emphasizes the point that large financial reverses could also conceivably lie in waiting. Over a five year projection period the margin of error in forecasting the terminal reserve level is large. Rachel Lomax, HMT may have some interesting comments on the system of forecasting.
Effect of GDP growth decline
5. The improved budgetary position is not a result of the recovery in the Hong Kong economy. Actual GDP growth was only slightly above the forecast for 1991 and for planning purposes the current Medium Range Forecast works on the basis of lower average GDP growth than in previous years (5 per cent average which is 0.5 per cent lower than the previous year).
6. GDP growth below this forecast trend will lower government revenue if taxes remain unchanged. Working with the assumption that the revenue share of GDP remains the same as shown in the MRF, the cost to HKG of average GDP growth 1 per cent lower than forecast (4 per cent) is HK$ 22 bn in lost revenues over the entire period to 1997. At 3 per cent GDP growth (2 per cent below forecast) the total cost in lost revenues is HK$ 44 bn. With 3 per cent average GDP growth the reserve level in March 1997 would be HK$ 28 bn, marginally above the target. Nonetheless this illustrative case supports the Financial Secretary's point that the reserve cushion can support growth of up to 2 per cent lower than anticipated.
Scope for raising revenues without raising tax burden
7. The MRF projects central government revenue on the basis of the taxes in place. It does not assume any new tax measures. As a result the ratio of revenue to GDP tends to fall over the forecast period. In the current exercise the ratio falls from 17.5 per cent in 1992/93 to 16.2 per cent in 1996/97. Revising the forecast with revenue at a constant 17.5 per cent share of GDP therefore raises higher levels of revenue from 1993/94 onwards. The cumulated value of extra revenues at current prices is HK$ 41.7 bn. This sum can be seen as a realisable margin which the HKG has available without raising the central government tax burden above its 1992/93 level. It also suggests considerable scope to prevent the budgetary situation from deteriorating.
Risks to non-tax revenue
8.
The principal risk to non-tax revenue is a decline in the value of receipts from land sales, either because land prices slump or because land is granted rather than sold to public agencies. In 1991/92 land transactions realised HK$ 16 bn of which HK$ 7.4 bn was transfered to the SAR account. HKG receipts are approximately equal to the revenue accrued to the Capital Works Reserve Fund and are forecast to be between HK$ 7.5 bn and HK$ 9.5 bn up to 1997.--