longer exist. I suggest that a relaxation of the upper tax-exempt limit be first introduced for a period of two years. The situation could then be reviewed for the 2002-2003 fiscal year.
2. Agreements for the avoidance of double taxation
  The accounting profession welcomes the Government's efforts to conclude agreements for the avoidance of double taxation with the Netherlands. I must nonetheless emphasize again, on behalf of the profession, the importance of section 4 of the Inland Revenue Ordinance which underpins the need to preserve confidentiality of taxpayers information.
3. Tax treatment of boutique fund managers
  The accounting profession has, for many years, urged the Government to recognise boutique fund managers on the same basis as other international fund managers for tax purposes. Unfortunately, the Government has not accepted our advice. The Singapore government has in this year's Budget introduced a series of tax breaks to boutique fund managers e.g. a five-year tax holiday. I deeply regret this valuable opportunity lost. I hope that the Government will now seriously monitor the effects of this change in competitiveness and the possible drain of funds from Hong Kong we may have to suffer as a consequence.
4. Language Fund
  The accounting and other professional bodies have actively lobbied for the setting up of the Language Fund. The original purpose was to help raise the level of English language in the industrial and commercial world. We believe that this would enhance Hong Kong's competitiveness. It seems, however, that the Fund has recently been used in ways that depart from this original purpose. The Fund has begun to consistently reject applications from commercial and professional organisations for training projects in the work place. The Fund is now seen to be used almost exclusively by regular educational institutions. I hope that the relevant departments pay serious attention to this problem and rectify this imbalance immediately.

Bravely assuming responsibility in spite of hidden risks

The Twenty-First Century is nearly here. The SAR Government is no longer living in “a borrowed place on borrowed time”. On the contrary, we should be actively planning for the future. The Financial Secretary has indeed seized this opportune moment to undertake bold reforms. Although reforms are never without political risks, the Financial Secretary has shown much courage to face the challenge.

Hong Kong's economy is still at a low point. The risk of structural fiscal imbalance must not be casually overlooked. If we are to escape the fate of having sustained deficits year after year, we must depend on the ability of the people of Hong Kong to rebound from economic adversity with just a little help from the Government. If not, Hong Kong will have to face great reductions in expenditure and / or significant tax increases in the next two years. While it might be said that this year's Budget is one that "strengthens fundamentals", it would perhaps be more appropriate to say that it is a Budget which displays "confidence". Next year will truly be the most trialing year for "adjusting to changes".


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