|Hong Kong is truly a land of good fortune and despite
the incursion on our stock market and the subsequent need
for the Government to acquire (almost forcibly) a substantial
amount of quoted shares in October 1998, these shares
have now soared in value and have ironically helped solve
the problems presented by this year's budget.
These shares have provided a massive windfall income
for our Government to offset the short-term impact of
recent deficits and, thus, give the still struggling
economy, particularly small-and-medium-sized businesses,
a much-needed tax break. However, the Government's structural
fiscal imbalance is still far from being resolved.
From what I understand of the Government's accounting,
the Hong Kong Monetary Authority (HKMA) manages the
Exchange Fund, which includes our fiscal reserves and
various funds, independent of the Government. As with
other central banks, the HKMA each year distributes
dividends which are accounted for in the Budget as the
Government's investment income. The investment income
for 1999/2000 surged from a forecast figure of HK$22.2
billion to a revised estimated figure of HK$44 billion.
It is worth noting that the Exchange Fund's year-end
closes on 31 December and that the investment income
is based on nine months' actual figures (from 1 April
1999 to 31 December 1999) and three month's projected
figures (1 January 2000 to 31 March 2000).
To update the investment income figure for the revised
Budget, the Government will have to project a value
for its investment portfolio as at 31 March 2000, which
will include its Hong Kong-quoted shares. The Exchange
Fund's earnings, on which the distribution is based,
comprise both the realised gains from the sale of the
TraHK Fund and the unrealised gains from the market
valuation of the shares still held by the Exchange Fund
Investment Ltd (EFIL) and the Exchange Fund's own overseas
A rapid reversal or slowdown of the current buoyant
stock market would seriously undermine the HKMA'a ability
to make similar distributions in the future. This year's
exceptionally huge HK$44 Billion investment income is
therefore clearly not a stable source of recurrent income.
In terms of the Budget, this HK$44 billion investment
income represents 19.2 per cent of the Government's
entire HK$229 billion revenue and is much bigger than
either the HK$37 billion expected profits tax yield
or the HK$23.8 billion expected salaries tax yield for
the same fiscal year.
If the Government had not received this unexpected
windfall of HK$21.8 billion (HK$44 billion less HK$22.2
billion) from extra investment income, our deficit would
have been HK$23.4 billion (HK$21.8 billion plus HK$1.6
billion revised deficit) instead. There is absolutely
no way the Government could have made up such a huge
deficit by merely tinkling the existing tax bases.
Given that I consider myself a responsible politician,
I have not played the populist tune of 'less tax, more
public expenditure'. Instead, I have lead the call for
listing the MTRC, and have helped to launch the successful
TraHK Fund as a director EFIL. I have also strongly
urged the Government to reform the civil service.
Notwithstanding, I have been involved in the debate
on the status of our public finances and the various
options open to our Government, including the very controversial
I have urged the Financial Secretary to tackle all
these problems gradually, pointing out the necessary
of balancing the Government's books in the medium-to-long-term
in the most acceptable way to the community.
When asked for my comments on the recent Budget, I
responded by saying that it was better than expected.
I agree with the 'gentle hand on the tiller' approach,
but feel we still need to tackle difficult issues such
as the necessity for a comprehensive tax review and
civil services reforms. I applaud the Financial Secretary's
clear economic blueprint and I thoroughly support him
in the battle to downsize the civil service.
I spoke about my desire to see Hong Kong crowned as
the financial/IT centre of China. For this to occur,
the Government will have to do much more to break down
two places. This is especially true in the IT sector
as without free entry into China, our own market is
actually quite limited in relation to the huge investment
currently being poured into Hong Kong.
I also mentioned the Government departments, for example,
the Post Office, which, despite their great commercial
potential, need to evolve in response the changing electronic
Civil service reforms should include a review of salaries
and conditions. Any delay in this review means that
public services are going to remain costly and uncompetitive.
However, the private sector will always be able to
take advantage of lower staff costs and more flexibility
in IT investment, meaning that the private sector will
be able to provide the same services as the public sector,
but cheaper and better. If that is the case, the call
for contracting out services and freezing fees in the
public sector will not stop.
Finally, I spoke about supporting our basic free-market
principles of allowing the private sector to take the
lead in developing the economy and the need for a comprehensive
As usually, my full speech will be supplied in due
course and your views are welcome.