Over the past few years, being able to illicit a response from the Financial Secretary in the Budget has stood me in good stead. Before the release of the 2000/01 Budget, I predicted a substantial deficit of no less than HK$10 billion. The final count showed a deficit of HK$11.4 billion. At that time, I strongly urged the government to look out for a possible structural operating deficit. This was confirmed by the Financial Secretary, who stated in his medium-term forecast that under the general revenue account, the government will continue to show an operating deficit until 2004/05.

In my 2001 Budget response, I also pushed for the need to assist small- and medium-sized enterprises (SMEs) to enter the China market following China's accession to the WTO. In 1999, I spoke about the necessity of using the accrual basis of accounting to provide the government with a better tool for financial management. In the same year, I also suggested that the government consider listing the MTRC and other government-owned enterprises. Since making my recommendations, the Financial Secretary has positively responded to all of these proposals.

With regard to this year's Budget, my response will focus on the government's huge fiscal reserves, a subject I raised in 1998, following the Handover, and to which the government partially responded in 1999. In my official Budget response for 2001, I also feel it is important to comment on the government's budgetary predictions, as well as discussing the need for greater transparency in regard to the government's revenue projections.

Commenting on these aspects will I believe, help the public to understand better the predicaments often experienced by the government when calculating the yearly budget.

The Budget comprises an operating statement (which is for the government's general reserve account) and a capital financing statement (the government's funds). In regard to these two accounts, the government already separates (albeit awkwardly) its recurrent income and expenditure from the much less stable capital side of its income and expenditure.

However, the results of this separation are incomprehensible to the majority of the general public and are only useful if a clearer accounting policy is promulgated and widely accepted.

In reality, the main culprits of the government's unstable budgeting exercise are Hong Kong land sales, investment income and the government's sporadic share listings, eg the MTRC. These three sources of income fell by about HK$27 billion last year, which accounts for nearly 10 per cent of the government's total revenue. But, despite this drop in revenue, most people frequently overlook the wide fluctuations in the government's capital expenditure which is normally billions below budget each year (I call these elements the ‘uncontrollable capital income and expenditure').

As a result, I urge the government to consider clearer accounting methods akin to those used by public-utility companies and franchise businesses, which clearly separate the more stable recurrent income and expenditure from the more unpredictable capital side. Additionally, I suggest the government use part of its reserves, ie the Land Funds, accumulated before the Handover, to stablise the capital account.

The objective of these suggestions is to help distinguish clearly Hong Kong's structural operating deficits from its uncontrollable non-recurrent capital income and expenditure. Any sudden windfall gains or losses from the non-recurrent budgetary side can be ironed out by directly transferring in and out of the stabilisation or equalisation fund.

Technically speaking, this would not violate art 107 of the Basic Law, and was the government's original intention for the Land Fund before the Handover - to support the HKSAR's major infrastructural investment projects, eg the railways and Disney World.

Since the recent build-up of Hong Kong's huge fiscal reserves and the acquisition of the Hong Kong share portfolio, investment income has begun to play a significant role in the Budget. Nonetheless, the general public seems to understand little of this, despite my persistent efforts in LegCo to try and get the government to reveal more.

In the 2001/02 Budget, the government estimated a figure of HK$35 billion for investment income (last year, the budgeted figure was HK$31 billion, but the actual return was only HK$22 billion). This amounts to an approximately 8 per cent return on the HK$400 billion-strong fiscal reserve.

With this in mind, I think the public has a right to know the assumptions made by the Hong Kong Monetary Authority in arriving at this investment income figure and the actual rate of return used. This is especially true in light of the rapidly falling global stock markets and the worldwide trend for downward interest rates. Although disclosing this information will not help to balance the budget, it will at least give the public fair warning of what is coming and help to avoid the wild speculation often associated in trying to predict the government's budgets.