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THE ECONOMY
The Capital Works Reserve Fund finances the Public Works Programme and land acquisitions. Since April 1, 1988, it has also covered capital subventions and major equipment systems previously financed from the General Revenue Account. On May 27, 1985 when the Sino-British Joint Declaration came into effect, the fund was re-structured to enable the premium income obtained from land transations to be accounted for in accordance with the arrangements in Annex III to the Joint Declaration. The income of the fund is derived mainly from premia and transfers from the General Revenue Account.
The Development Loan Fund is used mainly to finance social and economic develop- ments. The fund's income is derived from interest payments and capital repayments and transfers from the General Revenue Account. On April 1, 1988, following the enactment of the Housing (Amendment) Ordinance 1988, the outstanding balance of loans to the Housing Authority under this fund was waived and capitalised to form part of the per- manent government capital of the authority.
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 the General Revenue Account.
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 the General Revenue Account to enable the fund to meet its commitments, the only other source of income being loan repayments.
Management of the Budget
The government manages its finances against the background of a rolling five-year Medium Range Forecast of expenditure and revenue. This models the consolidated financial position of the General Revenue Account and of all the funds except the Lotteries Fund. Expenditure projections are regularly updated to take account of expected increases in the demand for and supply of government services. Revenue projections are made and updated to reflect the government's fiscal policies, changes in fees and charges for government services, and the general economic outlook.
A number of key principles underlie the government's management of public expendi- ture. The first is that the rate of growth of public sector expenditure should not exceed that of the Gross Domestic Product. The second is that there should be a broad balance of revenue and expenditure, erring on the side of surplus to ensure that the government maintains adequate reserves. The third is that at least half of the government's capital expenditure should be financed from operating surpluses - the excess of recurrent revenue over recurrent expenditure. Other guiding principles concern taxation policy, capital spending, and the rate of growth of the Civil Service.
The Budget presented by the Financial Secretary to the Legislative Council each year is developed against the background of the Medium Range Forecast to ensure that full regard is given to these principles and to longer-term trends in the economy.
In recent years the Administration has embarked on a programme of internal financial management reforms which are intended to help departments, and the government as a whole, obtain progressively better value for money. The main emphasis of this programme