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THE ECONOMY
miscellaneous services and transport, recorded faster increases than the average, but still represented significant moderation over 1995.
The GDP deflator, as a broad measure of overall inflation in the economy, showed an increase of 5.3 per cent over the course of 1996, compared with a 2.4 per cent increase in 1995.
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 Hong Kong's continued economic success. However, its small size and open nature leave the economy vulnerable to external factors, and government actions designed to counter these 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 over-riding. It is considered that the allocation of resources in the economy is best left to market forces. Adopting 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, at 16.5 per cent, is low by international standards.
Maintaining a small and efficient public sector is a crucial aspect of Hong Kong's fiscal policy. The underlying principle is to ensure that the government will not crowd out 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.
Another important role played by the government is to provide a good environment and a sound legal and institutional framework in which business can flourish. Accordingly, 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 able to weather shocks. The simple tax structure and low tax rate, in particular, provide 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 not spending by organisations in which the government has only an equity stake (such as the Mass Transit Railway Corporation, the Kowloon-Canton Railway Corporation and the Airport Authority).
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. Six other funds exist mainly to finance capital investments and expenditure, and government loans. They are the Capital Works Reserve Fund, Capital Investment Fund, Civil Service Pension Reserve Fund, Disaster Relief Fund, Loan Fund and Lotteries Fund.