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Madam President:

The drafting of the Budget affects all walks of life and every member of the community in Hong Kong. The Budget is a subject of such public concern it has become the talk of the town in February and March every year. And now, the focus of the debate and the discussion perspective often moves away from financial principles to include macroeconomic measures. These issues are so potentially explosive the Financial Secretary has to handle them with extreme caution and creative thinking.

The Budget can be viewed from the perspective of fiscal management, of economic regulation, and of political considerations. Given their different objectives, these perspectives will lead to very different perceptions and conclusions. I will first examine the Budget from each of these three perspectives and then incorporate the major political constraints into my analysis before giving an overall assessment. In this way, I hope to arrive at a fairer and more balanced overview of the Budget.

Financial management short changed

Judging from the financial perspective, the Budget is a let-down. It is stated in the Basic Law that Hong Kong must strive to keep expenditures within the limits of government revenues, achieve a fiscal balance, and ensure that the growth of public expenditure is commensurate with the growth of its gross domestic product (GDP). The Budget, however, will not be able to maintain any of these financial principles, not only in this financial year but also the next. Our public finances can even be described as “heftily over budget? The only positive aspect of the Budget is the targets it sets for future public finances. However, it is lacking in immediate action and implementation details. No wonder there is the impression the Budget is “not equal to the needs?of the time.

For a number of years during my terms in the Legco, I have been warning the government not to rely too much on unstable revenues from land sales and investment returns from equities and bonds. Instead, the administration should step up its productivity enhancement measures and consider broadening the tax base before it is too late. These suggestions may not be popular with the public but they are the inescapable responsibility of those in charge of public finance management. Before this year’s Budget was released, the government had successfully whipped up public support for the need to plug the hefty budget deficit. The Financial Secretary, however, failed to propose prompt measures to control expenditure and raise revenues. Now that he has missed this golden opportunity he will find it much harder to push his plans in future, when support will have waned.

Economic regulation takes time to work

government finances are interwoven with the economy of Hong Kong. The way the government manages its expenditures and revenues, however, sometimes conflicts with the economic circumstances of Hong Kong. The government’s share of public expenditure has risen to 22% in 2002 and our fiscal reserves have hit $400 billion. Any dramatic move will affect, directly or indirectly, the overall economic growth, the inflation rate and consumer purchasing power, the employment rate, and even the stability of the linked exchange rate in Hong Kong.

With deflation and a high unemployment rate prevailing, the government would be roundly criticized if it seeks to reduce expenditure drastically and introduce new taxes so as to achieve a balanced budget. That is why I agree with the Financial Secretary’s prudent way of solving the deficit problem, i.e. tackling the problem over a period of five years rather than overnight. It was wise of him too, to use deficit budgeting so that the surplus of our huge fiscal reserves could be ploughed back into the community through public expenditure.

Government to be censured for hiding the truth

What disappoints me most is the disclosure in the Budget that for years, the Government Consumption Expenditure deflator adopted in the drafting of the Budget is different from the GDP deflator. The huge discrepancy, in particular, is shocking! True, the practice has been in place for a long time and the government has taken the initiative to make the disclosure. It must be pointed out, however, that this important piece of information was not revealed until government expenditure has gravely deviated from the guiding principle stated in the Basic Law. One cannot help but wonder how reliable was the information about public finances released in the past by the government.

I strongly urge the government to clarify, in its reply, whether it had all along been hiding the truth, or whether it had simply been content to let sleeping dogs lie. If it had, how could the Legco and the public, in the absence of such important information, monitor government expenditure effectively? The government must give the Legco and the community a convincing explanation. Otherwise, it should be censured!

Political considerations dictate action

While trying to redistribute wealth to society through deficit budgeting, the government actually still has plenty of room to straighten out its finances. For instance, it could have grasped the opportunity to broaden the tax base by introducing more stable taxes such as boundary facilities improvement tax and football betting tax and by lowering personal allowances under salaries tax. The resulting revenue would enable the government to introduce new tax concessions and increase short-term or one-off subsidies such as those provided in the Home Purchase Loan Scheme. In this way, the government could meet long-term social needs and stimulate investment within a shorter time. Because of the constraints imposed by political considerations, however, the Financial Secretary gave up some of the room for manoeuvre in his Budget.

Last year, as a result of the 911 incident, public confidence in the economic prospects of Hong Kong plummeted. The community therefore hoped that Legco members of all parties would sink their differences and propose to the government immediate relief measures to rebuild confidence. The major parties in the Legco responded to public opinion at once and put forward an eight-party joint proposal.

Unfortunately, the government was indecisive and slow in taking up the parties?well-meaning economic relief proposal. A timely and precious opportunity for working with Legco in a spirit of mutual understanding is thus lost. The proposal, shoved aside by the government, turned out to be a heavy burden on the Budget.

For one thing, the new Financial Secretary had to face serious political challenges when drawing up his maiden budget. The Legco was unequivocal in opposing new taxes and new directorate posts. Legco was also united in demanding rates relief and resisting any measures which would worsen the unemployment problem. It was indeed wise of the Financial Secretary to have followed the wishes of the people. But even better results would have been achieved if these relief measures were introduced earlier to tackle the urgent needs of the community and allay the bad feelings of the public at the time. There was no need to wait until the release of the Budget.

Have more than one string to his bow

Having analyzed the Budget from the perspectives of financial management, economic regulation, and political considerations, I can understand why the Budget concentrates on setting the targets first and leaving the action plan till a later stage. I can also accept this as the natural outcome of the political reality. Still, I want to point out that the major medium-term financial targets set by the Budget involve high strategic risks. These targets include the projected rate of investment return, land premia, the scope for downward adjustment in civil servant salaries, and the rate of economic growth. I am sure that the Financial Secretary does not need me or other Legco members to alert him to the difficulty of achieving these targets. I believe, too, that he has got more than one string to his bow and that is the main reason why the targets are not accompanied by substantive measures and concrete data.

Overhaul of government finances just a matter of time

Shortly before the release of the Budget, the government departs radically from its usual practice and from its long established view regarding the Budget. It issued two reports at the same time, both confirming the inferences I made in as early as 1999: Hong Kong’s budget deficits are structural in nature because government revenues lack stability and the tax base is narrow. The release of these reports has stirred public and media attention, and political debates. All these will serve as the prelude to the Financial Secretary’s major overhaul of government finances in the future. What is lacking now is a wave on which Financial Secretary can ride. As for the bloated and inflexible civil service system long-insulated from shake-ups, it can expect stormy seas and a rough ride in the days to come.

Will the Principal Officials Accountability System, soon to be introduced, provide the wave on which Antony Leung could ride? It is said that he is considering a zero-base budget in which fixed allocations will be used to place a cap on the resources which can be deployed by the Principal Officials under the new system. The Principal Officials will then try to make ends meet by streamlining structures and outsourcing government services. The administration will take concerted action by adjusting civil service pay and promoting further the voluntary redundancy scheme. The Financial Secretary has wisely decided not to be too ambitious and just sets the trimming of the government as his primary goal. What is more, it is quite clear that he has already worked out the strategies for the realization of this goal.

Any Principal Officials under the Accountability System who fails to carry out government policies, or to convince the Legco and the public, or control expenditure will be held accountable and required to step down. The government can then justify the introduction of new taxes as a remedial measure to make up the deficit. Let’s wait and see whether this will actually happen.

Government to refrain from business activities

As to the criticism from a newspaper that the Financial Secretary was advocating an interventionist policy, I have pointed out in a newspaper article that the critics did not understand the situation and was worrying too much. I will not go into the details again here.

Nevertheless, despite good management philosophy, some officials still seem to be harbouring grandiose ambitions. They provide political convenience for government departments or the public sector to take part directly in business activities. For instance, the Airport Authority plans to invest in a new exhibition centre; the Hongkong Post has cornered the market of electronic certification; and the government has proposed to build Route 10. In all these we see the government coming dangerous close to competing for profit with the private sector.

I hope the government will have a clearer guiding principle as regards its involvement in business activities. In its deliberation about business projects submitted for approval, the government should let items proposed by the business sector take precedence over those devised under government central planning. I believe that since Hong Kong is an economic city, the role of the government is to lead the Hong Kong Incorporated ?as opposed to the Hong Kong government Limited ?in providing impetus to the economy. This boils down to a single principle: the economic interests of the community must come before those of the government’s own finances.

From its bitter experience in the Home Ownership Scheme and the present rental predicament of the Cyberport, the government should have learnt a lesson about the vagaries of business ventures. A retrospective look at history will show that many successful infrastructural projects were first proposed by the business sector and then supported by the government. Not the other way round. This principle must be upheld, especially after the appointment of Principal Officials with a background in commerce. Otherwise, when the executive-led system gathers momentum, Principal Officials will have even more power and can push through economic projects that are driven by political planning. The result will almost certainly be a waste of resources and endless political troubles.

Move quickly to pave the way for a balanced budget

The present economic hardships and the Financial Secretary’s rendition of the heartening song Below the Lion Rock have elicited from the Legco and the public deep sympathy for the government for its grave budget deficits. Their sympathy, however, will very likely disappear as soon as the economy recovers. For the deficit problem to be solved thoroughly, timely actions and an unfaltering determination to overcome political resistance will be essential.

But the problem of structural deficits cannot be solved, in the long run, by cutting expenditure alone. The government must formulate strategies and take action before it is too late. The increase in the duty on wine proposed in this year’s Budget is mere political tinkering and won’t be of much help.

The time is ripe for introducing taxes which do not affect people’s livelihood, such as football betting tax and boundary facilities improvement tax. I urge the Financial Secretary not to miss the opportunity again. He would be well advised to initiate the necessary legislation procedures in the next Legco year, when the Principal Officials under the Accountability System have assumed office. He can then pave the way for the 2003 Budget and lay the foundations for the finances of the SAR government to become healthy and strong in the long run.

Revision of level of fiscal reserves to be applauded

I applaud the Financial Secretary’s proposed revision of the level of the SAR’s fiscal reserves. Delinking the level of fiscal reserves from the money supply has proved to be of no impact on the linked exchange rate. Instead it has provided over $100 billion for the government to deploy in its fight against deficits. This, plus the streamlining of government structures, shows the public that the government has done all it could to solve the deficit problem. Well-planned steps such as these will be effective in preparing the public for the time when taxes are raised. The Financial Secretary also plans to keep fiscal reserves equivalent to around 12 months of government expenditure. This proposal, which coincides happily with the suggestion I made in 1999, did not seem to have met with much opposition in society. The Financial Secretary ought to be given credit for such a move.

Recommendations from the accountancy sector

On behalf of the accountancy sector, I would also welcome the Financial Secretary’s efforts and determination to promote professional services. On 3 April, representatives of the accountancy sector met with Mr Stephen Ip, Secretary for Financial Services, and proposed to him a number of recommendations on how to strengthen Hong Kong’s status as an international financial centre, attract foreign investment, and support local businesses in their bid to enter the mainland market. The recommendation include, for instance, the abolition of estate duty, which brings in little revenue but which adversely affect small and medium enterprises and middle-class families, in addition to deferring big investors from investing in Hong Kong.

Another important area that needs reform is the management culture and patterns of public expenditure. In nearly every Budget speech that I made since 1997, I have been urging the government to exercise control over its expenditure. I have also maintained that the civil servants must seek to improve their efficiency. In my 2000 Budget speech, I even warned that “if the civil service ... lag behind the commercial sector, which is striving to cut down on costs…The result will be constant calls for outsourcing government services and more discontent with the civil service? I hope that civil servant organizations will remain calm in their negotiations with the government, understand the legitimate expectations and demands the public have on them, and come up with constructive proposals on ways to increase their productivity.

Courage to challenge the bureaucracy

I admire Antony for his decision to give up a prestigious and enviably well-paid job to serve the public. It takes courage, dedication and a sense of vocation to assume public office when one is at the peak of one’s career. I admire him too for daring to challenge the prevailing bureaucratic culture by taking his responsibilities with such total commitment. Although I am critical of his maiden Budget on a number of points, I still think that, on the whole, the Budget has real substance and is highly commendable. I will not, however, allow my appreciation of his civic spirit and my friendship with him to intervene in my monitoring of his work. And I will continue to provide the government with frank criticisms and constructive comments.

With these remarks, I support the motion.


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