THE ECONOMY
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Economic Policy and Public Finances
Economic Policy
The government's basic policy of minimum interference and maximum support for the economy is a key factor underlying the continued economic success of Hong Kong. Owing to its small size and open nature, the economy is vulnerable to external factors, and government actions designed to offset unfavourable external influences are of limited effectiveness.
The government advocates free and fair competition. Business decisions are left to the private sector, except where social considerations are an overriding factor. It is considered that the allocation of resources in the economy is best left to market forces. With this free market philosophy, the government has not sought to influence the structure of industry through regulations, tax policies or subsidies. The tax system is kept as simple as possible. The corporate tax rate was, moreover, lowered during the year from 17.5 per cent to 16.5 per
cent.
Maintaining a small and efficient public sector is a crucial aspect of Hong Kong's fiscal policy. In 1994, public sector expenditure accounted for around 17 per cent of the GDP. When adjusted to exclude transfer payments, the share was only about 12 per cent. The underlying aim is to ensure that the government will not take an excessive amount of resources from the private sector. In concrete terms, the growth rate of public sector expenditure is to be kept within the trend growth rate of the economy.
The government sees its major role as providing a good environment and a sound legal and institutional framework in which business can flourish.
As individual sectors in the economy are not burdened by undue government regulations, industries in Hong Kong are able to adapt swiftly to changes in market conditions, and the economy as a whole is better able to weather external shocks. The simple tax structure, with low tax rates, in particular, provides a good incentive for workers to work and for entrepreneurs to invest.
Structure of Government Accounts
In accounting terms, the public sector is taken to include the Hong Kong Government itself, the Hong Kong Housing Authority, the Urban Council, the Regional Council and the government trading funds. Government grants and subventions to institutions in the private or quasi-private sectors are included, but expenditure by organisations in which the government only has an equity stake (such as the Mass Transit Railway Corporation and Kowloon-Canton Railway Corporation), is excluded.
The government controls its finances through a series of fund accounts. The General Revenue Account is the main account for day-to-day departmental expenditure and revenue collection. Five other funds exist mainly to finance capital investments and expenditure, and government loans. They are the Capital Works Reserve Fund, Capital Investment Fund, Disaster Relief Fund, Loan Fund and Lotteries Fund.
The Capital Works Reserve Fund finances the public works programme, land acquisi- tions, capital subventions, major systems and equipment items and computerisation. On May 27, 1985, when the Sino-British Joint Declaration on the Question of Hong Kong came into effect, the fund was restructured to enable the premium income from land transac- tions to be accounted for in accordance with the arrangements in Annex III to the Joint