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The 2003-04 Budget

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The 2003-04 Budget The 2003-04 Budget Information Pack for The Financial Secretary’s Consultations with LegCo Members October 2002 Introduction The Financial Secretary will hold a series of meetings with Members of the Legislative Council in November 2002 to consult Members on the 2003-04 Budget. Members are invited to send in their written submissions before or after those consultation sessions. To facilitate discussions during the consultation sessions, we have prepared the attached charts for Members’ reference. These charts are based on forecasts made in March 2002. As in the past, the Government will continue to follow the guiding principle of prudent management of public finances. Earlier, the Financial Secretary set three targets for our public finances in 2006-07. We aim to achieve these targets step by step through reducing the growth of government expenditure and modestly raising revenue. Chart 1 Contents I. Budget Principles (Charts 2 to 3) II. Medium Range Forecast (Charts 4 to 11) (in 2002 Budget Speech) III. Expenditure (Charts 12 to 13) IV. Revenue (Charts 14 to 26) V. Balance (Charts 27 to 28) I. Budget Principles Chart 2 The Basic Law Article 107 The Hong Kong Special Administrative Region shall follow the principle of keeping expenditure within the limits of revenues in drawing up its budget, and strive to achieve a fiscal balance, avoid deficits and keep the budget commensurate with the growth rate of its gross domestic product. z The Basic Law (Article 107) requires the Government to “follow the principle of keeping expenditure within the limits of revenues in drawing up its budget, and strive to achieve a fiscal balance, avoid deficits and keep the budget commensurate with the growth rate of its gross domestic product.” z These constitutional provisions for financial prudence are integral to maintaining the confidence of the international financial community, as well as local and overseas investors in Hong Kong. I. Budget Principles Chart 3 Targets/ Benchmark in 2006-07 Targets Restore balance in the Consolidated Account Attain a balanced Operating Account Reduce public expenditure to 20% of GDP or below Benchmark Maintain fiscal reserves equivalent to around 12 months of government expenditure z In the 2002 Budget Speech, the Financial Secretary set three targets for our public finances on 2006-07: ¾ first, restore balance in the Consolidated Account; ¾ second, attain a balanced Operating Account; and ¾ third, reduce public expenditure to 20% of GDP or below. z He also stated that the Government should have fiscal reserves equivalent to around 12 months of Government expenditure in 2006-07 to meet operating and contingency requirements. II. Medium Range Forecast (in 2002 Budget Speech) Chart 4 Medium Range Forecast 2002-03 To 2006-07 Economic Assumptions Trend annual nominal growth of 3.4% ¾ Average annual real growth of 3% ¾ Average annual GDP Deflator of 0.4% Trend annual CCPI of 0.3% z The Medium Range Forecast (MRF) is a projection of expenditure and revenue for the forecast period based on the forecasting assumptions and budgetary criteria outlined in 2002 Budget Speech. z This chart shows the parameters of economic assumptions adopted by the MRF for 2002-03 to 2006-07. II. Medium Range Forecast (in 2002 Budget Speech) Chart 5 Medium Range Forecast 2002-03 To 2006-07 Expenditure Assumptions Nominal growth of 0.6% in 2002-03 over the original estimate for 2001-02, or 6.2% over the revised estimate and average annual growth of 1% in 2003-04 to 2006-07 Underlying real growth of 2% in 2002-03 over the original estimate for 2001-02, or 7.7% over the revised estimate and average annual real growth of 1.5% in 2003-04 to 2006-07 4.75% civil service pay cut with annual expenditure savings of $6 billion z This chart shows the expenditure assumptions employed by the MRF for 2002-03 to 2006-07. z The actual civil service pay cut in 2002 only produces annual expenditure savings of $3 billion, half of the original assumption. II. Medium Range Forecast (in 2002 Budget Speech) Chart 6 Medium Range Forecast 2002-03 To 2006-07 Revenue Assumptions Revenue to grow broadly in line with nominal GDP Annual land premium at 2% of nominal GDP Rate of Investment Return on Fiscal Reserves at 4% in 2002-03 and 5.5% in 2003-04 to 2006-07 Additional recurrent revenue of $1 billion expected in 2003-04 onwards on reversion of duty on ULSD from $1.11/ litre to $2.89/ litre on 1.4.2003 z This chart shows the revenue assumptions adopted in the MRF of 2002-03 to 2006-07. II. Medium Range Forecast (in 2002 Budget Speech) Chart 7 Medium Range Forecast 2002-03 To 2006-07 Other Assumptions Additional recurrent revenue raising / expenditure reduction measures of $2 billion in 2003-04, rising to $9 billion in 2005-06 ($1 billion per annum expected from Boundary Facilities Improvement Tax from 2004-05) Additional one-off capital revenue / expenditure reduction of $10 billion each in 2004-05 and 2005-06 z This chart shows other assumptions adopted in the MRF of 2002-03 to 2006-07. II. Medium Range Forecast (in 2002 Budget Speech) Chart 8 Medium Range Forecast 2002-03 To 2006-07 Consolidated Deficit (in $ billion) 2002-03 2003-04 2004-05 2005-06 2006-07 Government Revenue 214.6 223.2 245.3 262.2 265.6 Operating and Capital Revenue 200.8 206.4 230.0 247.3 250.8 Investment Income 13.8 16.8 15.3 14.9 14.8 Government Spending 259.8 261.9 261.2 262.1 265.5 Government Expenditure 254.3 253.3 255.6 259.1 264.0 Capital Investment Fund 5.5 8.6 5.6 3.0 1.5 investments and advances Consolidated surplus / (deficit) (45.2) (38.7) (15.9) 0.1 0.1 As a % of GDP (Note) 3.6% 2.9% 1.1% 0.0% 0.0% Note: GDP forecast based on August 2002 update z This chart shows that the Consolidated Account will be in deficit from 2002-03 to 2004-05. The financial position will improve gradually and attain a balanced account in 2005-06 to 2006-07. II. Medium Range Forecast (in 2002 Budget Speech) Chart 9 Fiscal Reserves $ Billion 350 (Equivalent to no. of months of Government Expenditure) 340 (15) 330 320 310 300 (14) 290 280 (13) (13) (12) 270 260 250 02-03 03-04 04-05 05-06 06-07 Fiscal reserves will fall in the medium term. z This chart shows that the fiscal reserves are forecast to decrease from $325.6 billion in 2002-03 to $271.2 billion in 2006-07. Reserves in 2006-07 will be equivalent to 12 months of government expenditure. II. Medium Range Forecast (in 2002 Budget Speech) Chart 10 Comparison of Cumulative Growth in Government Expenditure and Cumulative Growth in GDP given the Introduction of Medium Range Forecast % 600 Real Growth in GDP 500 Real Growth in 400 Government Expenditure 300 Nominal Growth in Government 200 Expenditure Nominal Growth 100 in GDP 0 Forecast 86-87 88-89 90-91 92-93 94-95 96-97 98-99 00-01 02-03 04-05 06-07 Year Note: GDP forecast based on August 2002 update z Real growth in Government expenditure has been broadly in line with the growth in GDP in real terms. z Nominal growth in Government expenditure has overshot nominal growth in GDP in recent years. II. Medium Range Forecast (in 2002 Budget Speech) Chart 11 Public/ Government Expenditure As a Percentage of GDP % 25 20 15 10 5 0 89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 Year Public expenditure comprises Government expenditure plus expenditure by Trading Funds, Lotteries Fund and Housing Authority Government expenditure comprises expenditure charged to the General Revenue Account and the various Funds (excluding Capital Investment Fund) Forecast Note: GDP forecast based on August 2002 update z This chart shows that the Public/ Government Expenditure as a percentage of GDP has been rising in recent years. Public expenditure will reach 23% of GDP in 2002-03. III. Expenditure Chart 12 Rigidity of Government Expenditure 2001-02 % of % of Operating Total Major Operating Expenditure Expenditure Expenditure Components Personal Emoluments 26.12 21.76 Personnel Related Expenses (e.g.pension) 8.94 7.45 Subventions (Staff related) 33.91 28.24 Social Security 9.89 8.23 Total 78.86 65.68 z This chart shows that 79% of Government’s operating expenditure or 66% of total expenditure is resistant to reduction in both real and nominal terms. III. Expenditure Chart 13 Capital Works Expenditure for 1997-98 to 2006-07 35 30 25 20 15 $ billion $ 10 5 0 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Actual expenditure Expenditure allowed under budget guideline for 2002-03 to 2006-07 Forecast z The green line on this chart shows the actual expenditure on capital works for the period 1997-98 to 2001-02. During this five-year period, the average annual capital works expenditure was around $27 billion. z The expenditure allowed under the budget guideline for the period 2002-03 to 2006-07 totals $147 billion. As reflected through the red line, this provision implies an average annual capital works expenditure of about $29 billion, which is higher than the average spending in the past few years.
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