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10.4.97 (translation)

A Financial Dream Package

From an accountant's perspective, the 1997/98 Budget is a "Financial dream package".

The surplus for the year has exceeded the original estimate many times over; the forecasted surplus for the transition year should reach an all time high; our huge reserves now cover more than one-and-a-half times our total annual public expenditures; the Government's commitment in the amount of future expenditures for capital works is immaterial; contractual loans and contingent liabilities are kept well within safety limits; Hong Kong Government and its wholly owned corporations continue to enjoy top credit ratings awarded by reputable international credit rating agencies.

The Government of Hong Kong is clearly a reliable financial manager. The HKSAR will undoubtedly inherit a healthy balance sheet together with a sound system of revenue collection and expenditure control.

Delivered a Confident Message

The people of Hong Kong had hoped that the Financial Secretary would genuinely cooperate with the Chinese Government in the preparation of a transitional Budget which would straddle the handover of sovereignty. We had also hoped to see a Budget which would ensure the undisrupted operation of our government machineries; bring about a through train for all fundamental public policies embracing the management of public finances and monetary affairs; as well as lay a solid foundation on which to plan, and start to invest confidently in major infrastructural projects.

The Financial Secretary did live up to our expectations. At this crucial moment of our transition, he has delivered a clear and convincing economic message that can allay the concerns of Hong Kong people and of the international community.

Macro: Prosperity, Micro: Poverty

Indeed, this year's Budget truly paints a rosy macroeconomic picture. In spite of this, relentless critics still abound. Their words of steel cut right through the macro picture shield and uncover the large number of people still living in poverty and hardship in the real micro world.

Our society's needs and demands on Government are forever evolving. New situations constantly call for creative response; this often involves making different choices amongst policy options without the benefit of pre-tested outcomes. It is all too easy to pick up a few points from within the enormous scope of policy covered by the Budget and take isolated political pot shots at the Government. But a fair appraisal of the Budget should really focus on its overall sense of balance and macro level priorities. I am not of course implying that specific points of improvement should not be put forward for debate; I simply feel that they should not be used as reasons for immediately rejecting the entire Budget.

Untouchable Glimmering Gold

On Budget Day, the press quoted my immediate response and description of the Budget as: "A Budget of glimmering gold, but offering not a penny more to the needy; it brings neither elation nor surprise but at last allows the Financial Secretary to rest with no worry".

The golden cover of the printed Budget Speech has indeed aptly portrayed the limmering wealth of the Government. However, a staggering $30 billion surplus and a $300 billion reserve beg the unavoidable question of Government's true intentions when it stashes away enormous sums of money with no apparent confines. It also casts doubt on government's sincerity in carrying out the avowed principle of "Returning wealth to the people" through fiscal dividend.

The Financial Secretary had remained adamant about the size of his Budget surplus and fiscal reserves. In last year's Budget, he argued that the "inherent uncertainties" revailing in Hong Kong made it necessary to prepare for "torrential downpours not mild showers" by preserving our strong reserves. A week before Budget Day, financial leaders from all over the world came to Hong Kong for a regional meeting of the International Monetary Fund. They spoke in a chorus of unanimous optimism about the future economic prospects of Hong Kong.

The Budget that followed was thus also presented in a more harmonious tone. "No more storm on the horizon". The shift in position was obvious. Yet, the Financial Secretary merely chose to cite the need to inject funds into the Railway Development Strategy as the new explanation or thin concealment for his huge Budget surplus.

Let me examine this short sequence of events once again: 12 months ago, the Financial Secretary considered a surplus of $1.6 billion to be appropriate. He now would consider a revised surplus of $15.1 billion more appropriate. By next year, a $31.7 billion surplus is considered even more fitting to the circumstances. In the space of 12 short months, the Government has applied different criteria for assessing the appropriateness of the surplus level, each time using different reasons. Such inconsistency is simply not acceptable. Without an open, fair, and clearly defined underlying principle, how can the public know, let alone judge, when the Government is abiding by an established policy or when the Government is just being "greedy"?

Tax Review to Enhance Our Competitiveness

In view of this, I welcome the Financial Secretary's proposal for a comprehensive Profits Tax review, with simplification of the tax system and enhancement of business competitiveness as the targets. I also support the general direction set by the Financial Secretary, which is that tax concessions should be provided to the middle class salaries taxpayers to further lighten their tax burden. Moreover, I suggest that the Government should set a clear policy for maintaining our reserves at a reasonable level.

As a matter of fact, the coming year will be a good opportunity to conduct a comprehensive review of the Government revenue. This is because (1) at present, the Government has huge reserves to fall back on; (2) the political anxieties and uncertainties in Hong Kong have basically subsided; (3) new sources of revenue are available, such as the collection of Government rents in the New Territories, windfall revenue from the sale of land at high prices, and, with the opening of the new airport, there will soon be dividend on the capital invested in the project. Indeed, the Government coffers are not only full to the brim with recurrent revenue, they are actually flooded with it.

On the expenditure side, the Government's firm adherence to a prudent fiscal policy has won high acclaim from experts in financial management. On the revenue side, however, the Government is at times open to the charge of "caring for nothing but money".

It is my hope that the Government, when reviewing its revenue, would not rely too heavily on land sales and other land related revenue. Statistical evidence shows that receipts from land sales, land premium, stamp duty, rates, and government rents already constitute a large proportion of the total Government revenue.

Revenue from these same sources brought in $79.5 billion in 95/96 and $98.3 billion in 96/97, accounting for 52% and 58% respectively of the total revenue. Following the increase in revenue resulting from the collection of Government rents in the New Territories and from extra land sales in the 97/98 fiscal year, the Government will rely even more heavily on "disguised forms of land tax". It should be noted, however, that economic fluctuation, as well as political and administrative interference may affect land and property prices drastically, and this will in turn lead to instability in Government revenue. The Government must guard against such an eventuality.

Reserve for One Year, Deploy the Rest Wisely

The Government has cited the following reasons for adopting the "save for the rainy day" philosophy:

(1) The need to maintain a stable exchange rate for the Hong Kong dollars because of political instability;

(2) Funding for infrastructure development;

(3) Unstable revenue.

An in-depth analysis, however, shows that none of the above reasons are entirely applicable, when it comes to maintaining the exchange rate of the Hong Kong dollar, a few hundred billions is a measly sum. A much more effective safeguard is to use the mechanism of negative interest rate and to build up a Asian Monetary Network with other economies in the Asian Pacific region.

As for infrastructure development, funding for such projects can almost always be planned in advance and so the timing of cashflow can be controlled. In addition, Hong Kong Government seldom borrows. It thus enjoys a high credit rating and it can easily raise a loan should there be such a need. On the income side, the Government has a wide choice of revenue sources. It should have no problem in collecting tax with the usual high efficiency and the safeguard of our dependable legal system.

Given such a situation, it is quite inconceivable that there will be a dramatic reduction in tax revenue for any extended period of time. Over the past forty years, a small Budget deficit was recorded only five times. Obviously this cannot be used as a reason for aintaining reserves amounting to nearly two whole years of Government recurrent expenditure.

It is expected that the Government can continue to enjoy new sources of tax revenue and recurrent surplus in the foreseeable future. While keeping a watchful eye on inflation, the Government should thus make a serious attempt to find new applications of the "Returning wealth to the people" approach.

Funds for the People

In my opinion, reserves of $260 billion, i.e. one year of public expenditure, represents a reasonable figure and is already a very conservative estimate of what we really need.
The remaining $90 billion should be divided into three main portions and deployed to set up different funds for infrastructure development, provisions for the elderly, as well as to help enterprising youth in business ventures. In so doing, we could promote the self-help spirit of our citizens and regenerate the economic vigour of our society. My proposals are as follows:

(1) $50 billion to be earmarked for the overall railway development strategy;


$30 billion to be earmarked for funds to improve the living quality of the elderly;
Priority should be given to the injection of funds into the Mandatory Provident Fund Scheme, under which a retiring person can receive immediate allowance. With a
minimum monthly pension of $2,600, retirees will no longer need to rely on the commprehensive Social Security Assistance (CSSA) Allowance. The advantage of such a Scheme is that it can provide immediate minimum retirement protection upon implementation. Although the contribution period of the retiring person is short, this form of allowance still realizes the spirit of tripartite financing, for the contributions are still shared among Government, the employer, and the employee. In the long run, with the extension of the contribution period, the amount of allowance will be reduced steadily until it reaches zero after a decade or so. Thus, it should not be regarded as an item of recurrent expenditure. Besides, a long pay out period will not stimulate inflation and can gradually relieve the pressure on the Government's Comprehensive Social Security Assistance Scheme, thus allowing other elderly people who have to rely on this Scheme to enjoy a higher living allowance.


$10 billion to be earmarked for the setting up of a Venture Capital Fund to assist our enterprising young people and those who do not have sufficient capital to start their own businesses. Details of the Fund have already been explained in my response to the Governor's Policy Address. Funds such as the Venture Capital Fund I am proposing have also been set up in other countries. It should not be considered merely as a general recurrent expenditure item. In the long run it could not only enhance social and economic vigour and the self-help spirit of our citizens, but could also be profitable.

The above-mentioned funds are based on concepts of spending spread out over a limited time frame. I repeat that, in my view, such spending would be non-recurrent, helpful to our long-term economic development, and in keeping with the spirit of "Returning wealth to the people". In the final analysis, the economic vigour generated by our citizens is a much more effective guarantee of the strength of the Hong Kong dollar. It is far better than hoarding a huge amount of saving because such a policy will commit us to a conservative investment strategy which will inevitably lead to a devaluation in real terms.

Cost of Living an Invisible Burden

I have already commented on the desirability of restoring a balance between recurrent revenue and expenditure by means of tax reduction. I have also stressed the need to set up funds to steadily return our already overflowing reserves to the people. The last point I wish to make addresses the issue of cost of living. Cost of living in Hong Kong is now so high it has become an invisible burden on ordinary citizens.

The sandwich class is as we all know most heavily affected by the Government's tax increases or tax reductions. They benefit from tax reduction as much as they suffer from tax increase. For instance, increase in rates and fuel duty strike the middle class salaries families most directly. For many, end results of Government action is often to "put money into the taxpayers' pocket with the right hand, and take it away at once with the left hand".

Right now, high property prices are the primary cause of hardship. Recipients of the Comprehensive Security Assistance Scheme Allowance are no longer alone in having to consider retiring to the Mainland; more and more middle-class citizens are also faced with the painful decision of having to leave Hong Kong to retire.

In spite of the apparent prosperity of our society, it is still not easy for many who have contributed to the success of Hong Kong to be able to retire and spend their remaining years in Hong Kong. With the continual rise in the cost of living, hundreds of thousands of people are now living in poverty. Such an unfair social phenomenon must be dealt with. The Government should no longer follow the established practice of leaving these people to fend for themselves.

There have already been many discussions and debates on the need to increase spending on specific items of the Comprehensive Social Assistance Scheme, on education and on social welfare. My time is limited and I shall not elaborate on these proposal in details. I shall simply say that I support the general principle of such increases.

Thanks, on Behalf of the Profession

This year's Budget has provided many positive responses to the views advocated by the Accounting Profession, including the revamping of the Marginal Tax Structure in Salaries Tax and the deduction of Foreign Withholding Tax. We welcome these measures.

A few days ago, I arranged for a group of expert accountants on public finances to meet and exchange views with the Secretary for the Treasury, on ways to enhance, through the use of accrual accounting, the transparency and accuracy of public sector accounts. It is hoped that, by such initiatives, we can work together at finding new ways of allocating and managing public funds so that efficiency and accountability can be improved.

No surprises, No worries

The Budget has rightly adopted an approach of maintaining a tight control over public spending. Although it offers few pleasant surprises to our citizens, the Budget does show plainly the collective economic strength of Hong Kong and allows Hong Kong people to feel confident about our overall economic and financial position.

In this last phase of transition, it is obviously inappropriate to introduce large-scale fiscal reforms. Given that the public share this common view, a conservative Budget is in order. Prudence remains the best policy. It will allow the Budget to obtain the three rounds of approval it needs. The public would certainly appreciate why the Financial Secretary had not been more generous in increasing welfare spending. Had he not been so tight-fisted, the Budget would simply not have obtained the first round approval of the Sino-British Joint Liaison Group.

Mr. President, I would like to express my support of the Financial Secretary and hope that the Budget will be approved by the Legislative Council. In this second round of approval, let us give him the support he deserves to take the Budget confidently to the Provisional Legislature and to complete the third and final round.


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