Blog

Budget under the new phase of Hong Kong

I joined an anniversary celebration event of a primary school yesterday and had some playful time and delightful talks with the students there.

I joined an anniversary celebration event of a primary school yesterday and had some playful time and delightful talks with the students there. Before I left, I had invited them to write down their wishes for the coming Budget. Some asked for more outdoor playgrounds, some wished to have more performing opportunities, and some suggested more healthcare facilities in the community – from that I can see their care about the development of our home city.

In the blink of an eye November is upon us, and it is time for me to start preparing for the consultation of the Budget next year. That exchange session with children might be seen as an unofficial kick-off of the consultation exercise. In my daily work and activities, I like to listen to our people and put myself in their shoes. As regards the Budget, apart from providing resources for the Policy Address, the Budget also serves to allocate public resources effectively, with a view to better facilitating Government’s work and public services. As resources are limited, we need to allocate them appropriately in a reasonable and effective manner. Given the diversified needs of different sectors in the society and the wide range of issues that need to be addressed, we have to assess the urgency of the problems, set priority and allocate resources in a pragmatic manner, so as to gradually tackle people’s different needs.

As Hong Kong is a small and open economy, Government revenue has always been affected by economic cycle and market sentiment to a large extent. How about the situation this year? With the good performance in export and our effective measures in controlling the epidemic, our economy has seen a gradual improvement. The Consumption Voucher Scheme has also boosted businesses of the catering, retail and service sectors. These all point to an improvement in Government revenue.

In addition, some land sites in the prime urban area were sold for a high price. And driven by the positive outlook on the property market, property developers have become more active in paying land premium in order to develop their land, driving the relevant income to reach a new historical peak of over HK$40 billion as at end October. Revenue from stamp duties on property and stock were also higher than expected due to the flourishing market performance in the first half of the year. As such, the fiscal deficit of this financial year is expected to be far less than our estimate in early this year.

When we look into the Government revenue, operating revenue, such as salary tax and profit tax, are always guided by the economic cycle. Capital revenue such as land income is even further affected by market sentiment and atmosphere. In short, as we can see from the Government revenue recorded over the past two decades, land income of a single year is not a reliable and effective basis in estimating the land income of the following year. Moreover, the availability of land sites in premium urban areas varies greatly from year to year and the supply of land is limited.

As such, Government accounts have adopted the following categorization: pairing the operating revenue such as salary tax and profit tax with operating expenditure such as those for education, healthcare and social services; and paring the capital revenue such as land sales income with capital expenditure such as those for implementing capital works projects. By doing so, a clearer picture on the nature and sustainability of the Government revenue and expenditure can be presented.

As for the operating expenditure, our spending in healthcare, social services and education have increased by 53%, 62% and 25% respectively over the past five years. However, the increase of operating revenue over the same period is far from catching up with the same pace. There were even huge deficit in the operating account in the past two years as a result of the economic downturn and the outbreak of pandemic.

With the considerate amount of non-recurrent revenue brought by land related items this year, the problem of surging expenditure can be partly addressed. However, just like maintaining personal finance, we may use the profits earned from property or stock market to make other investment and consumption, but we should not expect the same profit would continue in the future. Similarly, if we make commitment in increasing recurrent expenditure based on that kind of expectation, it would be just like over-drafting from the future and could bring incalculable potential risks. In fact, some of the recent Government’s commitments involve large amount of recurrent expenditure, including the extension of the $2 Fare Concession Scheme to cover elderly aged between 60 to 64, the relaxation of eligibility for receiving the Old Age Living Allowance, and the paying of MPF for low-income class. The financial implications of all these measures will only be shown in the future financial years.

Due to the outbreak of pandemic and economic downturn in the past two years, we have deployed strong countercyclical measures to alleviate the pressures on people and enterprises, including some "one-off measures", or the so called "sweeteners" such as tax reduction and rate concession. Yet due to our narrow tax base, tax reduction could only benefit a relatively limited amount of people against the total population. And even though some people are living in self-owned property, there are many others living in rented flats, who could hardly be benefitted from rate concession. In short, when formulating any one-off measures, not only should we consider administrative feasibility and efficiency, but also their coverage and fairness.

Looking ahead, Hong Kong is moving towards a new phase of governance and prosperity. The executive-led system under the principle of "patriots administering Hong Kong" has brought us a new style of governance and the enhancement of the electoral system has revamped our political landscape. Under this new phase, what parameters should we take into account in considering the raising and allocation of resources? In my view, the following elements are necessary:

• - Tangible items that make people have a sense of achievement;
• - The grassroots should be further benefitted, and to share our fruit of economic development in a fairer manner and work hard along the goal of "common prosperity";
• - To promote a stronger, more comprehensive and solid economic growth for Hong Kong, with a view to providing more high-quality jobs to increase the income of people;
• - To address deep seated dilemmas such as housing and wealth disparity.

These tasks could not be accomplished overnight and need the support of the whole society. To push this forward in our next year Budget, we need your active participation and discussions. We will make our best effort in forging consensus and win the understanding, recognition and support of the people.

After the implementation of Hong Kong National Security Law and the enhancement of the electoral system, we are now holding our first Legislative Council election, which has reflected a more balanced participation. During the first week of nomination, we can see candidates coming from different sectors, backgrounds and professions, some of them are young professionals. Their goals are also more pragmatic, focusing on how to promote the better development of Hong Kong. The new electoral system is able to attract more candidates with different backgrounds, which could broaden the representativeness of the Legislative Council, showing that the new system could achieve a more diversified balance of views. It could be expected that the competition will be intense in this election and the society will have a growing expectation for its development. Let us participate in the exercise actively, and join hands together to build a better future for Hong Kong.

November 7, 2021