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THE ECONOMY
The Capital Works Reserve Fund finances the Public Works Programme and land acquisitions. With effect from the entry into force on May 27, 1985 of the Sino-British Joint Declaration, the fund was re-structured to allow for implementation of Annex III to the Joint Declaration dealing with the accounting of premium income obtained from land transactions. The income of the fund is derived mainly from this source and from transfers from General Revenue.
The Development Loan Fund is used mainly to finance social and economic develop- ments including, in particular, loans to the Housing Authority for the construction of public housing estates. Transfers are made from General Revenue to the fund to meet the loan requirements of the Housing Authority. Otherwise the fund's income is derived from interest payments and capital repayments.
The Home Ownership Fund finances mainly the construction of flats for sale under the Home Ownership Scheme. The Housing Authority is the government's agent for the design, construction and marketing of these flats. The fund was initially established by a transfer from General Revenue, and derives its income from the proceeds of sales of the flats. The fund also finances the recurrent expenditure on the administration and planning of the Private Sector Participation Scheme.
The Lotteries Fund is used to finance the development of social welfare services through loans and grants. It derives its income mainly from a share of the proceeds of the Mark Six lotteries. The Mass Transit Fund is used to finance the purchase of government equity in the Mass Transit Railway Corporation. Its income is derived entirely from transfers from General Revenue.
The Student Loan Fund is used to finance loans to students at the two universities, the two polytechnics, the Baptist College and other approved post-secondary institutions, and to Hong Kong students studying in the United Kingdom. Transfers are made as necessary from General Revenue to enable the fund to meet its commitments, the only other source of income being loan repayments.
Medium Range Forecast
The main technique used by the government in managing its finances is the Medium Range Forecast. This is a rolling five-year forecast of expenditure and revenue which concentrates on the consolidated financial position of General Revenue and all the funds except the Lotteries Fund. Expenditure projections take account of expected increases in the demand for and supply of government services. Revenue projections reflect expected patterns of collection in the light of fiscal policy, charges for various government services, and the general economic outlook.
Several principles underlie the strategy adopted in the Medium Range Forecast. The first is that the planned rate of growth of public sector expenditure should not exceed the forecast growth rate of the Gross Domestic Product. The second is that there should be a broad balance of revenue and expenditure, with more emphasis being placed on achieving a surplus as opposed to a deficit in order to ensure that the government's fiscal reserves are not eroded. The third is that, to preserve the stability of government's finances, at least half of the capital spending should be financed from the operating surplus, that is, the excess of recurrent revenue over recurrent expenditure. There are also other principles. They are concerned with taxation policy, capital spending, and the size of the Public Service.
The Budget presented by the Financial Secretary to the Legislative Council each year is set within the context of the Medium Range Forecast, thus ensuring that full regard is given to these principles and to longer-term considerations.