HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 483
OFFICIAL REPORT OF PROCEEDINGS
Wednesday, 1 March 1978
The Council met at half past two o’clock
PRESENT
HIS EXCELLENCY THE GOVERNOR (PRESIDENT)
SIR CRAWFORD MURRAY MACLEHOSE, GBE, KCMG, KCVO
THE HONOURABLE THE CHIEF SECRETARY
SIR DENYS TUDOR EMIL ROBERTS, KBE, QC, JP
THE HONOURABLE THE FINANCIAL SECRETARY
MR CHARLES PHILIP HADDON-CAVE, CMG, JP
THE HONOURABLE THE ATTORNEY GENERAL
MR JOHN WILLIAM DIXON HOBLEY, CMG, QC, JP
THE HONOURABLE THE SECRETARY FOR HOME AFFAIRS
MR LI FOOK-KOW, CMG, JP
THE HONOURABLE DAVID HAROLD JORDAN, CMG, MBE, JP
DIRECTOR OF TRADE, INDUSTRY AND CUSTOMS
THE HONOURABLE DAVID AKERS-JONES, CMG, JP
SECRETARY FOR THE NEW TERRITORIES
THE HONOURABLE LEWIS MERVYN DAVIES, CMG, OBE, JP
SECRETARY FOR SECURITY
THE HONOURABLE DAVID WYLIE MCDONALD, CMG, JP
DIRECTOR OF PUBLIC WORKS
THE HONOURABLE KENNETH WALLIS JOSEPH TOPLEY, CMG, JP
DIRECTOR OF EDUCATION
THE HONOURABLE DAVID GREGORY JEAFFRESON, JP
SECRETARY FOR ECONOMIC SERVICES
THE HONOURABLE GARTH CECIL THORNTON, QC
SOLICITOR GENERAL
THE HONOURABLE EDWARD HEWITT NICHOLS, OBE, JP
DIRECTOR OF AGRICULTURE AND FISHERIES
THE HONOURABLE THOMAS LEE CHUN-YON, CBE, JP
DIRECTOR OF SOCIAL WELFARE
THE HONOURABLE DEREK JOHN CLAREMONT JONES, JP
SECRETARY FOR THE ENVIRONMENT
DR THE HONOURABLE THONG KAH-LEONG, JP
DIRECTOR OF MEDICAL AND HEALTH SERVICES
THE HONOURABLE ERIC PETER HO, JP
SECRETARY FOR SOCIAL SERVICES
THE HONOURABLE PETER BARRY WILLIAMS, JP
COMMISSIONER FOR LABOUR
484 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
THE HONOURABLE RONALD GEORGE BLACKER BRIDGE, JP SERCRETARY FOR THE CIVIL SERVICE
THE HONOURABLE JOHN CHARLES CREASEY WALDEN, JP DIRECTOR OF HOME AFFAIRS
THE HONOURABLE SIR SZE-YUEN CHUNG, CBE, JP
THE HONOURABLE LEE QUO-WEI, CBE, JP
THE HONOURABLE OSWALD VICTOR CHEUNG, CBE, QC, JP THE HONOURABLE ROGERIO HYNDMAN LOBO, OBE, JP THE HONOURABLE PETER GORDON WILLIAMS, OBE, JP THE HONOURABLE JAMES WU MAN-HON, OBE, JP
THE HONOURABLE HILTON CHEONG-LEEN, OBE, JP
THE HONOURABLE LI FOOK-WO, OBE, JP
THE HONOURABLE JOHN HENRY BREMRIDGE, OBE, JP
DR THE HONOURABLE HARRY FANG SIN-YANG, OBE, JP THE HONOURABLE MRS KWAN KO SIU-WAH, OBE, JP
THE HONOURABLE LO TAK-SHING, OBE, JP
THE HONOURABLE FRANCIS YUAN-HAO TIEN, OBE, JP
THE REV THE HONOURABLE JOYCE MARY BENNETT, JP THE HONOURABLE CHEN SHOU-LUM, JP
THE HONOURABLE LYDIA DUNN, OBE, JP
DR THE HONOURABLE HENRY HU HUNG-LICK, OBE, JP
THE HONOURABLE LEUNG TAT-SHING, JP
THE REV THE HONOURABLE PATRICK TERENCE MCGOVERN, SJ, JP THE HONOURABLE WONG LAM, OBE, JP
DR THE HONOURABLE RAYSON LISUNG HUANG, CBE, JP THE HONOURABLE CHARLES YEUNG SIU-CHO, JP
ABSENT
THE HONOURABLE ALAN JAMES SCOTT, JP
SECRETARY FOR HOUSING
THE HONOURABLE ALEX WU SHU-CHIH, OBE, JP
THE HONOURABLE PETER C. WONG, JP
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 485 IN ATTENDANCE
THE CLERK TO THE LEGISLATIVE COUNCIL
MR STEPHEN TAM SHU-PUI
Papers
The following papers were laid pursuant to Standing Order 14(2):―
Subject LN No Subsidiary Legislation:
Dogs and Cats Ordinance.
Dogs and Cats (Amendment) Regulations 1978............................................. 37
Medical Registration Ordinance.
Medical Practitioners (Registration and Disciplinary Procedure) (Amendment) Regulations 1978..................................................................... 38
Mercantile Bank Note Issue (Repeal) Ordinance 1978
Mercantile Bank Note Issue (Repeal) Ordinance 1978 (Commencement) Notice 1978 .................................................................................................... 39
Securities (Amendment) Ordinance 1978.
Securities (Amendment) Ordinance 1978 (Commencement) Notice 1978..... 40
The Hongkong and Shanghai Banking Corporation (Amendment) Ordinance 1978.
The Hongkong and Shanghai Banking Corporation (Amendment) Ordinance 1978 (Commencement) Notice 1978 ............................................ 41
Public Health and Urban Services Ordinance.
Hawker (Permitted Place) Declaration 1/1978 ............................................... 42
Public Health and Urban Services Ordinance.
Hawker (New Territories) (Amendment) Regulations 1978........................... 43
Evidence Ordinance.
Evidence (Authorized Persons) (No 2) Order 1978........................................ 44
Port Control (Cargo Working Areas) Ordinance.
Port Control (Public Water-front) Order 1978 ............................................... 45
486 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 Sessional Papers 1977-78:
No 39―Draft Estimate of Expenditure for the year ended 31 March 1979 (published on 1.3.78)
No 40―Draft Revenue Estimates for the year ended 31 March 1979 (published on 1.3.78)
No 41―Draft Supporting Financial Statements and Statistical Appendices for the year ended 31 March 1979 (published on 1.3.78)
No 42―Report of the Establishment Sub-Committee of Finance Committee for the year 1977-78 (published on 1.3.78)
No 43―Report of the Public Works Sub-Committee of Finance Committee for the year 1977-78 (published on 1.3.78)
Government business
First reading of bill
APPROPRIATION BILL 1978
Bill read the first time and ordered to be set down for second reading pursuant to Standing Order 41(3).
Second reading of bill
APPROPRIATION BILL 1978
THE FINANCIAL SECRETARY moved the second reading of:―‘A bill to apply a sum not exceeding $10,265,942,000 to the service of the financial year ending the 31 March 1979.’
He said:―
Paragraphs
MOTION 1 ACKNOWLEDGEMENTS 2 STRUCTURE OF THE SPEECH 3
PART I: HONG KONG’S ECONOMY IN THE 1970s
(1) Growth and Development:
(a) External dependence 4- 9 (b) Overall performance 10- 12
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 487
Paragraphs
(2) Economic Progress 13- 14 (3) Changing Structure of the Economy 15- 20 (4) The Adjustment Mechanism 21- 31
PART II: PRESENT ECONOMIC POSITION AND PROSPECTS
(1) The Economy’s Performance in 1977:
(a) Gross domestic product 32 (b) Components of GDP 33- 38 (2) The Immediate Prospect:
(a) GDP forecast for 1978: 39 (i) Private consumption expenditure 40 (ii) Government consumption expenditure 41 (iii) Gross domestic fixed capital formation 42- 46 (iv) Exports 47- 48 (v) Imports 49 (vi) Exports and imports of services 50 (vii) Stocks 51 (viii)Total expenditure on GDP 52
(b) Prices 53- 54 (3) The Outlook for the Forecast period, 1979 to 1981:
(a) Shift to protectionism 55- 57 (b) Trend growth rate 58- 59
PART III: THE STATE OF THE PUBLIC FINANCES, 1974-75 TO 1977-78
(1) 1976-77 Accounts 60- 61 (2) Revised Estimates for 1977-78:
(a) Outturn 62- 63 (b) Revenue 64- 66 (c) Expenditure 67- 69
(3) Financial Position 70- 72 (4) Assessment of Performance, 1974-75 to 1977-78:
(a) Introduction 73 (b) Total expenditure 74- 75 (c) Recurrent and capital expenditure 76- 77 (d) Recurrent revenue and the financing of the capital
account 78- 79
488 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
Paragraphs
PART IV: THE OUTLOOK FOR THE PUBLIC FINANCE, 1978-79 TO 1981-82
(1) Forecast of Revenue and Expenditure:
(a) Introduction 80 (b) Method of compilation 81- 83 (c) Results 84 (2) The Budget for 1978-79:
(a) Underlying considerations of budgetary policy 85 (b) Revenue Estimates 86- 94 (c) Draft Expenditure Estimates 95- 99 (d) Summary and assessment 100-107
PART V: DRAFT EXPENDITURE ESTIMATES FOR 1978-79
(1) Introduction 108 (2) Main Components of Expenditure:
(a) Recurrent 109-117 (b) Capital 118 (3) Infrastructural Facilities 119 (4) Pattern of Expenditure (broad trends) 120-123 (5) Expenditure on Selected Services: 124 (a) Law and order 125-127 (b) Housing 128-134 (c) Education 135-143 (d) Medical and health services 144-147 (e) Social welfare 148-152 (f) Recreation, leisure and culture 153
PART VI: FISCAL POLICY AND REVENUE PROPOSALS
(1) Hong Kong’s Fiscal System 154-159 (2) Requirements of Tax Policy 160 (3) Tax Changes in Recent Years 161 (4) Fiscal Policy in the Future:
(a) Required growth rate of recurrent revenue 162-164 (b) Earnings and profits taxes:
(i) Report of the Third Inland Revenue Ordinance Review
Committee 165 (ii) Taxation treatment of interest 166-176
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 489
Paragraphs
(iii) Recommendations of the Review Committee accepted 177
(iv) Recommendations of the Review Committee not accepted
(v) Recommendations of the Review Committee still under consideration
178 179
(c) Rating 180-186 (d) Management of public utilities:
(i) General 187-189 (ii) Waterworks 190-193 (iii) Post Office 194 (5) Revenue Proposals for 1978-79:
(a) Introduction 195-196 (b) Provisional tax: instalment system 197 (c) Excise duty on imported cigarettes 198-201 (d) Kerosene 202-203 (e) First registration tax on private cars 204-208 (f) Post Office charges 209-213 (g) Stamp duties: general 214-218 (h) Stamp duty on contract notes 219-222 (6) Estimated Outturn in 1978-79 223
CONCLUSION 224-226 ANNEXES
(1) Note on preparation of GDP estimates
(2) Forecast increases in gross domestic product and prices, 1978 on 1977 (3) Terms of reference of the Advisory Committee on Diversification (4) Summary of revenue and expenditure, 1971-72 and 1974-75 to 1978-79 (5) Financial Circular No. 6/77: Five Year Forecast of Revenue and Expenditure 1977-78 to 1981-82
(6) Forecast of land production
(7) Extension of rating in the New Territories
(8) Summary of expenditure by main components, 1971-72 and 1974-75 to 1978-79 (9) Infrastructural facilities
(10) Summary of expenditure by groups of services, 1971-72 and 1974-75 to 1978-79 (11) Home Ownership Scheme construction programme
(12) Recreation, leisure and culture
(13) Note on appropriations-in-aid
(14) Fiscal changes 1972-73 to 1977-78 (in terms of the requirements of fiscal policy)
490 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
(15) Recommendations of the Third Inland Revenue Ordinance Review Committee not accepted by the Government
(16) Recommendations of the Third Inland Revenue Ordinance Review Committee still under consideration by the Working Party
(17) Summary of the notional commercial accounts for 1976-77 of the airport, the Kowloon-Canton Railway and the Lion Rock Tunnel
(18) Effect of new rates of first registration tax on typical retail prices (19) Stamp Ordinance: Heads of Charge to be retained/repealed
(20) Speech by the Financial Secretary in Legislative Council on 9 November 1977 on the taxation of trading profits
MOTION
Sir, I move that the Appropriation Bill 1978, which was published in an issue of the Gazette Extraordinary at 2 o’clock today, be read the second time.
ACKNOWLEDGEMENTS
2 Laid on the table today, Sir, are the Draft Estimates of Expenditure for 1978-79, and the Revenue Estimates, together with the usual supporting documents. On this occasion every year, I publicly acknowledge the assiduous efforts of all concerned in the preparation of the budget documents: I refer to staff in the Finance Branch, particularly, and in the Economic Services and Monetary Affairs Branches of the Secretariat and in the Census and Statistics Department; and, of course, in the Printing Department. I must thank them all again this year, and also Unofficial Members of the Economic Review Committee who assisted with the preparation of the Economic Background document. At the same time, I must, again as usual, acknowledge the co-operation of heads of departments and my hard working―and often unkindly regarded―colleagues in the revenue departments.
STRUCTURE OF THE SPEECH
3 I shall begin this speech by reviewing our economic development and social progress in the 1970s (PART I). Against this background, I shall then work towards my presentation of the 1978-79 budget (PARTS IV and V) by developing a view of our short term (1978) and medium term (1979 to 1981) economic prospects (PART II) which I shall then relate to the outlook for the public finances in the four years 1978-79 to 1981-82 (PART IV), having paused to take stock of the present state of the public accounts in the context of our experience in the four years 1974-75 to 1977-78 (PART III). I shall then move on to my revenue proposals for 1978-79 which I shall set in the context of fiscal policy generally (PART VI), concluding with some brief reflections on the implications of the present levels of public revenue and expenditure for our financial and administrative systems.
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 491 PART I: HONG KONG’S ECONOMY IN THE 1970s
(1) Growth and Development
(a) External dependence
4 Any discussion of Hong Kong’s economic growth and development must begin with the world economy and Hong Kong’s relationship to it. During the period 1971 to 1977 total world exports grew by about 6.5% per annum in real terms, with world exports of manufactures growing faster at nearly 8% per annum. These growth movements were not smooth, being marked in the case of total exports by a sharp slowing down in 1974 and an actual fall in 1975.
5 The growth rate of Hong Kong’s total exports(1) over this period, at nearly 8% per annum in real terms(2), was roughly the same as that for world exports of manufactures and followed a somewhat similar path, but with greater annual variations.
6 Hong Kong is one of the most externally dependent economies in the world. The proportion of gross domestic product in money terms(3) represented by total exports fluctuated somewhat throughout the period 1971 to 1977, but remained at over 80% in every year(4).
7 So, our experience over the period 1971 to 1977, and over the longer period 1961 to 1977, suggests that, in broad terms, there is a causal relationship between the growth rate of GDP in real terms and the growth rate of
(1) Domestic exports of goods plus re-exports.
(2) That is, at constant (1966) prices.
(3) That is, at current market prices.
(4) Total Exports as % of GDP (Current market prices)
1971 82.7 1972 81.2 1973 85.5 1974 86.9 1975 81.7 1976 89.3 1977 83.6
492 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
total exports in real terms(5). That is to say, the growth rate of GDP in any particular year is dependent on the previous year’s growth rate of exports and the growth rate of exports in the year in question. However, this relationship may have altered over time.
8 In the 1960s, except in two isolated years, exports always grew faster than GDP. This occurred even when, thanks to the lagged reaction of income growth to changes in export growth, the growth rate of exports was slowing down and the growth rate of GDP was accelerating. Between 1971 and 1977, although the growth rate of GDP was 9% per annum, its year-by-year path was not smooth with a peak year of 17% in 1976 and a trough rate of 2% in 1974. This cyclical path was a reflection of changes in the growth rate of exports but, in 1972, GDP and exports grew at the same rate and, in the two subsequent years, GDP grew more rapidly than exports. This was most marked in 1974 when exports actually fell and GDP continued to grow, albeit slowly.
9 So we may well be experiencing a gradual shift towards a lesser degree of dependence. This is what one would expect in theory: the level of GDP is the amount of value-added generated within the economy. Having virtually no natural resources, Hong Kong must import raw materials and semi-manufactures, process them (that is to say, add value to them)
and export them. With an increased emphasis on trading-up, so that each unit of imported input has more value added to it before being exported, and with the expansion of tertiary or service industries, with their typically low imported input component, the degree of external dependence can be expected to decrease slowly over time.
(b) Overall performance
10 The growth rate of GDP in real terms of 9% per annum over the period 1971 to 1977 was made up of broadly similar growth rates in each of the
(5) Growth Rate of:
GDP (%)
Total Exports (%)
1962 10.2 14.3 1963 11.7 9.6 1964 8.3 13.1 1965 18.3 14.4 1966 6.2 18.1 1967 8.9 13.9 1968 4.4 15.0 1969 14.0 16.7 1970 5.8 8.3 1971 3.2 7.2 1972 7.2 7.2 1973 14.2 12.2 1974 2.2 －9.4 1975 2.9 5.9 1976 16.9 28.0 1977 11.6 5.0
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 493
major components of expenditure. Expenditure on gross domestic fixed capital formation and Government consumption grew slightly faster than 9% per annum and private consumption, exports of goods and imports of goods grew more slowly(6). The overall performance of the economy was satisfactory, comparing favourably with most other economies, although the amplitude of the fluctuations in the growth rate of GDP was greater, but we are largely powerless to moderate such fluctuations(7).
11 With gross domestic fixed capital formation growing faster than GDP its share of GDP rose slightly between 1971 and 1977. However, this share has fluctuated throughout the period and it is difficult to discern a clear trend(8). The share of private fixed capital formation fell during and immediately
(6)$ million at 1966 prices Component of Expenditure 1971 1977 % p.a. Private consumption 13,631 22,087 8.4 Government consumption 1,028 1,767 9.4 Gross domestic fixed capital formation 3,465 6,005 9.6 Export of goods 13,581 21,060 7.6 Less: Imports of goods 17,385 24,929 6.2 Exports less imports of services 1,384 183 ― Increase in stocks ― 235 ― Total GDP 15,704 26,408 9.0
(7) Looked at from the point of view of the growth ra te of output per employee, the growth rate of the economy in the period 1971 to 1977 indicated a slight slowing down at 5.6% per annum, compared with a growth rate of 6% per annum in the period 1961 to 1971. On the face of it, this decline in the underlying supply side determinant of the economy’s growth path is worrying. However, it has not shown the time periods chosen for comparison and so it is not clear how significant this fall is, viz:
% p.a.
1961-66 7.4
1966-71 4.6
1971-76 5.1
(8)Gross Domestic Fixed Capital Formation as % of GDP (*)
Private%Public (**)%Total%
1961-66 20.5 5.4 25.9 1966-71 15.8 2.9 18.7 1971-77 18.0 3.9 21.9 1971 20.0 2.7 22.7 1972 19.3 2.8 22.1 1973 18.2 3.4 21.6 1974 17.2 4.6 21.8 1975 16.6 4.3 20.9 1976 16.6 4.0 20.6 1977 18.6 5.3 23.9
Notes: (*) At current market prices.
(**) As calculated for national accounts purposes (the figures include, for example, the MTR).
494 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
after the recession and only recovered in 1977. Looking at the longer period 1961 to 1977, there was a fall in the shares of both public and private domestic fixed capital formation in the middle years 1966 to 1971, compared with the earlier years 1961 to 1966. The improvement in the last few years 1971 to 1977 represents only a partial recovery to the earlier position.
12 However, consistent with its concentration on light industries with low capital intensity, which is in itself a consequence of the scarcity of land, Hong Kong has always tended to devote a lower proportion of GDP to investment in fixed capital than most of its Asian neighbours(9), and this trend seems to be continuing. But this is not to say that manufacturing industries in Hong Kong are necessarily under-capitalized and the capital utilisation factor here is certainly high.
(2) Economic Progress
13 In considering what a growth rate of GDP of 9% per annum in real terms means in terms of economic progress for the individual, it is necessary to adjust it for the population growth rate over the same period. As this was about 1.8% per annum(10) a growth rate of GDP per capita of 7.1% per annum is implied. This compares favourably with the 6.4% per annum recorded between 1961 and 1971 and both rates compare well with rates achieved elsewhere. (In 1977 GDP per capita at current market prices was $12,100; in 1971 it was $5,200; and in 1961 it was $1,900)(11).
14 During the period 1971 to 1977 Government consumption expenditure was, at 9.4% per annum, one of the fastest growing components of the GDP, surpassed only by Government spending of fixed capital formation which grew at about 20% per annum. These high growth rates mean that the income in kind provided by the Government, the so called social wage, has been increasing rapidly, particularly for the less well-off(12). This is evidenced by
(9) Gross domestic fixed capital formation as a percentage of the GDP (1973, current market prices):
Hong Kong 21.6 Taiwan 25.2
Japan 39.9 South Korea 26.0
Singapore 27.1 Philippines 19.8
Thailand 24.1
(10) Substantially lower than the 2.4% per annum recorded between 1961 and 1971.
(11) At constant (1966) prices:
1977 $5,850
1971 $3,880
1961 $2,090
(12) Hong Kong’s public expenditure policies are highly redistributive and the system of personal direct taxation is characterised by high thresholds. The salaries tax threshold for a single man is $12,500 p.a. and for a married man with two children is $31,087.
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 495
the improvements seen in many of the social services provided by the Government(13) and in the significantly improved social environment(14).
(3) Changing Structure of the Economy
15 A much publicised, but not very well documented, feature of the 1970s has been the shift of the Hong Kong economy into a development phase common amongst more developed economies: tertiary or service industries have begun to grow in relative importance while manufacturing industries have declined in importance(15). Even in 1971, manufacturing industries, although employing 47% of the labour force, contributed only 30% of the net output of the economy. Since then, these proportions have probably fallen to 44% of the labour force and 26% of net output. Meanwhile, tertiary industries have grown in importance: they contributed 56% of net output in 1971 and about 59% in 1977, whilst the proportion of the labour force they employed has risen from 36% to around 39%.
16 Thus, not only has there been a shift towards tertiary industries, but also this shift has been into industries offering a substantially higher output per head and almost certainly a substantially lower proportion of imported inputs
(13) For example, the proportion of the population housed in public housing estates rose from 37% in 1971 to 41% in 1977. Again, the number of secondary school pupils receiving subsidised education increased from 111,300 in 1971 to 242,200 in 1977. And in 1971-72 we spent $12.5 million only on public assistance but, in 1977-78, payments under the public assistance and disability and infirmity schemes will amount to $247 million.
(14) It is difficult to quantify improvements in the social environment collectively, but such improvements tend to be reflected in various aspects of the demographic structure of the population: for example, the infant mortality rate fell from 18 per 1,000 live births in 1971 to 17 per 1,000 in 1974 and to 14 per 1,000 in 1977 (c.f. in 1974 the UK: 16, the US: 17 and Australia: 17); again life expectancy at birth for men and women was 67 and 75 respectively in 1971 and 70 and 77 respectively in 1977. (These figures are comparable with European and North American countries).
(15) A rough indication of the shares of net output and employment is as follows: 1971 1977
Industry Output (%)
Employment (%)
Output (%)
Employment (%)
(1) Agricultural, fishing and mining 2 4 1 2 (2) Manufacturing 30 47 26 44 (3) Public utilities 2 1 2 1 (4) Construction 4 5 6 7 (5) Transport, storage and communications 6 7 6 7 (6) Wholesale and retail trade, restaurants
and hotels 20 16 23 20 (7) Financing, insurance, real estate and
business services 18 3 20 3 (8) Community, social and personal services 18 17 16 16 100 100 100 100
Note: (6) to (8) are tertiary or service industries.
496 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
in their gross outputs. Unfortunately, we do not know, as yet, the net contribution of tertiary industries to the current account of the balance of payments(16).
17 There is a danger in any analysis which attempts to consider individual industries and sectors of the economy in isolation that the essential interdependence of different industries and sectors will be forgotten. The development of manufacturing industries in our economy was facilitated by the prior existence of commercial and financial services established when Hong Kong was an entrepot. As manufacturing industries have prospered, these very service industries have themselves developed because of them and in support of them.
18 The growth of the financial services sector has been connected with the gradual change in the way in which Hong Kong’s trading and industrial concerns arrange to meet their capital requirements. For many years, they relied largely on retained profits and short term bank finance. Most firms were small and not very capital intensive and so had little need for long-term capital.
19 However, in the early 1970s, some took advantage of the greater activity in the stock market and raised equity capital through public issues. Although most industrial firms still rely on private share capital, retained profits and short-term bank finance, with the recent advent of more technologically advanced and generally more capital-intensive industrial processes, many have had to invest more heavily in fixed assets requiring a longer pay-back period. As a result, banks have been asked to provide longer term facilities and so the possibility of raising longer term finance direct, rather than through the banking system, has emerged. This growth in demand for longer term debt seems likely to continue.
20 What is perhaps really new in the Hong Kong context is the development of commercial, financial and other business services to meet the needs of other economies, primarily in the South East Asia region. There is, for example, an increasing number of overseas financial institutions doing business here and this contains the clear suggestion that at least some of our tertiary industries are now enjoying self-sustaining growth vis-a vis the domestic economy.
(4) The Adjustment Mechanism
21 So far I have dealt with the recent performance of our economy and developing changes in its structure. I must now consider the mechanism whereby our economy adjusts to variations in the world trading environment.
(16) See f.n. (40) below.
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 497
Between 1971 and 1977 the growth rate of the money supply was 18.2% per annum on the narrower definition, M1(17), and 18.3% per annum on the broader definition, M2(18). Over the same period, GDP in money terms grew at 17.2% per annum, the exchange rate appreciated by an amount equivalent to 1.2% per annum and the GDP deflator increased by 7.5% per annum.
22 Interpretation of these figures is difficult because, over the period, 1971-77, we moved from a fixed to a floating exchange rate regime, which involved substituting for an adjustment process that operated through changes in the money supply one that operates primarily through changes in the exchange rate. The Government through the Exchange Fund can still intervene in the foreign exchange market and, when that option is exercised, the adjustment will again take place, at least in part, through changes in the money supply(19).
23 When the exchange rate is freely floating, as it has been most of the time since November 1974, changes in the money supply become a consequence of the extent to which the Exchange Fund and the banks change their net spot foreign currency positions and of the changes in the level of bank lending; and, if the money supply is defined to exclude Government deposits, changes in the money supply will also be a consequence of whether the public sector is in surplus or deficit. However, the exchange rate and the money supply are still interdependent. This is because the banks take into account the demand for loans and advances and their own views about likely movements in the exchange rate in deciding whether or not they should acquire foreign currency assets.
24 With the adjustment process now working largely through the exchange rate, imbalances in the current account of the balance of payments, whether caused by a growth rate of GDP, and thus of imports, which is out of line with the growth rate of exports, or by some other factor, will tend to lead to shifts in the exchange rate. These will stimulate the necessary capital movements in the short-run and corrections in the real aggregates in the longer run.
(17) M1 is defined as notes and coins held by the non-bank private sector and their demand deposits (excluding 7 days’ call deposits), together with those of the public sector. (31 December 1971: $6,636 million; 31 December 1977: $18,082 million).
(18) M2 is defined as M1 plus savings and time deposits held by the non-bank private and public sectors. (31 December 1971: $21,359 million; 31 December 1977: $58,451 million).
(19) Should intervention freeze the exchange rate or reverse the trend in it, then the adjustment process would take place purely through the money supply. But, in practice, intervention is designed merely to mitigate and not prevent a movement in the exchange rate and so the adjustment process is shared between the exchange rate and the money supply.
498 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
25 Thus, when exports were advancing more rapidly than the GDP in 1975 and, more especially, in 1976 the effective exchange rate(20) appreciated(21). This made exports relatively more expensive in foreign currency terms and imports relatively cheaper in Hong Kong dollar terms. The result was a tendency for the gap between the growth rate of exports and the growth rate of GDP to close. This situation continued into the beginning of 1977, by which time the slackening in the growth of world demand for exports was, in any case, the dominant influence. At the same time, the increase in import prices in Hong Kong dollar terms slowed down(22) despite a continued increase in world export prices(23); and as domestic demand increased as a result of increased incomes generated by the 1975-76 export boom, the growth rate of imports exceeded that of exports(24).
(20) This is measured by the weighted average of the exchange rates of the Hong Kong dollar against the currencies of Hong Kong’s fifteen major trading partners.
(21) The effective exchange rate (18 December 1971=100) at each year’s end: 1971 99.1 1975 107.4 1972 98.1 1976 114.4 1973 103.7 1977 106.6 1974 105.9
Fluctuations in the effective exchange rate prior to the decision to float the Hong Kong dollar in November 1974 were due to changes in the relationship between the currency the Hong Kong dollar was then tied to, namely, sterling and later the US dollar, and the other currencies making up the basket of currencies used to calculate the rate. Since the decision to float, the effective rate has measured changes in the relationship between the Hong Kong dollar and the currencies in the basket used to calculate the rate.
(22) Hong Kong import price indexes (1973=100):
1976 1977
Q1 125 133 Q2 128 134 Q3 131 135 Q4 132 135
(23) World export price indexes (1970=100):
Q1 177 243 Q2 196 253 Q3 203 232 Q4 210 (still decreasing)
(24) Although there was also a slow down in the growth rate of imports because of the slow down in the growth rate of imports of raw materials and semi-manufactures, viz: Imports
Increase in quantity
terms
between:
Domestic exports %
Raw
materials
and semi
manufactures %
Food %
Con sumer goods %
Fuels %
Capital goods %
Total %
Q177/Q176 1 0 9 21 18 11 8 Q277/Q276 5 2 8 13 8 20 8 Q377/Q376 6 -1 1 16 10 0 4 Q477/Q476 8 14 3 13 －1 24 12 1977/1976 5 3 5 15 8 13 8
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 499
26 So, at the turn of the year, there was a reversal of the imbalance in growth rates of exports, on the one hand, and imports and GDP, on the other. There was, therefore, during 1977, a tendency for the overall balance of payments position to be in deficit. Thus, although the Government’s intervention in the foreign exchange market was very limited and the banks did not acquire foreign assets on a large scale, there was a net depreciation in the Hong Kong dollar. This amounted to 6.8%(25), as measured by the effective exchange rate index, although in terms of the US dollar alone there was little change. Other things being equal, this depreciation, by making exports relatively cheaper and imports relatively more expensive, will tend to correct this new imbalance(26).
27 Institutional factors and the leads and lags in the system affected the course of the adjustment process in the last two years. In 1976 the surplus on our overseas trading account, probably reinforced by an increased surplus on the balance of invisibles, generated pressures in the foreign exchange market which led to an effective appreciation of the Hong Kong dollar of about 6.5%(27). Particularly towards the end of 1976, this upward movement was reinforced by capital inflows, which were generated by the lagged adjustment of interest rates in Hong Kong to changes in interest rates elsewhere and the expectation of a further appreciation of the Hong Kong dollar.
28 With hindsight, the Hong Kong dollar probably appreciated too far in the last few months of 1976. By the beginning of 1977 this was a factor contributing to the weakening of our trade performance, but a factor of secondary importance compared with the general weakening of world demand.
29 The Exchange Fund entered the market at the beginning of 1977. It could be argued, again with hindsight, that we did too little too late but, whatever had happened to the exchange rate, capacity constraints within our economy would have prevented a further advance in the growth rate of the GDP on anything like the 1976 scale. Attempts by either the private or the public sector to achieve such a further advance would have resulted in price inflation. The correcting process of depreciation has continued throughout 1977 and is contributing to the elimination of the imbalance between exports and imports that exists at present(28). However, the rapid expansion of the
(25) That is, from 114.4 at the end of 1976 to 106.6 at the end of 1977.
(26) World export prices for the goods Hong Kong imports have been declining since the second quarter of 1977. So, despite a depreciation in the Hong Kong dollar, import prices in Hong Kong dollar terms have remained fairly constant.
(27) That is, from 107.4 at the end of 1975 to 114.4 at the end of 1976.
(28) 1977 ($ mn) 1976 ($ mn) Total exports (domestic exports and re-exports) 44,833 41,557 Imports 48,701 43,293 Balance of trade 3,868 1,736
Note: These figures are in trade accounts terms, not national accounts terms.
500 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
money supply through increased bank lending at relatively low interest rates may now be helping to keep up the level of domestic demand and so delaying the adjustment process.
30 Nevertheless, despite the leads and lags in the adjustment process, and the fact that the world environment does not move along a smooth and steady path, the adjustment process will always be tending to move the economy towards a state of internal and external equilibrium (admittedly, the operative word here is tending). Fortunately, support for the adjustment process is provided by the way the public accounts tend to move automatically into surplus during periods of rapid growth. Thus, in both 1976-77 and this financial year, our aggregate surpluses have had a stabilising effect on aggregate demand by reducing the money supply in the hands of the non-bank private sector, for they represented 30% of the increase in M1 during the two years ending 31 December 1977 and 11% of the increase in M2.
31 Our limited intervention in the foreign exchange market through the Exchange Fund and the preservation of the income-sensitivity of our fiscal system illustrate what I would regard as the correct role for the Government in the adjustment process, particularly if institutional and other factors are tending to frustrate the process. However, given the open nature of our economy, and the problems of accurately predicting its future course, this role does not enable us to avoid most of the cyclical behaviour imposed on our economy by shifts in the world trading environment.
PART II: PRESENT ECONOMIC POSITION AND PROSPECTS
(1) The Economy’s Performance in 1977(29)
(a) Gross domestic product(30)
32 The preliminary estimate of expenditure on the gross domestic product for 1977 in money terms, that is to say, at current market prices, is $54,444 million, representing a 15% increase over the (provisional) estimate of
(29) For a detailed review of developments in the economy in 1977, see The 1978-79 Budget: Economic Background.
(30) A note on the various estimates of GDP from the forecast released in the budget speech to the final estimate published in the half-yearly Economic Report for the following year but one is at Annex (1). In summary:
Forecast Budget Speech, 1978
Revised forecast Speech by the Financial Secretary at a public function around September, 1978
Preliminary Budget Speech and Economic Background, 1979 Revised Preliminary Half-Yearly Economic Report, 1979
Provisional Budget Speech and Economic Background, 1980 Final Half-Yearly Economic Report, 1980
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 501
$47,329 million for 1976(31). Although in last year’s budget speech(32) I forecast a 14% increase in GDP in money terms in 1977, which is fairly close to what the preliminary estimate now shows, I under-estimated the increase in real terms, that is to say, at constant (1966) prices, and over-estimated the increase in the general price level, as measured by the GDP deflator. So the increase in GDP in real terms was 12% compared with my forecast of 7%, and the increase in the deflator was only 3% compared with my forecast of 7%.
(b) Components of GDP
33 I shall now take each component of expenditure on the GDP separately and, unless I state otherwise, I shall be speaking in real or constant price terms. In last year’s Budget Speech, when forecasting private consumption expenditure for 1977, I said I was more persuaded by the view that there had been a shift in the relationship between income and consumption, following a world-wide trend(33), the view that consumption in 1977 would catch up with the income trend achieved in 1976. I consequently lowered the forecast of 14%, which was based on an econometric equation relating consumption to income, to 10%. The preliminary GDP estimates now suggest that the econometricians were right and common sense led me to a mistaken view. Private consumption expenditure in 1977 did reflect the rapid growth in incomes in 1976: it increased by 15% and was the GDP component which provided the main impetus to growth in 1977.
34 The Government’s consumption expenditure on goods and services(34) increased in 1977 by 13%, compared with the Budget Speech forecast of 10%(35).
35 Last year, in the Budget Speech, in forecasting investment expenditure, I tried to take account of the possible effects the uncertain economic prospects in and beyond 1977 might have on investment plans and gave a figure of 12% for the growth of investment in plant and machinery(36). However, the
(31) The latest estimates of the gross domestic product are as follows:
At current market prices
At constant (1966) market prices
$mn % increase $mn % increase
1975 (final) 37,268 5.7 20,230 2.9 1976 (provisional) 47,329 27.0 23,655 16.9 1977 (preliminary) 54,444 15.0 26,408 11.6 (32) B.S., 1977, paragraph 42.
(33) B.S., 1977, paragraph 33.
(34) Defined for national accounts purposes to exclude recurrent expenditure by such ‘trading departments’ as the KCR and the Post Office.
(35) B.S., 1977, paragraph 34.
(36) B.S., 1977, paragraph 36.
502 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
bunching of purchases of large items of transport equipment, such as ships and aircraft, during 1977 resulted in an increase amounting to 17%.
36 The preliminary estimate of investment expenditure on building and construction, which may still be subject to substantial revision, shows an increase of 34% in 1977(37). Although the increase is much higher than the forecast of 13% in last year’s budget speech(38), the absolute value of $3,000 million is not significantly different from the $3,100 million implied in the forecast. This is because the preliminary estimate for 1976 has been revised substantially downwards. In other words, the post-recession upsurge in building and construction activity accelerated in 1977.
37 In contrast to the buoyancy of domestic activity, the increase in (total) exports was 5% in 1977, three percentage points lower than the forecast of 8%(39). While this was chiefly the result of unexpectedly depressed demand for textiles and clothing in the markets of the EEC, an additional factor may have been that the strength of domestic activity in 1977 prevented the cost/price structure from adjusting sufficiently to make exports more competitive. The growth in imports in 1977 was 8% instead of the 10% I forecast, mainly due to the fact that there was very little growth in the import of raw materials and semi-manufactures, consistent with the state of export demand.
38 On the balance of exports and imports of services, as I said last year, the figures include quite a large token estimate which bears a fixed relationship with the total exports of goods(40). As a result, moderate growth in exports relative to imports will statistically lead to a surplus of invisible trade smaller than would otherwise be the case. In addition, the growth of expenditure abroad by Hong Kong residents in 1977 was more rapid than the growth of tourist expenditure in Hong Kong, thus reducing further the surplus. As estimated, the surplus of exports over imports of services in 1977 is the smallest experienced over the entire period 1961 to 1977 in both current and constant price terms.
(2) The Immediate Prospect
(a) GDP forecast for 1978(41)
39 So much for the economy’s performance in 1977. I turn now to my usual forecast for the year ahead of us, beginning with each component of expenditure
(37) To a total of no less than $6,500 million at current prices.
(38) B.S., 1977, paragraph 35.
(39) B.S., 1977, paragraphs 37-38.
(40) B.S., 1977, paragraph 39. Plans are, however, in hand to improve on the coverage and the quality of statistics relating to imports and exports of services.
(41) For a summary, see Annex (2).
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 503
on the GDP; and, again, I shall be speaking in real (or constant price) terms unless I state otherwise.
(i) Private consumption expenditure
40 There appears little doubt that the growth of private consumption expenditure will slow down in 1978. But, as the slowing down in the growth of incomes in 1977 compared with 1976 was only moderate, private consumption expenditure in 1978 should still remain buoyant with a growth rate above the average experienced over the period 1971 to 1977, namely, 8.4%. Private consumption expenditure in 1978 should grow by 10% (but, for the record, let me stress that a rate such as this can only be sustained, in the medium and long term, if there is a correspondingly strong growth rate of exports).
(ii) Government consumption expenditure
41 On the basis of the Draft Estimates of Expenditure for 1978-79 (Consolidated Account), I estimate that Government consumption expenditure on goods and services, as defined for national accounts purposes, will increase by 14%.
(iii) Gross domestic fixed capital formation
42 Turning now to gross domestic fixed capital formation: I expect the somewhat uncertain trading environment to have some effect on manufacturers’ plans to expand capacity. Furthermore, there were substantial increases in investment in plant and machinery in some manufacturing industries in 1976 (e.g. textiles) and in others in 1977 (e.g. electronics). So notwithstanding the need to trade up, to diversify and to take advantage of technical change, the growth rate in 1978 may be moderate. At the same time, the growth rate of investment in transport equipment and construction machinery should remain high. On balance, I forecast the growth rate of investment in plant and machinery in 1978 at 10%.
43 As for private investment in building and construction, I expect the growth rate of demand in 1978 to be rather less than in 1977(42). On the
(42) The increase in the floor area of building starts in 1978 is likely to be smaller than in 1977. This is indicated roughly by the total floor area of new buildings for which consents to commence work have been given: these increased by only 10% in 1977, compared with 38% in 1976. The amount of vacant commercial and office space, although declining in the past year or so, is still high; and, while vacant factory space was in short supply in 1976 and 1977, the amount available increased towards the end of last year to over one million square feet. The volume of starts for residential buildings for 1978 is likely to be affected by the 74% increase in the total floor area represented by the consents given in 1976. So the floor area of consents for residential buildings in 1977 fell by 15% compared with 1976.
504 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
other hand, the public sector’s and the MTR’s capital works programmes imply a desired increase in building and construction activity which is as rapid as that achieved in 1977, that is, at around 30% to 40%. I expect to see, therefore, in 1978, a further shift within overall building and construction activity in favour of the public sector.
44 The overall actual increase that can be achieved in 1978 depends, of course, on the capacity of the construction industry. The rapid growth in building and construction activity in 1977 was made possible by a rapid increase in employment in the industry: the number of on-site workers was, on average, 32% higher than in 1976. With the preliminary estimate of expenditure on building and construction in 1977 showing an increase of 34%, the implicit increase in productivity in 1977 was minimal and may be compared with an average of about 5% per annum during the period 1971 to 1976(43).
45 Towards the second half of 1977 the growth in employment in the building and construction industry appears to have slowed down(44) as unemployment for the economy as a whole fell to a low level(45) and as the decline in manufacturing employment ceased(46). As I do not expect the growth rate of exports in 1978 to be less than in 1977, and as the building and construction industry is relatively small, I think there will be scope for further increases in employment in 1978. In addition, as the large number of workers who joined the industry during 1977 become more skilled, the increase in productivity achieved in 1978 may be higher than in 1977. Against this somewhat complicated background, I expect construction employment to grow by about 15% and productivity about 5%. This becomes my forecast for the increase in investment in building and construction.
46 Thus, my forecast for the growth of gross domestic fixed capital formation as a whole in 1978 is 15%.
(43) Part of the reason for the low increase in productivity in 1977 may have been that the additional labour attracted to the industry was relatively unskilled. Also, despite the value of imports of construction machinery in 1977 being some 75% higher than in 1976, the increase in the capital stock of construction machinery would be less than the increase in employment and so the capital/labour ratio might have actually fallen in 1977, thus adversely affecting productivity.
(44) The increase during the fourth quarter of the year was 4%.
(45) 4.1% in September 1977.
(46) 1976 1977 March 698,787 756,320 June 748,846 775,841 September 778,788 758,299 December 773,746 755,108
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 505 (iv) Exports
47 Any forecast of exports depends on developments in our overseas markets, on the ability of exporters to take advantage of these developments, and on the willingness of overseas governments to permit their markets to be supplied by Hong Kong. A detailed examination of the prospects for the growth in our various markets in 1978 was undertaken for the purpose of making an econometrically based forecast of growth in total exports. All I need say here is that the outlook for the US economy in 1978 is moderately buoyant, but with some uncertainty for the latter half of the year. The growth rate of the United Kingdom economy is expected to improve, led by an improvement in consumer demand. All the available forecasts for the German economy, however, show very little growth.
48 Although our domestic exports of textiles and clothing will be affected by recently negotiated quota restrictions, albeit perhaps less severely in 1978 than later on, the possibility of further trading-up remains and the prospects for exports of goods other than clothing and textiles continue to be good. The forecast is, therefore, for domestic exports to grow in 1978 by 5%. I expect re-exports to grow faster at 8%, giving a forecast for total exports of goods of 6%.
(v) Imports
49 I forecast a 9% growth of imports in 1978 with a relatively more rapid growth of imports of consumer goods and capital goods, consistent with my forecasts for private consumption expenditure and investment in plant and machinery.
(vi) Exports and imports of services
50 It is difficult to offer a precise forecast for the balance of exports less imports of services. Taking account of the possibility of an increase in tourist expenditure in Hong Kong of about 10% and a continuation of the increase in spending abroad by Hong Kong residents(47), I forecast a 10% increase in exports less imports of services. This is consistent with the assumptions used in my forecast for private consumption expenditure.
(vii) Stocks
51 Stock adjustments are also difficult to forecast, but I forecast that stocks in 1978 will grow in line with exports, that is to say, at a rate of 6%.
(47) The preliminary GDP estimates show an increase in expenditure abroad by Hong Kong residents in 1977 of about 20% to 25%.
506 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 (viii) Total expenditure on GDP
52 So the gross domestic product, as a result of these expected changes in the components, is forecast to increase by 9% to a value in terms of constant (1966) prices of $28,800 million. But in view of the margins of error associated with the component forecasts, I am using this only as a shorthand for a range between 8% and 10%.
(b) Prices
53 World prices for primary products are forecast on the whole to remain fairly stable with food prices falling slightly as a result of good harvests, and prices for raw materials and metals and minerals rising slightly. World prices for manufactures are forecast to increase by 6% in 1978. On the assumption that the exchange value of the Hong Kong dollar will be stable during 1978, I expect consumer prices generally to increase by about 5% with higher increases for housing and some personal services.
54 The price increases of the other components of the GDP combine with this forecast increase in consumer prices to give a deflator of 7%. There are two reasons why I think the deflator will be higher in 1978 than the increase in consumer prices. First, investment prices will be higher than this at 10% due to higher building and construction costs (+13%)(48) and higher import prices for capital goods (+7%). Secondly, I expect export prices to increase slightly faster (+5%) than the increase in import prices (+4%) partly reflecting quality upgrading, which may not be fully accounted for by our quantum indexes of exports, and partly reflecting increases in labour costs. So my forecast for the growth rate of GDP at current prices is 17%(49), bringing it to a value of $63,500 million.
(48) The movements in the prices of construction materials in 1977 were such that the effect of the rapid increase in wage rates for construction workers on overall costs was partly offset; so much so that the heavy load put on to the building and construction industry does not appear to have been inflationary(*). But, in the last quarter of 1977, prices for construction materials began to rise and overall costs have, as a consequence, started to accelerate(**). This acceleration, if sustained, is worrying. But, as the movement of prices of construction materials reflects world price movements, the outlook for which does not appear to be particularly unfavourable, it may be that the increase in local prices of construction materials in recent months will prove to be a temporary phenomenon. However, as the increase in construction costs in 1978 will be about 13%, careful monitoring by those concerned in the public sector will be vital(***).
Notes: (*) The labour and materials cost index prepared by the Public Works Department was, on average, 10% higher in 1977 than in 1976.
(**) The Tender Price Index, prepared by the Public Works Department, for the fourth quarter of 1977 was 35% higher than for the same quarter in 1976.
(***) Central Tender Board and the Public Works Priority Committee.
(49) That is, 1.09× 1.07=1.17.
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 507 (3) The Outlook for the Forecast Period, 1979 to 1981
(a) Shift to protectionism
55 The GDP forecast for 1978, at 9% in real terms, is the same as the trend growth rate experienced between 1961 and 1977, but is higher than the rate I believe we can expect to maintain through to the mid-1980s.
56 The question is whether domestic exports will grow fast enough in the future to sustain the present trend growth rate of the GDP. Following the conclusion of the rather restrictive textiles agreements with the United States, the EEC and other countries, the growth prospects for exports of textiles and clothing are definitely less than would otherwise be the case. Although, as far as textiles and clothing exports to the EEC are concerned, the immediate effect in 1978 has already been discounted to a great extent by virtue of the relatively low level of exports in 1977, the new agreements are such that both growth and flexibility provisions for the next five years have been reduced substantially. This shift to protectionism is most worrying for, after all, textiles and clothing do represent about half of Hong Kong’s domestic exports at present.
57 Its consequences in terms of the growth rate of the economy must depend on Hong Kong’s ability both to trade up in textiles and clothing and to find new markets for these traditional exports; and to develop markets for other products. I suspect that, at our stage of development, we may find that the scope in respect of textiles and clothing is limited. If this turns out to be so, then Hong Kong is unlikely to be able to rely on this industry contributing as much in real terms to the growth rate of exports, and thus of GDP, as it has in the past. Supposing, as may well be the case, the growth rate of exports of textiles and clothing in real terms is halved, then, to maintain our desired growth rate of GDP, exports of other products might have to increase by something over 12% per annum (compared with a recent trend of 8%). A shift to such products would involve greater uncertainty. For example, our experience with electronics indicates we shall tend to depend on sudden developments in technology. Then again, many of these products are far more durable than the products of the textiles and clothing industries; and the markets for them are more easily saturated. Furthermore, in many cases, Hong Kong lacks the advantage of a lead in terms of experience, one of the many points which the Advisory Committee on Diversification will be dealing with(50).
(b) Trend growth rate
58 As far as general conditions for world trade are concerned, the forecast for the three years 1979 to 1981 at present appears to be moderately expansionary,
(50) It is hoped that the Advisory Committee will be in a position to report on its terms of reference, which are at Annex (3), by the middle of the year.
508 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
pansionary, although there are uncertainties concerning the economies of the United States and Germany. One promising feature is that the outlook is for the rate of inflation to continue to fall. The implication of this is that there may be less opposition to expansionary policies than would otherwise be the case. But the main uncertainty remains: to what extent will Hong Kong be able and, perhaps more important, be allowed to take advantage of any growth in world trade that results from these policies? Thus a question mark now hangs over the extent to which we can maintain into the mid-1980s the 7% growth rate of GDP per capita, which we have enjoyed so far in the 1970s
59 A further factor which will, in any case, slow down the growth rate of GDP by the mid-1980s is the slow down in the growth rate of the population of working age from the present 3% per annum to just over 1%.
PART III: THE STATE OF THE PUBLIC FINANCES, 1974-75 TO 1977-78(51) (1) 1976-77 Accounts
60 So much, Sir, for the state of our economy and our prospects as I see them at this moment in time. I must now report to Honourable Members on the present state of the public finances.
61 I budgetted for a deficit of $355 million in 1976-77 which I reckoned could be legitimately financed from our reserves(52). In the event, this was not necessary as the final accounts showed a surplus of $902 million, or 12% of total revenue, even better than the $850 million I predicted in last year’s Budget Speech(53). The surplus on recurrent account was more
(51) All expenditure figures (Amounts and percentages), quoted both here and in Parts IV and V, refer to the General Revenue Account only, that is to say, they are exclusive of all transactions of the Urban Council financed by the Urban Council Rate and the yield from fees and charges levied by the Council and the Housing Authority’s rent income and borrowings from the Development Loan Fund. But transfers from the General Revenue Account to the Development Loan Fund are included.
(52) B.S., 1976, paragraph 205.
(53) B.S., 1977, paragraph 64. Revenue at $7,493 million was 9% higher than my original estimate of $6,857 million, but expenditure at $6,591 million was below the approved estimate of $7,212 million by $621 million, or nearly 9%, all but $65 million being on capital account. In summary:
$ mn $ mn
O/A.E. F.A. O/A.E. F.A.
Recurrent Account:
Revenue 6,369 6,849 ― ― Expenditure 5,289 5,224 +1,080 +1,625 Capital Account:
Revenue 488 644 ― ― Expenditure 1,923 1,367 -1,435 -723 Overall deficit/surplus ― ― - 355 + 902 Notes: O/A.E. = Original/Approved Estimates
F.A. = Final Accounts
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 509
than sufficient to finance the whole of capital expenditure. Even so, recurrent expenditure at 79% of total expenditure was out of balance, and would have been so even with a better performance on capital account(54).
(2) Revised Estimates for 1977-78
(a) Outturn
62 This year 1977-78, after taking into account my revenue proposals(55), the difference between estimated expenditure of $8,245 million and estimated revenue of $8,275 million was only $30 million. Effectively, therefore, I budgetted for a balance.
63 The revised estimates of revenue and expenditure for 1977-78(56) are $9,231 million(57) and $8,160 million respectively. Thus, the year’s operations will result in a surplus of $1,075 million(58). This figure is fairly close to
(54)
$ mn % Guideline
(1) Recurrent revenue 6,849
Total expenditure = 6,591 = 104 At least 88% (2) Recurrent expenditure 5,224
Recurrent revenue = 6,849 = 76 No more than 80% (3) Surplus on recurrent account 1,625
Capital expenditure = 1,367 = 119 At least 60% (4) Recurrent expenditure 5,224
Total expenditure = 6,591 = 79 No more than 70% (5) Capital revenue 644
Capital expenditure = 1,367 = 47 At least 20%
(55) Involving a loss of $137 million: see B.S., 1977, paragraphs 189-222 and B.S., 1977, paragraphs 95-101.
(56) As shown in the Estimates for 1978-79, but excluding from revenue the premia for the Mass Transit Railway Corporation’s Kowloon Bay Depot site and for the six sites being developed in Phase I of the Home Ownership Scheme, and excluding from expenditure the same amounts transferred to the Mass Transit Fund and the Home Ownership Fund. The amounts concerned in these transactions are $335 million and $528 million respectively.
(57) Excluding the drawdown of a sum of $27 million from the Hongkong and Shanghai Banking Corporation Consortium Loan for the Sha Tin Urban Development (Housing) Project (see Memorandum Note on Asian Development Bank Loans on page 796 of the Estimates).
(58) $ mn $ mn O/A.E. R.E. O/A.E. R.E.
Recurrent Account:
Revenue 7,339 8,074 ― ― Expenditure 6,236 6,248 +1,103 +1,826 Capital Account:
Revenue 936 1,161 ― ― Expenditure 2,009 1,912 -1,073 -751 Overall surplus ― ― + 30 +1,075 Notes: O/A.E. = Original/Approved Estimates
R.E. = Revised Estimates
510 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
the estimate of the surplus derived from the Treasury’s cash book at 16 February last, but not quite close enough. Accordingly, when considering our financial position at 1 April next, I shall be using a figure of $1,150 million being my prediction of the surplus. But even a surplus of $1,075 million, equal to 11.6% of total revenue, is rather remarkable, even for this very remarkable place, and so it deserves an explanation, particularly as it is the highest on record(59). (laughter) In broad terms, it results from an unexpected flush of revenue rather than a failure of expenditure.
(b) Revenue
64 At $9,235 million the revised estimate of revenue for 1977-78 exceeds the original estimate of $8,275 million by $960 million, or by 12%.
65 Recurrent revenue is up by a net $735 million, or by 10%, on the original estimate(60). No less than $449 million of this excess is due to my underestimating the marked effect of the sharp recovery in 1976 on earnings and profits taxes and the growing efficiency of the Inland Revenue Department(61); and bets and sweeps taxes yielded $70 million, or 25%, more than the original estimate. (laughter)
66 Capital revenue is up by $225 million, or by 24%, on the original estimate as premia from land transactions have yielded $199 million more than I expected, thanks to a larger number of modifications and re-grants, higher land prices(62) and a pronounced tendency for premia to be paid in lump sums rather than by annual instalments. Estate duty yielded $17 million more than expected.
(c) Expenditure
67 At $8,160 million the revised estimate of expenditure for 1977-78 is, for the third year running, less than the approved estimate(63), but this time
(59) Compare recent years:
Surplus ($ mn) % of total revenue
1975-76 224 3.6 1976-77 902 12.0 1977-78 1,075 11.6
In the first year of the four year period being used for comparative purposes (1974-75), we incurred a deficit of $380 million which represented 6.4% of total expenditure. (60) For a detailed analysis of the differences between the revised estimates of revenue and the original estimates see the Memorandum Notes on the Revenue Estimates.
(61) See also paragraph 156 below.
(62) $670 million was realised from the sale of 90 acres of non-industrial land and 20 acres of industrial land.
(63) $ mn 1975-76 －583 1976-77 －621 1977-78 －85 (1974-75 +508)
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 511 by only $85 million(64), or by only 1% of the approved estimate of $8,245 million.
68 On recurrent account, there is net over-spending but of $12 million only, despite the 1977 salaries revision which cost us $260 million, because of savings in most personal emoluments subheads. It took longer than expected to fill new and vacant posts. On capital account, there is net under-spending of $97 million(65). Although this is after a transfer from revenue of $100 million to the Development Loan Fund to enable on-lending commitments to the Housing Authority to be met(66), it represents a very much better performance than in the last two years: in 1976-77, we underspent by $556 million and, in 1975-76, by $415 million.
69 However, under-spending on capital account of, in effect, nearly $200 million needs to be explained. I am glad to say it can be, quite satisfactorily. Departmental special expenditure is down by $62 million on the approved estimate largely because of delayed deliveries and I over-provided $44 million for the Home Ownership Fund. Under-spending on the two Public Works Programme components of the capital account is down by $109 million only on the approved estimates, or by 7% only compared with 30% and 22% in the last two years (1976-77 and 1975-76).
(64) However, this under-spending has occurred despite net supplementary provision of $238 million. That is, supplementary provision of $798 million up to 15 February 1978, minus frozen provision of $560 million (of which $100 million has been found from Head 50 Miscellaneous Services Subhead 100 Additional commitments).
(65) Approved Estimates
Component 1977-78 ($ mn)
(1) Public Works Programme (other than New Towns and
Revised Estimates 1977-78 ($ mn)
Housing) 833 745 (2) Public Works Programme (New Towns and Housing,
including a transfer of $100 million from General
Revenue to the Development Loan Fund for on-lending to
the Housing Authority) 631 710 (3) Subventions 88 87 (4) UPGC 57 53 (5) Departmental Special Expenditure 158 96 (6) Defence Costs Agreement: Capital Works 28 23 (7) Home Ownership Fund 103 59 (8) Miscellaneous 111 139 2,009 1,912 (*)
Note: (*) See f.n. (56) above.
(66) Included as a commitment without provision in the Estimates for 1977-78 (see Head 50 Miscellaneous Services Subhead 357 Payment to Development Loan Fund).
512 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 (3) Financial Position
70 So I estimate that our fiscal reserves(67), which stood at $3,713 million at the beginning of this financial year, will stand at $4,890 million at the beginning of the financial year ahead of us(68).
71 On the basis of a gearing of three we need to earmark at least $3,200 million of our reserves to secure our contingent liabilities which will stand at around $6,400 million at 31 March 1979 (that is to say, at the end of the coming financial year) rising to $9,500 million by 31 March 1982 (that is to say, at the end of the new three year forecast period). That leaves $1,690 million for short term difficulties and to finance our seasonal deficits. At 16.5%, this is a little better than our guideline of 15% of estimated expenditure in the ensuing year(69).
72 Incidentally the available assets in the Development Loan Fund and the Lotteries Fund are not included in our fiscal reserves for they are committed to approved loan allocations(70). Nor are the net proceeds from the sale of our gold coins: when the accounts for the Year of the Horse coin have been finalized the surplus in the Special Coin Suspense Account will be $53 million. It may be safely assumed that only a very few coins will be returned
(67) That is, the balances available for appropriation, if need be, over and above the general revenues of the Colony as represented by the General Revenue Balance, which is the excess of the Government’s financial assets over its short term liabilities.
(68) That is, $3,713 million + predicted surplus of $1,150 million + $27 million being the loan drawdown referred to in f.n. (57) above = $4,890 million. It should be noted that it is no longer necessary to take account of differences in exchange values and changes in the book values of fixed interest bearing investments for virtually all the General Account’s foreign currency balances are now held by the Exchange Fund against interest bearing certificates of indebtedness: see B.S., 1976, paragraphs 75-84.
(69) B.S., 1977, paragraphs 105-107.
(70) Available assets in the Development Loan Fund at 1 April 1978 will be $122 million against outstanding allocations of $1,097 million, of which $933 million is for housing (*), $13 million for non profit making schools, $37 million for loans to students and $97 million for the Industrial Estates Corporation. As the available assets in the Fund are not sufficient to meet the anticipated calls to be made on the Fund during 1978-79, estimated at $525 million, a sum of $400 million has been entered in the commitment and provision columns under Head 52 Miscellaneous Services Subhead 360 Payment to Development Loan Fund (see page 341 of the Estimates). Available assets in the Lotteries Fund at the same date will be $45 million to which must be added estimated receipts during the year of $22 million. Payments in 1978-79 against approved and new allocations are likely to be $24 million, leaving a balance in the Fund of $43 million at 31 March 1979. Outstanding allocations will amount to only $13 million. However, it is expected that, by the end of the forecast period, the accumulating surplus in the Fund will have been exhausted.
Note: (*) Housing Authority ($866 million for public housing and $20 million for the commercial elements of the Home Ownership Scheme); Housing Society ($30 million for the Urban Improvement Scheme); Local Government Officers Housing Scheme ($10 million); and Hong Kong Building and Loan Agency Ltd. ($7 million for guaranteed notes).
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 513
to the Treasury for redemption and so, eventually, this surplus will be available for public purposes; and, indeed, $13 million has already been earmarked for the Morrison Hill Indoor Stadium. When the Lunar New Year series is completed the surplus in the Suspense Account should be in excess of $200 million. So this venture is proving to be quite profitable and we have in mind, also, making a few extra dollars by selling a high quality display case for the serious collector(71). (laughter)
(4) Assessment of Performance, 1974-75 to 1977-78
(a) Introduction
73 Having brought Honourable Members up to date, as it were, with the state of our accounts I shall now set our performance in 1977-78 in the context of the four years 1974- 75 to 1977-78.
(b) Total expenditure
74 In the year 1974-75 we reached a plateau of expenditure, for the 1975-76 budget had to reflect the slowing down in the growth rate of the economy(72) and our expenditure performance in 1976-77 was disappointing: the increase was only 9%, whereas I budgetted for an increase of 16%(73). In 1977-78, I budgetted for an increase of 20%(74), but we shall achieve an increase of 24%(75).
75 Over the four years 1974-75 to 1977-78, therefore, total expenditure in money terms has grown from $5,973 million to $8,160 million, or by 37%. In real terms, that is to say at constant (1966) prices, this is equivalent to about 20%. In terms of our steady-progression guideline, which ‘requires’ us to achieve an average annual increase of 10% in real terms(76), our
(71) In my 1976 budget speech (B.S., 1976, paragraph 92), I outlined a proposal under consideration at that time, under which the Government would offer a gold coin certificate for sale. This certificate would guarantee the owner either a proof or a circulated coin each year. At that time, I had no idea that there would be any serious legal problems with the proposal. But there are, and they appear to be insurmountable.
(72) Expenditure in 1975-76 was held at virtually its 1974-75 level: $6,023 million compared with $5,973 million, an increase of only 1%. I actually budgetted for a deficit in 1975-76 of $431 million, but a combination of lower than expected tender prices, few claims under fluctuation clauses and physical delays led to under-spending of $415 million on capital account. See also Annex (4).
(73) That is, estimated expenditure in 1976-77 of $7,212 million on the revised estimate of expenditure in 1975-76 of $6,222 million.
(74) That is, estimated expenditure in 1977-78 of $8,245 million on the revised estimate of expenditure in 1976-77 of $6,843 million.
(75) That is, the revised estimate of expenditure in 1977-78 of $8,160 million on actual expenditure in 1976-77 of $6,591 million.
(76) B.S., 1977, paragraph 103.
514 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
performance in these years was rather uneven, not surprisingly in view of the fluctuations in our economic situation. In 1974-75, total expenditure in real terms increased by 11%, fell to less than 1% in 1975-76, recovered somewhat to 3.4% in 1976-77 and then jumped―as intended(77)―to nearly 16% in real terms this year.
(c) Recurrent and capital expenditure
76 Recurrent expenditure has grown from $4,175 million in 1974-75 to $6,248 million in 1977-78 (revised estimate), or by nearly 50%. In real terms, this is the equivalent of 28%. Capital expenditure has increased from $1,798 million in 1974-75 to $1,912 million in 1977-78 (revised estimate), or by 6% only, which is about equal to the increase in the relevant costs over the period.
77 Despite the unevenness of our progress the guidelines relating to the construction of the budget were largely observed over the period as a whole, the exception being the balance between recurrent and capital expenditure(78).
(d) Recurrent revenue and the financing of the capital account
78 Recurrent revenue increased from $5,156 million in 1974-75 to $8,074 million in 1977-78 (revised estimate), or by 57%. Discounting the net effect of the revenue proposals in each of these four years, the increase was only 46%, being 4% in 1975-76, 16% in 1976- 77 and 21% in 1977-78 (revised estimate). Capital revenue averaged $425 million in the first two years of the period, rose to $644 million in 1976-77 and then nearly doubled to $1,161 million in 1977-78 (revised estimate).
(77) B.S., 1977, paragraphs 109 and 122.
(78) Average of
1974-75 to 1977-78 % Guideline
(1) Recurrent revenue
Total expenditure 97 At least 88% (2) Recurrent expenditure
Recurrent revenue77.5 Not more than 80% (3) Surplus on recurrent account
Capital expenditure 87.5 At least 60% (4) Recurrent expenditure
Total expenditure 75 Not more than 70% Capital revenue
Capital expenditure 40 At least 20%
Note: In 1974-75, the deficit year, guidelines (1), (2) and (3) were breached quite seriously: 86%, 81% and 55% respectively.
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 515
79 As a result of these trends the surplus on recurrent account was more than sufficient to finance the deficit on capital account in three years out of the four, and so we ran overall budget surpluses. By contrast, in 1974-75, the surplus was insufficient to finance the deficit on capital account even though capital revenue exceeded the guideline of 20% of capital expenditure(79) and so we ran in that year an overall budget deficit.
PART IV: THE OUTLOOK FOR THE PUBLIC FINANCES, 1978-79 TO 1981-82 (1) Forecast of Revenue and Expenditure
(a) Introduction
80 So much for the past four years. I shall now take an overall view of the outlook for the public finances in the next four years 1978-79 to 1981-82 before proceeding to present in detail the budget for 1978-79. This overall view is based on a forecasting exercise undertaken by the Finance Branch last autumn(80), the figures for the first year (that is to say, the coming budget year) being the starting point in the preparation of the Draft Estimates.
(b) Method of compilation
81 The forecast of recurrent revenue was, as usual, based on existing tax rates and charges and on assumed growth rates, and was expressed in terms of 1977 values. Capital revenue accrues mainly from land sales and, although more information is now available about land production as a result of the efforts of the Special Committee on Land Production(81), somewhat arbitrary assumptions had to be made for sales proceeds(82).
82 For the purpose of forecasting total expenditure (at 1977 prices), departments were required to submit returns which distinguished between, on the one hand, commitments in respect of maintaining and expanding present
(79) Guideline 1974-75 1975-76 1976-77 1977-78 %%%%
(3) Surplus on recurrent account
Capital expenditure 55 88 119 95 (5) Capital revenue
Capital expenditure 24 26 47 61 (80) See Annex (5).
(81) See f.n. (99) below and Annex (6).
(82) For example, the extent to which sales in the New Territories might be in the form of Letter B exchanges and the extent to which developers opt for payment by instalments.
516 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
services(83); and, on the other hand, new services(84) but, in the nature of things, there are bound to be other new services fed into the system during the forecast period.
83 The figures for recurrent expenditure were then adjusted upwards by the Finance Branch for the 1977 salaries revision and corrected for errors and omissions. In preparing the figures for capital expenditure, the Finance Branch had regard to the guideline figures (updated to 1977 prices) laid down in last year’s budget speech for the then forecast period(85). Further adjustments were made to both sets of figures to take account of commitments arising from policy intentions which subsequently became known to the Finance Branch.
(c) Results
84 I shall refrain from imposing on Honourable Members an analysis of the results of this exercise in detail(86), vital though it is to sound management of the public finances and, in particular, to the construction of the budget for the immediately ensuing year. Suffice it to say, that the exercise threw up an overall deficit of $790 million in 1978-79 and further deficits of $570 million and $400 million in the first two years of the forecast period. By 1981-82, there is a surplus of $630 million, reflecting a tailing off in departmental expectations together with the fact that recurrent revenue has been projected right forward on the basis of assumed growth rates.
(2) The Budget for 1978-79
(a) Underlying considerations of budgetary policy
85 When constructing the budget for 1978-79 against the background of this forecast exercise, I bore in mind six considerations: first, the likely level of the gross domestic product in 1978(87); secondly, the importance of achieving
(83) Appendices I-IV referred to in the circular at Annex (5).
(84) Appendices I-VI, ibid.
(85) B.S., 1977, paragraphs 99-101.
(86) 1978-79 ($ mn)
Recurrent Account:
1979-80 ($ mn)
1980-81 ($ mn)
1981-82 ($ mn)
Revenue 8,400 9,170 10,000 10,960 Expenditure 7,280 7,510 7,980 8,430 Surplus +1,120 +1,660 +2,020 +2,530 Capital Account:
Revenue 1,130 990 920 930 Expenditure 3,040 3,220 3,340 2,830 Deficit -1,910 -2,230 -2,420 -1,900 Overall position -790 -570 -400 +630 (87) $63,500 million at current prices or $28,800 million at constant (1966) prices.
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 517
a growth rate of public expenditure in real terms next year high enough to bring the average growth rate over the five year period 1974-75 to 1978-79 up to the 10% guideline defining steady progression; thirdly, the state of our fiscal reserves; fourthly, the different monetary consequences of a public sector (Consolidated Account) which is in balance, deficit or surplus; fifthly, the guidelines which define the desirable relationship between recurrent and capital expenditure and the role which recurrent revenue should play in the financing of the capital account; and, finally my final explanation, the absolute levels at which the various components of the capital account should be fixed(88).
(b) Revenue Estimates(89)
86 The forecast of total revenue in 1978-79 compiled last autumn was $9,530 million, but the Revenue Estimates as printed anticipate collections of $10,366 million, such is the speed at which figures can change in Hong Kong.
87 At $9,130 million the estimate of recurrent revenue represents an increase of $1,056 million, or 13%, over the revised estimate for 1977-78 of $8,074 million.
88 Earnings and profits taxes account for $3,990 million, or 44%, of total recurrent revenue. This represents an increase of $615 million, or 18%, over the revised estimate for 1977-78 of $3,375 million (which was $676 million, or 25%, up on actual collections in 1976-77 thanks to the surge of incomes in 1976, the first year of recovery after the recession).
89 The yield from General Rates is estimated at $795 million, an increase of $85 million, or 12%, over the revised estimate for 1977-78 of $710 million. This increase allows for the effect of the second year of the scheme designed to cushion the impact of the new valuation list applicable from 1977-78(90). There are also the further extension of rating in the New Territories(91) and the yield from new developments in the urban areas which will become liable to rates for the first time in 1978-79.
90 The yield from stamp duties is estimated at $550 million, an increase of $60 million, or 12%, over the revised estimate for 1977-78. This is almost
(88) See f.n. (123) below.
(89) For full details see Memorandum Notes in the printed Revenue Estimates. (90) B.S., 1977, paragraphs 201-205.
(91) See Annex (7). A Resolution under Section 18 of the Rating Ordinance will have to be made in early March to establish the percentage rates applicable in specified rating areas in order to give effect to the policy of phasing in the full rates charge in rating areas of the New Territories (See B.S., 1976, paragraph 187).
518 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
entirely due to additional assignments of property which will contribute nearly 55% to total stamp revenue, about the same as in 1977-78, but well up on the previous three years(92).
91 Reflecting the prosperity of the post-recession years, as well as the introduction of the Mark Six Lottery in September 1975, the higher rate of duty of 11% on exotic bets(93) and the growing use of the Jockey Club’s off-course betting facilities(94) and telephone betting accounts, revenue from bets and sweeps taxes are estimated to yield no less than $480 million in 1978-79. This represents an increase of $135 million, or 39%, over the revised estimate for 1977-78 of $345 million(95).
92 The estimated yield from excise duties in 1978-79 at $730 million, compared with the revised estimate of $711 million for 1977-78, is disappointing. After the various increases in duties in 1974, 1975 and 1976(96), we seem to have reached a plateau of yields(97). The estimated yield from excise duties next year will contribute only 8% to total recurrent revenue compared with 9.2% in 1974-75.
93 My estimate of capital revenue is $1,236 million, which is an increase of $75 million on the revised estimate for 1977-78 of $1,161 million. This increase is made up of an additional $120 million for tax concessions and $15 million for estate duty and a decrease of $61 million from land sales, private treaty grants, modifications and re-grants.
(92) 1976-77: 47%; 1975-76: 35%; 1974-75: 28%.
(93) That is, quartet, double quinella, six-up and treble bets.
(94) Introduced progressively since 22 December 1973.
(95) As a matter of interest, the estimated yield next year is five times actual revenue from this source in 1974-75. Bets and sweeps taxes will thus contribute 5.3% to total recurrent revenue in 1978-79 compared with 1.9% four years ago.
(96) 27 February 1974: liquor and tobacco
26 February 1975: liquor and tobacco
3 December 1975: liquor and tobacco
25 February 1976: hydrocarbon oils.
(97) After increasing by 22% in 1976-77, yields increased by only 4.4% in 1977-78 (revised estimate) and are estimated to increase by only 2.7% in 1978-79, viz:
Hydrocarbon
Alcohol ($ mn)
Tobacco ($ mn)
Oils
($ mn)
1974-75 154 184 135 1975-76 199(*) 218(*) 141 1976-77 242(*) 250(*) 189(*) 1977-78 (Revised Estimates) 254 248 209 1978-79 (Estimates) 260 255 215
Note: (*) Reflecting economic recovery as well as increased rates of duty.
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 519
94 But, at $874 million, expected revenue from land transactions is buoyant by historical standards(98). Land sales as such should yield $669 million. Approximately 68 acres of non industrial land and 20 acres of industrial land will be sold, compared with 98 acres and 17 acres respectively this year and 37 acres and 99 acres last year. Fortunately, the outlook for the three forecast years is better than this, at least in terms of land production (which may not be the same thing as land sales)(99). A note on land production is at Annex (6) to the printed version of this speech.
(c) Draft Expenditure Estimates
95 After the total of the forecast submissions for recurrent expenditure in 1978-79 had been adjusted upwards for the 1977 salaries revision and downwards as a result of Finance Branch scrutiny(100), a figure of $7,280 million emerged. Commitments in respect of maintaining existing services, expanding these to meet increased demand at existing standards, and extending them within approved policies where timing had been specifically agreed, came to $6,960 million(101). Thus the submissions contained proposals for recurrent expenditure on essentially new services in 1978-79 costing $320 million.
96 Heads of departments were then advised to prepare their Draft Estimates submissions for commitments on existing services within the figure of $6,960 million which, however, was approximately 83% of the estimate then before me of recurrent revenue.
(98) Thus: $ mn 1974-75 287 1975-76 346 1976-77 557 1977-78 (Revised Estimate) 935 1978-79 (Estimate) 874
(99) According to the Report of the Special Committee on Land Production, the following is the outlook for the forecast period:
Non-industrial(*) (acres)
Industrial (acres)
1979-80 350 537 1980-81 321 431 1981-82 406 353 Note: (*) i.e., for private development.
(100) Reductions and corrections were made for unrealistic assumptions about recruitment, inadequate allowance for previous spending performance, arithmetic errors, wrongful inclusion of new proposals, etc.
(101) The limits within which departments were advised to prepare their submissions were provisional only: on the one hand, they were still subject to further Finance Branch scrutiny but, on the other, there was still a possibility of heads of departments being invited to submit subsidiary estimates in respect of new proposals. See Appendices V-VI referred to in the circular at Annex (5).
520 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
97 Nevertheless, despite the Speech as the guideline, having regard to the likely outturn for 1977-78, the likely size of the capital account in 1978-79, and several policy decisions in the social welfare and secondary education fields taken after the forecast returns had been submitted I took the view that some $220 million could be afforded for new proposals contained in the forecast submissions in 1978-79. Following advice from the Chief Secretary’s Committee, certain departments were invited to submit subsidiary estimates for those high priority proposals for new services caught within this figure of $220 million. The total of departments’ main estimates, based on the provisional acceptable levels of expenditure previously given to them, and their subsidiary estimates, finally came to $7,323 million(102).
98 The Finance Branch took as their starting point for the preparation of the estimates of capital expenditure the guideline figure of $3,050 million which I suggested last year would be acceptable(103). This guideline figure envisaged expenditure of $2,300 million on the two Public Works Programme components of the capital account and $750 million on all other components. The guideline figures for the two Public Works Programme components were then updated to 1977 prices and so became $2,530 million. Having regard to the spending capability of the Public Works Department and the Housing Authority, a figure of $2,008 million was eventually inserted in the Draft Estimates. A figure of $935 million was inserted for all other capital expenditure making a total of $2,943 million.
99 So the Draft Estimates for 1978-79 provide for total expenditure of $10,266 million. We exceeded $5,000 million only four years ago, in 1974-75, and $2,000 million only eight years ago, in 1970-71.
(102) As a matter of interest, the financial implications of pursuing only those policies and programmes implicit in the Draft Estimates for 1978-79 over the three year forecast period, using the same revenue forecast as in f.n. (86) above, are as follows:
1981-82
($ mn)
Recurrent Account:
1978-79 ($ mn)
1979-80 ($ mn)
1980-81 ($ mn)
Revenue 9,130 9,170 10,000 10,960 Expenditure 7,323 7,640 8,090 8,510 Surplus +1,807 +1,530 +1,910 +2,450 Capital Account:
Revenue 1,236 990 920 930 Expenditure 2,943 2,183 2,039 1,276 Deficit －1,707 －1,193 －1,119 －346 Overall position + 100 + 337 + 791 +2,104
(103) B.S., 1977, paragraph 99.
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 521 (d) Summary and assessment
100 The difference between my estimate of revenue of $10,366 million shown in the Revenue Estimates as printed and the Draft Estimates of Expenditure amounting to $10,266 million is $100 million(104).
101 Before proceeding to describe the Draft Estimates of Expenditure, I must assess the budget in terms of the six considerations which I mentioned earlier I had borne in mind when preparing it.
102 First, the size of the public sector, defined to include all transactions recorded in the Consolidated Account(105): whatever the ‘correct’ relationship may be between public sector expenditure and the GDP in any given set of economic circumstances in Hong Kong, the relationship is an important one. Assuming no changes in budgetary or fiscal policies, the size of the public sector as measured by the ratio of public sector expenditure to the GDP will (or should) exhibit cyclical variations, perhaps even on a slowly rising trend. That is to say, the ratio will (or should) increase on the downswing phase of economic activity and decrease on the upswing, and tend to increase again as the recovery phase matures. Thus, the ratio decreased from a high of 18.8% in the trough year 1974-75, to an average of 16.5% in the two upswing years 1975-76 and 1976-77 and then increased again to 17.2% in 1977-78 as the growth rate of the economy (in money terms) decelerated (from 27% in 1976 to 15% in 1977). In the coming financial year, 1978-79, if the public sector’s spending performance matches funds available and the GDP forecast (for 1978) is accurate(106), the ratio will increase further to 18.4%.
103 Secondly, the growth rate of General Revenue Account expenditure: at $10,266 million the Draft Estimates for next year represent an increase of $2,106 million, or 26%, over the revised estimate for 1977-78 of $8,160
(104) $ mn $ mn Revenue:
Recurrent 9,130 ― Capital 1,236 10,366 Expenditure:
Recurrent 7,323 ― Capital 2,943 10,266 Surplus on recurrent account ― 1,807 Deficit on capital account ― 1,707 Overall difference ― + 100
(105) The Consolidated Account includes General Revenue Account transactions, all transactions of the Urban Council and the Housing Authority, all other transactions of the Development Loan Fund and the transactions of the Lotteries Fund and the Home Ownership Fund: see Appendices VI and VIII to the Estimates.
(106) At 17% in money terms. Inasmuch as the growth rate in real terms in 1978 is forecast to be 9%, compared with 12% in 1977, the recovery will be, in fact, further maturing in 1978.
522 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
million. It may be compared with an increase of 24% in 1977-78 (revised estimate) and 9.3% in 1976-77 (and is no less than a 72% increase on 1974-75). In real terms, the increase budgetted for in 1978-79 is 21% compared with 16% in 1977-78 (revised estimate) and 3.4% in 1976-77 (and is no less than a 46% increase on 1974-75). Thus the growth rate over the five years 1974-75 to 1978-79 inclusive will be virtually up to the steady- progression guideline of 10% per annum.
104 Thirdly, although the level of our fiscal reserves must keep in step with the level of expenditure, as the free element in our reserves at 1 April 1978 will be 16.5% of estimated expenditure, I see no need to budget deliberately for a surplus. I regard what is, in effect, a balanced budget to be quite adequate to secure our financial stability even in these uncertain times, particularly as I have provided quite generously for transfers to the Development Loan Fund and the Home Ownership Fund.
105 Fourthly, although the economy is now operating at, or near, full capacity and a growth rate of 9% (in real terms) implies that it will continue to do so(107), I do not think monetary considerations justify budgetting for a surplus(108).
106 Fifthly, as regards the structure of the budget itself: the guidelines have been closely observed(109), despite the fact that recurrent expenditure is growing so fast (though whether the present quite buoyant growth rate of recurrent revenue will last forever is another matter). Fortunately, also, capital revenue will finance 42% of capital expenditure.
(107) The labour force is expected to grow by about 3% and the average growth in output per head (productivity) between 1961 and 1977 was about 6% p.a. giving a growth in productive potential of about 9%.
(108) Deficit on Consolidated Account (Estimates) is $74 million.
(109) $ mn % Guideline Recurrent revenue 9,130 (1) Total expenditure = 10,266= 88.9 At least 88% Recurrent expenditure 7,323 (2) Recurrent revenue = 9,130= 80.2 No more than 80% Surplus on recurrent account 1,807 (3) Capital expenditure = 2,943= 61.4 At least 60% Recurrent expenditure 7,323 (4) Total expenditure = 10,266= 71.3 No more than 70% Capital revenue 1,236 (5) Capital expenditure = 2,943= 42.0 At least 20%
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 523
107 Finally, as regards capital expenditure: the provision of $2,008 million for the two Public Works Programme components is $522 million below the guideline figure updated to 1977 prices. Thus, it was possible to increase the provision for all other capital expenditure to $935 million, as compared with the guideline figure of $750 million, without seriously inflating total capital expenditure.
PART V: DRAFT EXPENDITURE ESTIMATES FOR 1978-79
(1) Introduction
108 I turn now, Sir, to the actual subject of this motion, the Draft Estimates of Expenditure for 1978-79. They are supported as usual by compendious Memorandum Notes which deserve close study. I can do no more here than analyse proposed expenditure by main components and in terms of broad trends and then treat, in some depth, a few selected services.
(2) Main Components of Expenditure
(a) Recurrent
109 The provision for expenditure on recurrent services(110) is $7,323 million, including $200 million for additional commitments of an unavoidable nature arising during the year(111). This represents an increase of $1,075 million(112), or 17%, over the revised estimate for 1977-78 of $6,248 million.
110 Personal emoluments and allowances (but not on-costs) at $2,771 million account for 37.8% of recurrent expenditure, compared with 38.5% in 1977-78 (revised estimate), and an average of 40.4% over the previous three years(113). Over the three years ending 31 March 1977, the approved establishment of the civil service increased by 4,677 posts to 117,495, or by 4%, but this year it has grown by a further 8,414 posts, or by 7.2%, to 125,909 posts. This acceleration reflects, in part, the virtual standstill on the creation of new posts during 1975-76 and, in part, policy decisions in respect of new
(110) That is to say:
Personal Emoluments
Departmental Other Charges
Public Works Recurrent
Recurrent Subventions (including UPGC)
Pensions
Defence
Public Debt
Miscellaneous
See Annex (8).
(111) Head 52 Miscellaneous Services Subhead 100 Additional commitments. (112) The fact that this figure is the same as the estimated surplus for 1977-78 is purely coincidental (believe it or not).
(113) 40% is the guideline for personal emoluments.
524 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
quite labour-intensive services(114), but I cannot pretend to be satisfied that we are able to devote enough attention to the manning of departments generally as opposed to applications for particular increases. In 1978-79, whilst the provision in the personal emoluments subheads allows for new posts probably required, the posts themselves are not shown in the Draft Estimates since departmental applications have yet to be examined and approved by Finance Committee.
111 Departmental other charges(115) at $1,064 million have been kept to 14.5% of recurrent expenditure, compared with 14.2% in 1977-78 (revised estimate), and an average of 16.7% over the previous three years. I consider that, for departmental other charges to be kept below 15% of total recurrent expenditure is a reflection of the continued concern of departments with cost-efficiency.
112 Public Works Recurrent expenditure(116) at $473 million accounts for 6.5% of recurrent expenditure, compared with 7.5% in 1977-78 (revised estimate), and an average of 6% over the previous three years. Last year I said that anything less than 6% of recurrent expenditure is inadequate to maintain our various assets intact and operate the various services covered
(114) Increases in approved establishments,
Department 1974-75 to 1977-78 Police 2,910 Medical and Health 157 Prisons 1,530 ICAC 1,079 Fire Services 1,066 Urban Services (NT Division) 617 Public Works 548 Social Welfare 431 Inland Revenue 400 Urban Services (Urban Council) 385 Agriculture and Fisheries (including Country Parks Division) 368 Transport 300 Trade, Industry and Customs 298 New Territories Administration 291 Kowloon-Canton Railway 158 Post Office 99 Labour 92 Legal Aid 88 Rating and Valuation 86 Others (net) 188 13,091
(115) That is, all recurrent expenditure other than personal emoluments, Public Works Recurrent, recurrent subventions, defence, pensions, interest and service charges on the public debt and miscellaneous services.
(116) That is, all expenditure connected with the maintenance of Government assets and the operation of various services such as water supply, sewage works, quarries, street lighting, etc.
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 525
by this component of recurrent expenditure satisfactorily, but I think this guideline should be nearer 7%.
113 Recurrent subventions (including subventions to the UPGC) at $1,857 million will absorb 25.4% of recurrent expenditure, compared with 26.7% in 1977-78 (revised estimate), and an average of 26.1% over the previous three years. Overall, taking recurrent and capital subventions together, one fifth of total Government expenditure is disbursed by subvented organizations, and the branch of the Audit Department set up in 1976 for subvented organizations is to be strengthened during 1978 to enable audits of all the larger organizations to be undertaken regularly(117). May I interpret here, Sir, that when the Director of Audit carries out an audit of subvented organization, he does so either because a statutory provision or administrative arrangement requires, or enables him to do so or as a result of a specific authorization from the Governor that such an audit is in the public interest. He then has a statutory duty to report his findings. His reports are not attacks on the integrity of any organization or individual but are designed to bring to notice any errors, omissions or malfeasance which may have occurred. His reports are integral to our system of public accountability and, as such, they should be regarded as pointers to possible remedial measures.
114 Expenditure on pensions at $257 million accounts for 3.5% of recurrent expenditure, compared with 3.9% in 1977-78 (revised estimate), and an average of 3.7% over the previous three years.
115 Our contribution to the cost of the Armed Forces stationed here will be $358 million(118), or 3.5% of total expenditure in 1978-79 compared with 3.6% in 1977-78 (revised estimate), and 1.6% in the last year of the previous Agreement (1975-76).
116 The cost of our public debt(119) will represent just 0.4% of total expenditure, having fallen from 0.5% this year, although it was only 0.1% in 1974-75.
(117) When the Director of Audit carries out an audit of a subvented organisation, he does so either because a statutory provision or administrative arrangement requires or enables him to do so, or as a result of a specific authorization from the Governor that such an audit is in the public interest. He then has a statutory duty to report his findings. His reports are not attacks on the integrity of any organisation or individual, but are designed to bring to notice any errors, omissions and malfeasance which may have occurred. His reports are integral to our system of public accountability and, as such, should be regarded as pointers to possible remedial measures.
(118) This figure excludes the reprovisioning and related exercises referred to in note (***) to f.n. (123) below. The Defence Costs Agreement as such provides for the Hong Kong Government’s share of the total cost (recurrent and capital) of the agreed garrison of 4 1/3rd major units, as recalculated from time to time by reference to measures of inflation, to be 50% in 1976-77, 62½% in 1977-78 and 75% from 1978-79 onwards.
(119) Interest charges and actual repayments or sinking fund contributions.
526 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
117 Finally, as regards recurrent expenditure under Miscellaneous(120): at $543 million there is included $200 million for additional commitments of an unavoidable nature arising during the year(121).
(b) Capital(122)
118 The provision for capital expenditure is $2,943 million made up of $858 million for the Public Works Programme, other than New Towns and Housing, $1,150 million for New Towns and Housing and $935 million for all other components(123). This latter figure includes $185 million for capital subventions for education and medical services and the Universities and the Polytechnic; $201 million for departmental special expenditure; $399 million for the Home Ownership Scheme to meet expenditure in the second year
(120) See the Memorandum Note on Head 52 Miscellaneous Services for a description of the expenditure involved.
(121) Already I am aware of possible calls on this subhead amounting to $140 million. If the proposals concerned, which were included in the forecast submissions, and accorded at high priority by the Chief Secretary’s Committee, had been processed in time they might well have been included in the relevant heads of the Draft Estimates. But they were not in a form to enable this to be done.
(122) See Annex (8).
(123)
Component
(1) Public Works Programme (other than New
Guideline figures (*) ($ mn)
Draft Estimates 1978-79
($ mn)
C.f. Revised
Estimates 1977- 78
($ mn)
Towns and Housing) 1,210 858 (**) 745 (2) Public Works Programme (New Towns and
Housing including transfers to the
Development loan Fund for on-lending to
the Housing Authority) 1,320 1,150 710 (3) Subventions 80 114 87 (4) UPGC 60 71 53 (5) Departmental Special Expenditure 220 201 96 (6) Defence Costs Agreement: Capital Works 20 29 23 (7) Home Ownership Fund 300 399 59 (8) Miscellaneous 70 121 (***) 139 3,280 2,943 1,912
Notes: (*) At 1977 prices.
(**) Under present accounting arrangements that part of expenditure on two projects met from loans from the Asian Development Bank amounting to $67.7 million in 1978-79 is not included here (see Memorandum Note on Head 61 Public Debt, paragraphs 2-3 on page 426 of the Estimates).
(***) Public debt repayments, reprovisioning of Victoria Barracks and RAF Kai Tak and Lyemun and Shamshuipo Barracks, and other additional capital works for the Armed Forces outside the terms of the Defence Costs Agreement. The totol amount of land eventually released as a consequence of these various reprovisioning exercises will be 235 acres. See also Annex (6).
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 527
of Phase I and in the early stages of Phase II(124); and $114 million for defence works (both on DCA account and outside the DCA).
(3) Infrastructural Facilities
119 This is a convenient place just to mention the essentially infrastructural facilities provided for in the Public Works Programme, comprising those projects concerned specifically with communications(125), water supplies and development works (particularly in the New Towns). We shall spend about $1,243 million on these in 1978-79, compared with $993 million in 1977-78 (revised estimate), spread over nearly 400 projects with a total outstanding cost at 31 March 1978 of $7,900 million. Certain key elements are described in detail in Annex (9) to the printed version of this speech (with a reference also to the Mass Transit Railway project even though it does not fall within the definition of the public sector used for budgetary management purposes).
(4) Pattern of Expenditure (broad trends)(126)
120 In recent years, through the Green Pages in the Estimates, the Finance Branch has prepared an analysis of General Revenue Account (and Consolidated Account) expenditure on a functional basis. I must draw attention to certain developing trends, now that expenditure has grown so dramatically, that is to say, from $2,700 million in 1971-72, to $5,973 million in 1974-75 to $10,266 million in 1978-79.
121 The pattern of expenditure provided for in the Draft Estimates for 1978-79 is as follows: general services (including law and order)(127) will absorb 18.7% of total expenditure; economic services(128) 7%; community services(129) 20.4%; social services(130) 42.6% (and remember that, additionally, housing is partly financed outside the General Revenue Account from the Housing Authority’s own resources); and finally all other services(131) 11.3%.
(124) Phase I: 9,539 flats; Phase II: 3,200 flats (approximately).
(125) Airport, Post Office, harbour, car parks, KCR, and roads and related civil engineering works. See also Appendix XI to the Estimates.
(126) See Annex (10).
(127) Administration, law and order, defence, public relations, revenue collection, financial control.
(128) Primary products, airport and harbour, commerce and industry, communications, statistics, land and survey, Royal Observatory, certain miscellaneous subventions.
(129) Transport, roads and civil engineering, water, fire services, amenities and related services. (130) Education, medical and health, housing, social welfare, labour.
(131) Launches and dockyard, printing, supplies, common supporting services such as E and M Office and BOO, the Government computer, quarters, passages, telephones, telegrams, public debt, pensions and gratuities.
528 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
122 Over the four years 1974-75 to 1977-78 the pattern was rather different(132) with general services absorbing only 17.6% of total expenditure and social services only 40.8%, but with community services absorbing as much as 23.4%, largely because of water development and highways projects. I expect the current emphasis on social services to remain with us for some time.
123 Given the increases in expenditure provided for in the Draft Estimates for 1978-79, the pattern of expenditure by groups of services is satisfactory. But we must not be complacent about the cost of general services and the various services in the residual group, which have risen by 102% and 84% respectively since 1974-75, for we must maximise our efforts in respect of economic, community and social services(133). Expenditure on the latter, on the social services, I might add, has risen by 99% since 1974-75 and by 314% since 1971-72.
(5) Expenditure on Selected Services(134)
124 That, Sir, is the broad picture. I shall now spell out the Government’s intentions in respect of certain services in the coming year and how they are provided for in the Draft Estimates.
(a) Law and order
125 The Draft Estimates provide for expenditure of $1,024 million on law and order services(135) in 1978-79. This represents 10% of total expenditure.
(132)
%
General services 17.6 Economic services 8.5 Community services 23.4 Social services 40.8 Other 9.7 100.0
(133) %increases on
Draft Estimates 1978-79
% $ mn
Revised Estimates 1977-78
Actual
Expenditure 1974-75
General services 18.7 1,918 18 102 Economic services 7.0 720 11 33 Community services 20.4 2,092 18 27 Social services 42.6 4,375 35 99 Other 11.3 1,161 35 84 100.0 10,266 26 72
(134) Recurrent and capital expenditure.
(135) Immigration, ICAC, Judiciary, Legal Department, Prisons, Registrar General, Police.
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 529
126 There can be no doubt that there is continuing public concern about the prevalence of crime. The Government shares this concern, but I would point out that the number of violent crimes has continued to fall since 1974-75(136). Moreover, for the first time since 1971-72, there is likely to be a reduction in the number of serious crimes in 1977-78(137). No doubt the increase in Police manpower has contributed very largely to this improved situation, and the Government is determined to see that this downward trend is maintained.
127 The cost of the regular Police Force will be $638 million in 1978-79. This includes provision for 1,987 new posts(138), yet to be approved, and the acquisition of additional communications equipment.
(b) Housing
128 In the four years 1974-75 to 1977-78 the Public Works Department, the Housing Authority and the Housing Society completed accommodation for 348,300 persons. Over the next four years, 1978-79 to 1981-82, accommodation for a further 953,300 persons is expected to be completed, including accommodation for about 80,300 persons(139) to be built under the Home Ownership Scheme. Work on further estates will be in progress at the end
(136) Violent crimes: % 1974-75 19,820 ― 1975-76 17,663 ―11 1976-77 15,605 ―12 1976-77 (first ten months) 13,383 ―12 1977-78 (first ten months) 12,473 ―7 (137) Serious crimes (i.e. reported crimes less minor offences):
%
1971-72 32,713 ― 1972-73 34,975 +7 1973-74 43,595 +25 1974-75 57,015 +31 1975-76 58,318 +2.3 1976-77 60,046 +3 1976-77 (first ten months) 51,205 +3 1977-78 (first ten months) 47,575 ―7
(138) The majority of the new posts are for new police stations and reinforcement of staff in CID and in districts.
(139) In 17,800 flats on the basis of an assumed average occupancy rate of 4.5 persons per flat.
530 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
of 1981-82 for completion in subsequent years(140). So we can expect that, by 1984, adequate public housing will be available to meet a very large proportion of the community’s needs.
129 During 1978-79, the Housing Department estimates that it will spend about $696 million on the Housing Authority’s building programme for rented accommodation, of which about $400 million, or some 57%, will be met from borrowings from the Development Loan Fund, and the balance from the Authority’s own resources. The Public Works Department will continue construction work on those estates on which planning had already started when the new Housing Authority was formed(141) and expects to spend $125 million on them during 1978-79. But the Draft Estimates envisage, over and above this sum, the expenditure of $89 million on community facilities to ensure balanced development(142).
130 Last year, when announcing the Government’s intention to augment the public housing programme by building flats for sale and, at the same time, cater for the very real needs of the lower middle income class, I said that the Working Party on Home Ownership had three main tasks. The
(140)
Year
Accommodation completed for the rented programme (persons)
Accommodation to be provided under the Home Ownership Scheme
(persons)
1974-75 (actual) 68,600 ― 1975-76 (actual) 110,300 ― 1976-77 (actual) 74,600 ― 1977-78 (estimated) 94,800 ― 1978-79 (estimated) 127,800 ― 1979-80 (estimated) 229,800 37,500 1980-81 (estimated) 260,700 20,000 1981-82 (estimated) 256,700 22,800 1982-83 (estimated) 278,500 36,700 1983-84 (estimated) 234,700 24,800 1984-85 (estimated) 193,900 27,000 1985-86 (estimated) 117,000 20,300
(141) On 1 April 1973.
(142) Housing Public Works
Estates Authority ($ mn)
Department ($ mn)
Urban areas 330 75 New Towns 366 50 Community facilities ― 89 696 (*) 214 (**)
Notes: (*) Of which $400 million will be met from borrowings from the Development Loan Fund.
(**) Financed wholly from General Revenue.
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 531
first was to co-ordinate the efforts of the various departments involved in planning the production and sale of flats; the second was to work out a practical scheme of mortgage facilities; and the third was to decide how, and by whom, such a scheme should be managed.
131 The first task has been substantially completed. The Working Party has now devised a phased programme for some 42,000 flats to be built over the nine years 1977-78 to 1985- 86(143). In January this year, Finance Committee approved the revised project estimates in respect of the 9,539 flats in Phase I(144). So the Draft Estimates for 1978-79 provide for the transfer of some $400 million from General Revenue into the Home Ownership Fund(145). With the finalization of the cost inputs and cash flows involved, the Housing Authority has recently been able to announce the range of sale prices of the flats in Phase I and to invite applications from members of the public.
132 In addition, the Government will shortly be inviting real estate developers to submit tenders initially for two sites―one in New Kowloon, the other in Tuen Mun―for the construction of flats for sale to people within the eligible income range. If this experimental joint venture scheme should prove to be a success, it may open up an alternative way by which the Government can further promote home ownership.
133 As regards the second and third tasks, the Working Party has negotiated with a number of leading banks a scheme by which banks and other financial institutions will be invited to commit funds for eligible flat purchasers on certain standard terms(146) which are more favourable than those normally available on the open market for residential mortgages. The broad outlines of this scheme have been accepted by the leading banks and the contingent liability involved in guaranteeing a proportion of each mortgage loan has been accepted by Finance Committee(147).
134 Responsibility for the administration of the Home Ownership Scheme will shortly be vested in the Secretary for Housing and a memorandum of arrangements between the Government and the Housing Authority has
(143) The latest forecast of the construction programme for the Home Ownership Scheme is at Annex (11).
(144) See Memorandum Note on the Home Ownership Fund on page 798 of the Estimates. (145) Via Head 52 Miscellaneous Services Subhead 361 Payment to Home Ownership Fund.
(146) The financial institutions willing to take part in the scheme will provide mortgage finance sufficient to cover 90% of the purchase price of the flats, with repayments spread over a maximum period of 15 years at rates of interest varying between 7½% and 9% per annum.
(147) So, subject to various details being finalised, a notice will be issued within the next two to three months inviting financial institutions to take part in the scheme. Once settled, the scheme will be administered by the Secretary for Monetary Affairs.
532 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
been drafted to provide a frame-work within which decisions can be properly taken. (c) Education
135 The Draft Estimates provide for expenditure of $1,917 million on education in 1978-79(148). This represents 18.7% of total expenditure.
136 The Government’s Policy of providing a public sector place for every child of primary school age (6-11) has been more than achieved for some years now. But this does not mean that no new primary classes will be opened in 1978-79. With the shift of population to the New Towns, and so that no child shall have to travel an unreasonable distance to school, the Draft Estimates provide for an additional 11,115 new places in developing areas in 1978-79 to be offset by a reduction in areas of over provision.
137 The target for places in Government and aided schools for handicapped children has recently been increased nearly threefold to 50,800 by 1985-86(149). Over 14,500 such places already exist, and the Draft Estimates provide for an additional 5,300 places during the forthcoming year.
138 At the secondary level, a Form I place in the public sector will be available for all Primary 6 leavers in 1978. So the Secondary School Entrance Examination was held for the last time last year. The demand for places in Form I in September this year, based on the number of Primary 6 leavers, is estimated at 100,900. Accordingly, the Draft Estimates provide for
(148) Recurrent $ mn Education 275.2 Education subventions 1,063.5 UPGC 333.5 Student fare subsidies 35.7 1,707.9
Capital $ mn Government-built schools including technical institutes (PWNR) 45.5 Education subventions 88.0 UPGC 71.0 Departmental special expenditure 5.0 209.5
Additionally, some $43 million is expected to be drawn in 1978-79 as loans from the Development Loan Fund to assist in the financing of new school buildings in the aided and private sectors and for loans to students at the Universities, the Polytechnic and the Baptist College.
(149) As part of the Government’s overall plans for rehabilitation as set out in the White Paper entitled ‘Integrating the disabled into the community: A united effort’, published in October, 1977.
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 533
the number of Form I places to be increased from 74,000 at the present time to 100,900(150).
139 The immediate measures employed to provide junior secondary education for all rely heavily on buying places in private schools and on floating classes. Last year and the year before(151) I said that these measures were temporary expedients and that new schools must be built and equipped. In 1976-77 we embarked on an ambitious secondary schools building programme. To date, 31 schools have been completed, 21 will be completed in 1978-79 and a further 34 will be completed by September 1981(152). By 1983, all the Forms I to III places in these new schools will be fully operational.
140 As from the beginning of the next financial year, education at the junior secondary level is to be free. While this decision does not involve the Government in providing additional school places it is, nevertheless, a costly development. Working out the detailed arrangements has been considerably more difficult than at first anticipated because a number of important policy considerations have been involved. For example, we have had to consider whether school authorities will, in future, be precluded from charging tong fai and other subscription charges and, if so, the extent to which the Government should take these over. It is only in recent weeks that the overall picture has become clearer. Present indications are that the costs will be $50 million in 1978-79 in respect of the two terms involved, and $80 million for the first full financial year thereafter. But because of the uncertainties and difficulties I have referred to, no specific provision
(150) Planned provision of Form I places (academic years):
Types of School 1977-78 1978-79 1979-80 1980-81 1981-82 Government schools 5,868 6,520 6,800 6,800 6,800 Aided and assisted schools 33,048 38,640 38,560 41,280 44,200 Bought places in private schools 35,036 55,740 50,340 42,720 32,700 (*) (**) (***) (***) (***)
73,952 100,900 95,700 90,800 83,700
Notes: (*) Equals 75% of demand, based on Primary 6 leavers.
(**) Equals 100% of demand.
(***) Equals 100% of demand as numbers in the age group contract (although the extent of over-provision will depend upon the speed at which bought places are phased out).
(151) B.S., 1977, paragraph 159, and B.S., 1976, paragraph 126.
(152) Building Starts Building Completions No. of
Year
projects 1977-78 1978-79 1979-80 1980-81 1981-82
Before 1977-78 36 25(*) 7 ――― During 1977-78 15 2 10 3 ― ― To start in 1978-79 30 ― 4 8 18 ― To start after 1978-79 5 ―――― 5 Note: (*) Four projects were completed in 1975-76 and 1976-77.
534 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
has been included in the appropriate heads in the Draft Estimates. However, I have earmarked a sum of $50 million in the Additional Commitments vote, and so expenditure on education in 1978-79 will be $1,967 million, which represents 19.2% of total expenditure.
141 Education beyond Form III is referred to in the Green Paper published last November on senior secondary and tertiary education. The Green Paper proposes that the earlier target of providing places in Forms IV and V for 40% of the 15-16 age group should be increased to 50%. No final decision has been taken on this proposal, but the Draft Estimates provide for an additional 11,381 places in September this year in accordance with the build-up of places towards the 40% target(153).
142 In September 1978 the four technical institutes will have a total enrolment of approximately 3,400 full time students and 8,600 students on part-time day release courses, an increase of 1,000 and 4,900 respectively. The considerable expansion in enrolment on part-time day release courses is due to the enactment of the Apprenticeship Ordinance in 1976 and the designation of a further five trades in 1978. The fifth Technical Institute at Kowloon Tong is scheduled to open in September 1979; when fully developed in 1981-82 this institute will provide another 3,800 places in full time and part-time day release courses.
143 At the level of tertiary education, the student targets for the current planning period, which ends in mid-1978, are 8,850 students at the Universities and 9,850 full time equivalent students at the Polytechnic. These have been exceeded at the Universities, but not at the Polytechnic(154). During the course of this year the institutions will move into a new planning period, this time a triennium covering the academic years 1978-79 to 1980-81. In order that the UPGC might draw up its recommendations for the forthcoming triennium, student targets were set for 1980-81, the last year of the triennium, at 10,330 at the Universities and 11,400 full time equivalent students at the Polytechnic. The UPGC’s recommendations for recurrent and capital grants to achieve these targets involve a total recurrent expenditure over the triennium of $1,017 million and new capital expenditure amounting to $223 million(155). The UPGC’s recommendations will, in due course, be put to Finance Committee. But the Draft Estimates contain the necessary provision for the continuation of current commitments at the three
(153) By 1981, 37,460 aided Form IV places, representing 40% of demand within the age group, will be available.
(154) Actual enrolments in December 1977 were:
Universities 8,899
Polytechnic (full time equivalents) 9,090
(155) In addition, there will be a carry-over of capital expenditure from projects already started, but not yet completed, of $155 million.
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 535
institutions and for their development during that part of the first year of the triennium which lies within the coming financial year.
(d) Medical and health services
144 The Draft Estimates provide for expenditure of $891 million on medical and health services in 1978-79. This represents 8.7% of total expenditure.
145 Considerable progress has been made in implementing the regionalization scheme for medical and health services. This scheme will improve the utilization of beds and other facilities by enabling the transfer of patients between hospitals. It must obviously involve the subvented hospitals, and so it has been necessary to introduce the standard Government daily maintenance fee of $5 for general class beds into those subvented hospitals participating in the scheme(156) and to bring these hospitals onto a full deficiency grant basis. This was done during 1977-78 with the Buddhist and Pok Oi Hospitals and the process will continue in 1978-79 with the Yan Chai Hospital and the Caritas Medical Centre. This is not only a costly trend, but also involves the Government having a much closer relationship with the hospital authorities concerned, the implications of which are not yet, perhaps, fully realised.
146 In 1978 the net increase in beds in Government and subvented hospitals will be 823; this compares with 512 in 1977(157). There are a number of very major projects in the planning pipeline, construction of which will begin during the next year or so(158). Perhaps the most spectacular will be the new 1,400-bed teaching hospital at Sha Tin; I am currently negotiating with the Asian Development Bank the possibility of a loan to help finance this interesting project. Construction of a Blood Transfusion Centre will begin for the Hong Kong Red Cross to enable it to provide a centralized blood transfusion service, and planning has started on the development of a 600-bed cardio-thoracic centre at the Grantham Hospital.
(156) But the Tung Wah Group continues to provide, in accordance with its traditional practice, generally free services.
(157) Net annual increases in beds:
1977 1978 1979 1980 1981 1982 1983 1984
Government 93 70 104 1,304 210 360 1,430 1,200 Government
assisted 419 753 40 ― 180 ――― Private ―――― 600 ― ― 500
Total 512 823 144 1,304 990 360 1,430 1,700 7,263
(158) In addition to the new regional hospital at Sha Tin (To be completed in 1983) projects in the pipeline include a dental teaching clinic at Sai Ying Pun, a polyclinic at Sha Tin, a polyclinic and district hospital at Tuen Mun, a third general nurse training school, health centres at East Kowloon and Ha Kwai Chung and Stage III of the East Kowloon Polyclinic.
536 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
147 Before leaving, Sir, the medical and health services, I would like to pay tribute to the contribution which the Tung Wah Group of Hospitals has made over the years, and continues to make, towards the provision of hospital services. I am confident that the reorganized and revitalised Tung Wah administration will move smoothly and efficiently into its second century of service to the people of Hong Kong. I know that some reorganization of the medical division remains to be considered and, since this division is financed almost exclusively from public funds, this is to be tackled jointly with the Medical Department.
(e) Social welfare
148 The Draft Estimates provide for expenditure of $535 million on social welfare services(159). This represents 5.2% of total expenditure in 1978-79.
149 It is in the field of social welfare that we shall see the most dramatic developments in the coming year. In recent months, considerable thought has been given, both within Government and in the community, to where the need lies for the continued expansion of social welfare services. As a result, areas of need have been identified and proposals made in the form of Green Papers for assistance to the elderly, to youth and to those in our community who should receive help through the social security system. A White Paper on rehabilitation services was published last October.
150 If the policies set out in the three Green Papers and the White Paper are implemented in full, the additional, and I stress additional, recurrent expenditure over the period 1978-79 to 1981-82 will be nearly $800 million(160). This is a considerable figure. Nevertheless, the Government is proceeding on the assumption that funds will be available for all these plans. Accordingly, the Draft Estimates for 1978-79 provide for them and their cost is reflected in the forecast of expenditure in the period 1979-80 to 1981-82.
(159) These funds include expenditure on the Social Welfare Department, subventions to voluntary agencies, certain miscellaneous subventions and the Legal Aid Department.
(160) Recurrent financial implications (at 1977 prices):
Estimates Total
1977-78 1978-79 1979-80 1980-81 1981-82 1978-79―1981-82
Services for the elderly 2 9 15 22 30 76 Personal social work among youth 4 18 23 27 29 97 Rehabilitation 122 140 158 173 184 655 Social Security:
(a) Public assistance 180 234 228 229 232 923 (b) Welfare allowances 98 109 155 192 214 670 Total 406 510 579 643 689 2,421 (104) (173) (237) (283) (797)
Note: Figures in parenthesis indicate the additional expenditure for these four programmes, i.e. a total of $797 million over the four year period.
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 537
151 It will take some time for the financial implications of our ambitious social welfare plans to show themselves up fully in the annual Estimates. Some of the services concerned have, in any case, a long lead time before expenditure can actually be incurred. For example, many social welfare projects require a high input of skilled staff which will take time to recruit and train in the numbers required. In one area, however, payments are much easier to effect. I refer to social security cash payments. These are an open-ended commitment over which there can be no control since the expenditure cannot be restricted by the imposition of budgetary cash limits. The additional expenditure resulting from the proposals in the Green Paper entitled ‘Help those least able to help themselves’ will, if implemented, be about $65 million in 1978-79 rising to $168 million by the end of the three year forecast period(161). Estimated expenditure in 1978-79 on public assistance, on welfare allowances and other forms of social security is $337 million and accounts for nearly two thirds of the provision in 1978-79 for recurrent expenditure on social welfare. This is an increase of $88 million, or 35%, over the revised estimate for 1977-78 covering not only the immediate effect of the expansion of the social security system, but also the new rates of public assistance which came into effect in February this year.
152 The provision for recurrent expenditure in 1978-79 on social welfare includes $100 milion for subventions to voluntary agencies, an increase of 41% over the revised estimate for 1977-78 and a near doubling of expenditure
(161) The Green Paper proposes the following allowances within the two major social security cash payment schemes:
(a) Public Assistance Scheme
Basic allowance
Long-term supplement
Old age supplement
(b) Welfare Allowances Scheme
Old age allowance
Disability allowance
Chronic sick allowance
The additional costs of the Green Paper proposals are as follows:
1981-82
($ mn)
(a) Public Assistance Scheme
1978-79 ($ mn)
1979-80 ($ mn)
1980-81 ($ n)
Supplementary allowance for long-term cases 16.0 16.0 16.0 16.0 Old age supplement 37.5 31.0 33.0 35.0 Disregard of earnings 0.25 0.25 0.25 0.25 Appeals Board and fraud specialists 0.25 0.25 0.25 0.25
(b) Welfare Allowances Scheme
Extension to residential institutional accommodation
5.5 5.5 5.5 5.5
Extension of old age allowance 5.5 46.5 70.0 85.5 Chronic sick allowance ― 5.0 18.0 25.5
Total 65.0 104.5 143.0 168.0
538 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
in the short space of two years(162). This prompts me to suggest that the time has come for us to reconsider which social welfare services should continue to be the responsibility of organizations subvented on a discretionary grant basis. It may well be that our moves to convert Government’s financial assistance to agencies in some key fields to a unit cost basis will help to bring this issue more clearly into focus.
(f) Recreation, leisure and culture
153 Finally, in this review of selected services, I turn to recreation, leisure and culture: not nearly enough has been said about the Government’s efforts in recent years to develop facilities for these activities, given their importance for the physical and mental well-being of the community. I cannot attempt a comprehensive review here, particularly as the implications for recurrent expenditure are difficult to identify, but I have referred to just a few of the major projects in hand in Annex (12) to the printed version of this speech.
PART VI: FISCAL POLICY AND REVENUE PROPOSALS
(1) Hong Kong’s Fiscal System
154 I turn now, Sir, to the subject of fiscal policy. In our circumstances there is now no alternative to a relatively high dependence on direct taxation(163) for the financing of recurrent services and to help finance the deficit on capital account. For two reasons, moreover, there will be a tendency for the relative importance of earnings and profits taxes to increase and to go on increasing: first, there is a greater scope for altering the structure of the direct tax system and the applicable rates. In the case of the indirect tax system(164) and fees and charges(165), there are obvious constraints. Secondly, as earnings and profits taxes are roughly proportional to incomes, yields are
(162) Social Welfare subventions are, of course, allocated by the Director of Social Welfare on the advice of the Social Welfare Advisory Committee, but I envisage that in 1978-79 the provision will make possible the subvention of an additional 1,000 places in day nurseries; an improvement in the standards in subvented day and residential creches to meet the requirements of the Child Care Centres Ordinance; the bringing onto subvention of 31 additional training centres, sheltered workshops, hostels for the physically handicapped and mentally retarded people, a home for the aged, youth centres and children centres; and the refund in full of rates to voluntary agencies.
(163) Direct taxes are defined as earnings and profits taxes, and estate duty (which is credited to capital account).
(164) Indirect taxes are defined as excise duties, General Rates, internal revenue (i.e. bets and sweeps taxes, stamp duties, entertainment tax and hotel accommodation tax), motor vehicle taxes, franchises and airport concessions. (Taxi concessions are regarded as capital revenue).
(165) Including receipts appropriated-in-aid: see Annex (13).
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related to the growth rate of the economy and, if that is sustained at, say, the trend rate experienced in recent years, high yields will be enjoyed(166).
155 I would like to dwell for a moment on the income-sensitivity of our direct tax system: yields from earnings and profits taxes have grown from $52 million in 1951-52 to $929 million in 1971-72 to an estimated $3,990 million next year. In the last six years, 1971-72 to 1977-78, the yield has increased from $929 million to $3,375 million or by 263%, whilst the GDP (at current prices, of course) has grown by 160% only. The only major tax change during this period was in the rate of corporation profits tax which increased from 15% to 17%.
156 Of course, the productivity of the system is also a function of the efficiency of administration. Not only has a far greater number of persons and businesses been identified as being liable to tax, but also the Inland Revenue Department has, with the assistance of additional staff and increased powers, been able to step up its investigations into the affairs of persons who seek to evade tax and these investigations are bearing fruit(167).
157 The thesis that there will be a tendency for the relative importance of earnings and profits taxes to increase is borne out by our experience over the past six years, 1971-72 to 1977-78: the yield from earnings and profits taxes has grown at an average annual rate of 23%, the yield from indirect taxes at 13% and the yield from fees and charges at 15%(168). Thus, whereas in 1971-72 earnings and profits taxes contributed 30% of total recurrent revenue, by 1977-78 they contributed 42%; the contribution of indirect taxes fell from 39% to 32%; and the contribution of fees and charges fell from 31% to 26%.
158 These trends have, in a sense, invalidated the guideline ratios borne in mind in recent years for assessing the balance of the fiscal system, namely, that the ratio of direct to indirect taxation should be 45:55 and the ratio of direct and indirect taxation taken together to all other recurrent revenue should be 65:35. The average ratios for the four years 1974- 75 to 1977-78
(166) In other words, since the yields from earnings and profits taxes are fairly income-sensitive, whilst yields from indirect taxes (and fees and charges, too, for that matter) are relatively income-insensitive, the net effect is that our fiscal system is compatible with the adjustment process over the course of the trade cycle.
(167) In 1977-78 something like $27 million will be derived from over 100 cases. The Commissioner of Inland Revenue has also recently instituted a policy of encouraging assessors outside the Investigation Section to handle, as part of their normal duties, a selection of smaller evasion cases. The direct result of all this activity is, of course, small compared with total tax collected, but it is the immeasurable deterrent effect on would-be evaders which is far more important.
(168) Although these figures reflect both the effects of changes in the tax system and the automatic changes in yields arising from the growth of incomes, the same tendency would emerge even after corrections had been made to remove the effects of tax changes.
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were 57:43 and 71:29. Sensibly, therefore, the guideline ratios should be revised to, say, 55:45 and 70:30, but this does not diminish their importance, which is to remind us of the importance of trying to maintain the yield from indirect taxes and fees and charges.
159 Of course, even more important than any particular relationship between revenue from fees and charges and revenue from direct and indirect taxes is the principle that general taxation should not assist in the financing of services which can be related to individual needs except where, as is frequently the case, a policy decision has so decreed it should, in whole or in part(169).
(2) Requirements of Tax Policy
160 At the same time, our tax system must be designed to meet six requirements: the first reguirement is to generate sufficient recurrent revenue to finance a major part of a given level of total public expenditure (which I have set, for guide-line purposes, at 88%) and to maintain our fiscal reserves at a satisfactory level. The second requirement is that the tax system is as neutral as possible as regards to internal cost price structure and investment decisions. The third requirement is that the laws governing the tax system are adapted from time to time to make them consistent with changing commercial practices. The fourth requirement is that each and every levy―be it direct or indirect―is simple and easy (and, therefore, inexpensive) to administer(170) and does not encourage evasion, for a low and narrowly based tax system simply cannot afford to finance costly overheads. The fifth requirement is that the tax system is equitable as between different classes of taxpayers or potential taxpayers and between different income groups (and this means, inter alia setting relatively high thresholds for personal taxation and generally ensuring that the system rests as lightly as possible on the disposable incomes of those at the lower end
(169) There are five groups of fees and charges:
(a) those designed to cover the full cost (including the cost of capital) of the services provided;
(b) those which are not so designed because, for one policy reason or another, the costs of the services concerned are borne in part by General Revenue;
(c) those which are pitched deliberately at a level to deter usage for policy reasons; (d) those which are pitched well above full costs, but just below the level at which diminishing returns set in (that is, those which are tax loaded);
(e) those which are pitched at a level to reflect that they represent a payment for belonging to trading groups enjoying monopoly or semi-monopoly privileges (that is, those which are royalty loaded).
For the principles underlying the pricing of public utility type services see paragraph 187 below.
(170) For both the Government and the taxpayer.
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of the income spectrum, or leaves them virtually untouched). Exceptionally, and this is the sixth requirement, the tax system must be capable of being used to achieve non-fiscal objectives when necessary.
(3) Tax Changes in Recent Years
161 The tax changes introduced in the past six years have all been consistent with one or more of these requirements as Honourable Members will see from a close study of Annex (14) to the printed version of this speech.
(4) Fiscal Policy in the Future
(a) Required growth rate of recurrent revenue
162 Neither the results of the forecast exercise nor, obviously, the expenditure implications for the forecast period of the policies implicit in the Draft Estimates for 1978- 79 provide us with any real guide as to the required growth rate of recurrent revenue over the next few years(171). There are four reasons for this: first, the forecast returns tend to spell out the cost of departmental requirements for the forth-coming budget year with greater accuracy than for the three years of the forecast period itself. Secondly, although the forecast returns of revenue are related to assumed growth rates of such relevant aggregates as income and personal expenditure there is a tendency for the forecast returns of public expenditure to understate the growth of demand for existing public services. Thirdly, there is a tailing off in the planning of new services in the last year or so of the forecast period. Finally, and this is a contrary point, although both the revenue and expenditure forecast returns are based on values and prices prevailing at the time, expenditure has tended to be less inflation prone than revenue(172).
163 In order to try to arrive at a better idea of the order of likely fiscal requirements in the forecast period, and without implying that any necessary tax changes should be automatically introduced regardless of other considerations (including economic and monetary considerations), it is necessary to reconstruct the forecast. I have done this on the basis of three assumptions: first recurrent expenditure will grow at the annual guideline rate of 10% (at 1977 prices); secondly capital expenditure will be set at the guideline figure of $3,280 million, of which 60% will be financed by the surplus on recurrent account; and thirdly recurrent revenue will grow at the rates assumed in the forecast exercise, but from the rather higher base shown in the 1978-79 Revenue Estimates.
(171) See f.ns. (86) and (102) and Appendix IV to the Estimates.
(172) Moreover, the forecast returns of revenue are not adjusted upwards (or downwards for that matter) to reflect the actual Revenue Estimates for the budget year.
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164 The results of this somewhat speculative exercise indicate a slight shortfall of recurrent revenue in the first two years of the forecast period and a slight surplus in 1981- 82 ($100 million)(173). But these slight shortfalls and the slight surplus represent fine-tuning to an almost idiotic degree and reality could be very different indeed and expectations, therefore, disappointed if, for example, economic circumstances keep the economy off its trend growth rate. Furthermore, insufficient capital revenue might be available to finance 20% of capital expenditure(174).
(b) Earnings and profits taxes
(i) Report of the Third Inland Revenue Ordinance Review Committee
165 Quite apart from the need to bear in mind the economic, equity and administrative requirements of fiscal policy, I, therefore, see a future need for the system to be reinforced to make it even more productive of revenue than at present, preferably at current rates. To this end, a small Working Party of officials, chaired by myself, has been examining the recommendations of the Third Inland Revenue Ordinance Review Committee and has come to certain conclusions, some of which have also been the subject of Government decisions.
(ii) Taxation treatment of interest
166 The Working Party gave priority to the taxation treatment of interest because there are a number of unsatisfactory features in the present law which the Review Committee attempted to resolve; and the taxation treatment of interest can be conveniently, and without prejudice, separated from the Review Committee’s other major recommendations.
167 Under the Inland Revenue Ordinance, tax is levied at the standard rate on interest arising in or derived from Hong Kong. But the Ordinance lays down no test for determining the place where the interest arises in
(173) 1978-79 ($mn)
1979-80 ($mn)
1980-81 ($mn)
1981-82 ($mn)
Guideline for capital expenditure 3,280 ――― Of which 60% = ― 2,000 2,000 2,000 Recurrent expenditure 7,323 ――― Applying a 10% growth factor = ― 8,100 8,900 9,800 Total requirement = ― 10,100 10,900 11,800 Recurrent revenue 9,130 ――― Applying the forecast rate of growth = ― 9,900 10,800 11,900 ∴Difference = ― -200 -100 +100
(174) 20% of $3,280 million=$650 million. Ideally, of course, capital revenue should finance 40% of capital expenditure for debt financing is a last resort.
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or is derived from. However, based on case law, it has been established that the test to be used is the provision of credit test, that is to say, the place where the credit is made available to the borrower. The Ordinance also exempts certain persons (e.g. banks) from payment of tax on interest as such and, in respect of these persons, profits from interest accruing to them as part of their business profits are chargeable to profits tax.
168 The provision of credit test to identify the source of interest chargeable to tax has proved open to manipulation. With the emergence of Hong Kong as a financial centre and with more sophisticated instruments now becoming available, there is a possibility that even further erosion of the yield from interest tax will be experienced. It has been found that loan agreements can be so structured that interest escapes Hong Kong tax completely even when the proceeds are remitted back to Hong Kong for use here. Whilst, originally, this manoeuvre was restricted to loans in foreign currencies and the Hong Kong borrower thus had to accept an exchange risk, a more recent development has been to link loans to the Hong Kong dollar.
169 As in the case of the charge on other forms of income, the Review Committee recommended that the existing charge on interest as such, and on interest which forms part of the profits of a business, should continue to be restricted to income arising in or derived from Hong Kong, but should be reinforced. So first, in respect of interest generally, the Review Committee recommended that this reinforcement should be by way of extending the territorial source criterion, so as to tax interest received on funds used by the borrower to produce profits chargeable to Hong Kong tax unless, of course, the interest is already being taxed under the provision of credit test(175). Secondly, the Review Committee recommended that, in respect of interest which forms part of the profits of banks (and other deposit-taking institutions), the reinforcement should be effected by including all interest which a banking business actively carried on in Hong Kong obtains without the substantial intervention of any branch elsewhere(176).
170 When the Working Party considered the Review Committee’s first recommendation, it accepted the argument that all significant flows of income which are the result of economic activity carried on in Hong Kong should be taxed. The Working Party was concerned, however, that the lender would not be able to calculate his tax liability, if any, until the use of the funds by the borrower had been established; and that, when the lender is not a bank or a corporation carrying on a trade or business in Hong Kong, the borrower would be, under the Review Committee’s recommendation, responsible for deducting tax at source. Thus complicated
(175) Recommendation (3) on page 64 of TIRORC Report.
(176) Recommendations (1) and (2) on page 79 of TIRORC Report.
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questions of apportionment of funds used partly to generate Hong Kong profits and partly for other purposes would arise. This of course is incompatible with the withholding system.
171 The Working Party concluded that a supplementary source test related to the activities of the borrower could be justified on the grounds that interest which arises from economic activities of a borrower in Hong Kong should be brought to charge; but the Government finally took the view that the implications of applying such a supplementary source test (i.e. of such a deeming provision) were unacceptable.
172 As regards the Review Committee’s second recommendation, the Working Party agreed that the extension of the ambit of the profits tax charge to include interest which a banking business actively carried on in Hong Kong obtains without the substantial intervention of branch elsewhere can be achieved within the framework of the territorial source criterion. The Working Party concluded that the recommendation could be implemented without too much difficulty and, indeed, it would somewhat simplify the preparation of tax computations.
173 The Government agreed with the Working Party that this recommendation should be accepted as it stands and a bill to amend the Inland Revenue Ordinance will be published in the Government Gazette on Friday and, if passed into law, will be effective from the year of assessment 1978-79. The Government agrees with the Review Committee that it is a bank’s organization in Hong Kong, and use to which that organisation is put to collect funds for lending, which are the source of its profits from interest. Thus, where such a business is carried on in Hong Kong, any resulting profits ought to be chargeable to tax here in the same way as commissions, fees and exchange profit dealings are charged at the present time. With the rapid expansion of off shore business, an increasing proportion of the profits of these institutions would otherwise escape tax. There is no justification for this inasmuch as these profits are, in effect, derived from economic activities carried on in Hong Kong.
174 Based on present information in the Inland Revenue Department, and on various other assumptions regarding interest rates and coverage, the additional tax yield will be about $145 million in 1979-80 and thereafter about $80 million per annum(177).
(177) The payment of provisional profits tax for 1978-79 in the case of an established bank with an accounting date of 31 March is based on the preceding year, i.e. the year ending 31 March 1978. Since the proposed date of implementation is 1 April 1978 the tax yield in 1979-80 will be made up of:
(a) $80 million for final 1978-79 assessemnt; and
(b) $80 million for 1979-80 provisional assessment, less approximately $15 million which will fall due for payment in 1980-81 under the two instalment system.
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175 This charge in the law will have implications for profits from two separate types of activity. First, as regards profits derived from income received on funds borrowed in Hong Kong, but invested overseas: such overseas assets are normally denominated in foreign currencies, but not necessarily(178). The additional tax liability would be 17% of the net profits derived from such interest earnings. These overseas assets are normally acquired partly because banks would not otherwise be able to meet their statutory liquidity requirements, partly to service the foreign currency requirements of Hong Kong customers, and partly because of a lack of suitable instruments in Hong Kong. The after-tax profitability of banks will be reduced and banks with large net foreign currency positions will be particularly affected. However, at present, banks and similar financial institutions are in a very privileged tax position compared with businesses generally. Even taking into account any foreign tax payments, they presently enjoy an effective rate of tax here well below 17%.
176 Secondly, as regards the so-called offshore business conducted by banks and other financial institutions: lendings to Hong Kong residents are financed, not by borrowings of Hong Kong dollars, but by borrowings of foreign currencies from abroad. This type of business has been growing very rapidly and is conducted both by long-established local banks and overseas institutions recently established in Hong Kong solely for this purpose. At present such institutions do not have to pay profits tax on any interest generated by such business that is to say, lendings to nonresidents even though the business is carried on in Hong Kong. Under the proposed amendment to the law all such profits will be taxable. However, in many cases profits earned in Hong Kong by a foreign bank are liable to tax in the country where the head office of the bank is situated. This is particularly true when the operation is conducted by a branch rather than a subsidiary. Where there exists unilateral relief from double taxation, the only effect will be to reduce the tax paid to the country where the head office is situated. But where there is an increase in the overall tax liability, it could be argued that a danger could exist of this type of business being transferred elsewhere. On balance, I believe a substantial loss of such business to be most unlikely: not only are banks reluctant to ascribe a tax motive to the form in which they do business, but also Hong Kong’s tax advantages are certainly not the only reason why overseas institutions decide to conduct offshore activities here. For instance, those financial centres with virtually nil tax rates tend to be suitable for book-keeping purposes only.
(iii) Recommendations of the Review Committee accepted
177 Two other major recommendations of the Review Committee have so far been accepted. These deal with dividend withholding tax and the
(178) Even when they are denominated in Hong Kong dollars, the provision of credit test may not be successfully applied (see paragraph 168 above).
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present surcharge of two percentage points on tax on corporate profits. Several relatively minor recommendations have also been accepted: the Review Committee did not think any new arguments had been adduced for any change in the law in respect of removal expenses, pre-commencement expenditure, designs, trade marks and patents, rules for outlays for employments and businesses, redundancy payments, past service contributions to retirement schemes and reserves and provisions(179).
(iv) Recommendations of the Review Committee not accepted
178 Eight recommendations of the Review Committee have not been accepted. These deal with a working wife’s allowance, the extension of profits tax to profits which a business actively carried on in Hong Kong obtains without the substantial intervention of any branch elsewhere, the taxation treatment of certain fringe benefits, the taxation treatment of quarters occupied by directors of director-controlled companies, subscriptions to professional societies, premiums for short leases and gifts in kind to charities. The reasons for rejection are contained in Annex (15) to the printed version of this speech.
(v) Recommendations of the Review Committee still under consideration
179 The remaining recommendations of the Review Committee, including two major recommendations relating to mandatory assessments of aggregate income and the consequential treatment of property income as business profits, a recommendation relating to the taxation of shipping profits, and a suggestion that the present table of rates of depreciation could, with advantage, be simplified, all these are still under examination. The preliminary views of my Working Party are set out in Annex (16) to the printed version of this speech.
(c) Rating
180 In last year’s Budget Speech I explained that a reassessment of rateable values has two objectives: first, to ensure that rateable values are kept up-to-date having regard to open market rentals, so that they remain an effective tax base; and, secondly, to ensure that relative changes in values between different premises are taken fully into account, so that the incidence of the tax remains fairly distributed. I said, then, that to achieve these objectives, it is clearly necessary for rateable values to be reassessed at regular intervals.
181 Such a reassessment, or revaluation, was carried out in 1972, and the new values became effective from 1 April 1973. A further revaluation was
(179) Report of TIRORC, paras. 236, 237, 240, 225, 233, 242, 245 and 247.
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planned for 1974 but, for a variety of reasons, it was necessary to postpone the exercise, and the next revaluation did not take place until 1976, effective from 1 April 1977.
182 The four year gap between these two revaluations meant, on the one hand, that we failed to meet our objectives during those four years and, on the other, that the new values established in 1977 involved very significant increases reflecting the upward trend in market rentals between 1972 and 1976. To avoid any repetition of this, my intention was that a further revaluation should be carried out in 1978, to be effective from 1 April 1979.
183 But I see no merit in mounting such an exercise in the absence of any indication that the current values are failing to meet our objectives, because a revaluation exercise is, to say the least, disruptive somewhat in its effect both on ratepayers and on the staff of the Rating and Valuation Department.
184 The Commissioner of Rating and Valuation at my request has reexamined the 1977- 78 valuation lists in the light of recent market rentals and is satisfied that there are, as yet, no established trends which make it essential to revise the base values this year. I propose, therefore, to defer any revaluation for the time being(180).
185 To offset the loss of revenue from the postponement of the revaluation which eventually took place in 1976, the General Rate was increased by two percentage points, that is, from 9% to 11% in 1975, and by a further one percentage point, to 12%, in 1976. Following the revaluation in 1976 it was possible to reduce the General Rate by 4½ percentage points, to 7½%, effective from 1 April 1977. Additionally, a scheme of relief was introduced which limited the increase in actual rates payments.
186 On the basis of the existing General Rate applied to the 1977-78 values, and having regard to the scheme of relief, I estimate that rates revenue should increase from $710 million in 1977-78 (revised estimate) to $795 million in 1978-79, or by nearly 12%. The forecast is thereafter for an increase of 7.2% in 1979-80. This increase, if achieved, is acceptable and I do not at this stage envisage any change in the General Rate for 1979-80 as a result of this deferment of the revaluation.
(d) Management of public utilities
(i) General
187 Finally, Sir, in this Survey of what the future may hold for taxpayers and the public generally, I must refer to the pricing policy we must adopt
(180) This deferment will not prejudice ratepayers’ rights, in accordance with Section 37 of the Rating Ordinance, to seek to alter the rateable values of their premises at yearly intervals.
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for Government owned and operated public utility undertakings, namely, the waterworks, the Post Office, the airport, the Kowloon-Canton Railway and the Lion Rock Tunnel(181). The basic principle of pricing policy must be that consumers―be they individuals or trades or industries―should be charged the full cost of the resources consumed by each undertaking(182) unless conscious (and I repeat unless conscious) policy decisions dictate otherwise on social or political grounds. This principle is not invalidated simply because the services are not provided by the private sector or because they are of a type that only the Government can provide.
188 For many years, notional commercial accounts have been prepared for these undertakings, but only recently have the underlying accounting principles been critically examined and standardised. I hope that we shall shortly have comparable sets of accounts for all undertakings with effect from the financial year 1976-77, which will demonstrate the true profit and loss position of each undertaking and the return on average net fixed assets employed. Thus, we shall have a rational basis for pricing policies and capital investment decisions.
189 I have summarised the position in respect of the airport, the KCR and the Lion Rock Tunnel as revealed by the accounts presently available in Annex (17) to the printed version of this speech, but I must mention here the waterworks and the Post Office.
(ii) Waterworks
190 The application of the no-subsidy principle to the waterworks, involving as it does a sufficient cash flow to meet recurrent expenses, and also the need to amortise capital invested over realistic periods of time, has always been troublesome. Our physical and climatological circumstances have led to a chronic concern over many years with excess demand, the possibility of restrictions and the pricing policy to be adopted. This has forced us to the conclusion that, while a 24-hour supply in all normal circumstances must be our aim, we cannot always provide for exceptional circumstances. It would be possible, of course, to aim for a 24-hour supply in all circumstances, coupled with a pricing policy based on a strict adherence to full costs, because charges would then have to be pitched so much higher than at present. But, clearly, this would involve too high a price level to be
(181) For the purposes of this discussion, Government car parks and town halls in the New Territories are excluded; as are abattoirs and civic centres (e.g., City Hall), management and control of which are vested in the Urban Council, which may raise charges to cover all recurrent expenses and, in the case of new facilities handed over, capital costs as well if so requested by the Government.
(182) Including depreciation, the cost of capital and land. (In addition, of course, there is also the question of a return on investment).
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acceptable; and we must bear in mind the situation of those who would be content with a restricted supply at lower prices. So our pricing policy for this undertaking involves a modification of the no-subsidy principle: that is to say, the charges are pitched at the level low enough for everyone to meet his reasonable needs; and, indeed, the first 2,700 gallons consumed per 4-month billing period is reckoned to be the minimum required to keep a family alive and healthy and so is regarded as a fair charge on General Revenue(183).
191 The waterworks accounts were barely in balance in 1976-77 and are estimated to be in deficit by $200 million in 1977-78. Thus the return on average net fixed assets employed is now nil and next year the undertaking will incur a loss of nearly $250 million (and will be in a negative cash flow situation as well). Further deficits will be incurred in the three year forecast period amounting to nearly $400 million. Thus, as I have warned Honourable Members for the past two years, a revision of water charges is quite inevitable, with particular reference to large domestic users and non-domestic users (and, incidentally, the extra cost of guaranteeing the latter non-domestic users a 24-hour supply is calculated to be, at present, $1 per 1,000 gallons rising to $2.50 by the end of the forecast period). From a purely technical point of view, we could introduce a new pricing system during 1978, and the commercial arguments for doing so are certainly there, but I have decided we should wait until we have more experience with our new computerised billing system. (laughter)
192 Before leaving the waterworks, I should mention that the Director of Water Supplies estimates that, even with the completion of the High Island Scheme, by the early 1982s demand will, once again, have caught up with supply and that, if regular restrictions are to be avoided, the supply system will have to be further extended. However, conventional methods of developing water resources within Hong Kong, by extending catchment areas and building new reservoirs, are practically exhausted. Unless demand can be kept down by voluntary conservation or restrictions and the risk of long-term restrictions once again accepted, it will be necessary to make use of non-conventional methods and or to try to arrange for a larger supply from China.
193 Non-conventional methods are very expensive, require a long lead time and, in the main, involve new technology which has yet to be tried in Hong Kong or, indeed, tried on a large scale anywhere. These methods will involve costly and time consuming investigations and trials. Having to resort to them would inevitably mean that the cost of water must rise and rise further.
(183) Hong Kong Hansard, 1971, page 541.
550 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 (iii) Post Office
194 The Post Office showed a satisfactory return of $75 million in 1976-77 and this should rise to around $87-$88 million in 1977-78 and 1978-79. Over the three year forecast period 1979-80, 1981-82 a total return of the order of $325 million should be realised. As the valuation of assets employed by this undertaking has not been finalised, it is not yet possible to say what rate of return is being earned. The management of the Post Office is based on the identification of various cost centres, some of which are presently making a loss and, as there is no reason why several of these cost centres should be cross-subsidised, I shall be proposing shortly that the relevant charges should be increased from 1 April next.
(5) Revenue Proposals for 1978-79
(a) Introduction
195 For three reasons I do not have in mind any fiscal proposals for 1978-79 designed solely to raise additional revenue: the budget for 1978-79 is in balance; as I said earlier(184), the somewhat uncertain economic prospect in the forecast period notwithstanding, I regard the likely state of our fiscal reserves at 1 April next as satisfactory; and, given the likely level of GDP in 1978, I see no need for budgetary policy to exercise other than a neutral influence on the money supply(185). In particular, I see no need for budgetary policy next year to exercise a deflationary influence by transferring Hong Kong dollar deposits from the non-bank private sector to the public sector. (This year, of course, 1977-78, although I likewise budgetted, effectively, for a balance, the public sector did exercise a deflationary influence: this was because the private sector’s demand for resources was stronger than expected and so we automatically―and helpfully in terms of the price level―incurred a large surplus(186)).
196 Nevertheless, I do have seven revenue proposals to put to Honourable Members on other grounds: three are designed to tighten up tax administration; one is designed to introduce an element of progressivity in the application of one of our taxes; one is designed to reduce losses being incurred on certain postal services; one is designed to modernise one of our tax laws and, at the same time, offer substantial relief; and the last is designed to remove an alleged disincentive to investment.
(184) See paragraph 104 above.
(185) See paragraph 105 above.
(186) See paragraph 30 above.
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(b) Provisional tax: instalment system(187)
197 To begin with the bad news: in 1975, in order to meet one objection to the introduction of a system of provisional tax payments, namely, that payments would, in certain circumstances, have to be made before earnings or profits had been received, I announced that the Commissioner of Inland Revenue would, as a matter of administrative practice under Section 72 of the Inland Revenue Ordinance, permit payment of provisional salaries and profits tax in two instalments, 75% being due on the normal due date and the balance three months later(188). A surprisingly large number of persons are still not availing themselves of this facility. (At 31 January 1978, 40,000 salaries taxpayers alone had already paid up in full). But what causes both the Commissioner and me concern is the large number of persons(189) who abuse the concession by defaulting on both instalments and thereby demonstrating a positive unwillingness to meet their tax liabilities. (laughter) It is, of course, advisable that follow-up action be taken against these people as soon as possible and that it should not have to be taken in two stages, as it were, once for the first instalment and again for the second instalment, at considerable cost to the generality of willing taxpayers. With effect from 1978-79, therefore, notices for payments of provisional salaries and profits tax will carry a warning that, if the first instalment is not paid by the due date the second instalment will automatically become due. (laughter) I might add that the number of salaries tax that falls for 1976-77 provisional and earlier years is currently about 20,000.
(c) Excise duty on imported cigarettes(190)
198 I increased the specific rates of duty on intoxicating liquors and tobacco three times recently: in February 1974, in order to restore the incidence of duty which had declined as a result of price increases(191); in February 1975, in order to offset the effect on the revenue of declining consumption in the case of intoxicating liquors and to increase the revenue in the case of tobacco(192); and, in December 1975, partly to eliminate Commonwealth preference margins and partly to raise additional revenue(193).
199 I am satisfied that price increases have not eroded the incidence of duty to such an extent as to justify upward adjustments of the specific rates of duty. But an adjustment is required in the case of imported cigarettes. (laughter)
(187) Meeting the fourth requirement in paragraph 160 above.
(188) Hong Kong Hansard, 1974-75, page 386.
(189) The number of salaries tax defaulters for 1976-77 (provisional) and earlier years is currently about 20,000.
(190) Meeting the fourth requirement in paragraph 160 above.
(191) B.S., 1974, paragraphs 127-131.
(192) B.S., 1975, paragraphs 109-113.
(193) B.S., 1976, Annex (4).
552 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
200 There has been a growing tendency for imported cigarettes to be made of tobacco which has been specially treated, the process is called “puffing”, so that, for a given weight, the volume is increased. This has resulted in less tobaco, by weight, being used in certain brands of imported cigarettes. Thus the amount of duty payable per packet of cigarettes has regrettably declined. I estimate that, as a result, the loss of revenue is of the order $9―11 million per annum.
201 Accordingly, I propose to increase the rate of duty on imported cigarettes by $1.65 per pound to $20.15 per pound. This will have the effect of restoring the yield and the amount of duty levied on a packet of 20 imported cigarettes will only increase by six cents. Thus retail prices should be increased only slightly and not necessarily immediately. In order to bring the new rate of duty into effect as from 2.30 p.m. today, Your Excellency this morning signed the necessary Order under the Public Revenue Protection Ordinance.
(d) Kerosene(194)
202 A further technical problem that has arisen is the growing tendency on the part of certain users of passenger and goods vehicles to mix kerosene and diesel. This is objectionable on at least two counts. (laughter) In the first place, because diesel engines are not intended to take such mixtures their use has added to the growing problems of pollution. And, secondly, in March 1972 I specifically abolished the duty on kerosene and certain other hydro-carbon oils(195) because it tended to add to industrial costs and the cost of living. I estimate that the practice of adulterating diesel with kerosene has resulted in a loss of revenue of about $1.5 million per annum. But it would clearly be inappropriate to seek to recover this loss which I have no doubt will grow by imposing a new duty on diesel/ kerosene mixtures as this would amount to condoning a practice that is at variance with environmental considerations.
203 In all these circumstances, I propose to introduce legislation in the near future to amend the Dutiable Commodities Ordinance in such a way as to make it an offence to use kerosene for automotive purposes.
(e) First registration tax on private cars(196)
204 When Commonwealth preference on motor vehicles was abolished in December 1975 non-enfranchised buses(197), goods vehicles, taxis and enfranchised
(194) Meeting the fourth and sixth requirements in paragraph 160 above. (195) B.S., 1972, paragraphs 49-50.
(196) Meeting the fifth requirement in paragraph 160 above.
(197) That is, non-enfranchised public buses, private buses, public light buses and private light buses.
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 553
public cars were brought within the scope of the Motor Vehicles (First Registration Tax) Ordinance for the first time, but at the rate of tax equal to that being paid on such vehicles of non-Commonwealth origin, vehicles were paying under the Commonwealth Preference (Motor Vehicles) Ordinance. So we now have a situation in which passenger vehicles providing public transport (other than enfranchised public buses and non-enfranchised public cars) attract an ad valorem rate of tax of 15%, while all other motor vehicles, that is to say, non-enfranchised public cars, private cars, and motor cycles and tricycles, attract an ad valorem rate of 30%(198).
205 I think the time has now come to take a harder look at this ad valorem tax on private cars. The present flat rate of 30% is a proportional rather than a progressive levy. While it is true to say that the purchaser of, say, a Rolls Royce (laughter) pays substantially more, in absolute terms, than the buyer of, say a Honda Civic, it can be argued forcefully that the person who buys a Rolls Royce should be taxed at a higher rate than the person who can just about afford a Honda Civic. A degree of progressivity is already an established feature of our system of personal taxation, and is also present in the annual tax on the ownership of motor vehicles(199).
206 I propose, therefore, to introduce a scale for first registration tax which will distinguish between basic, semiluxury and luxury private cars. Given current price levels, I think it would be reasonable to define a basic car as one which costs the importer no more than $20,000 in respect of the manufacturer’s price and the cost of freight and insurance(200). Likewise, I think a semi-luxury car is one which costs the importer between
(198) B.S., 1976, Annex (4), paragraphs 5-7.
(199) Take, for example, the annual licence fees payable under the Third Schedule to the Road Traffic (Registration and Licensing of Vehicles) Regulations made under the Road Traffic Ordinance which are in steps increasing in direct proportion to the cylinder capacity of the vehicle:
Licence fee
Cylinder capacity
payable $
(a) Up to 1,000 c.c. 350 (b) Exceeds 1,000 c.c. but does not exceed 1,500 c.c. 500 (c) Exceeds 1,500 c.c. but does not exceed 2,500 c.c. 750 (d) Exceeds 2,500 c.c. but does not exceed 3,500 c.c. 1,000 (e) Exceeds 3,500 c.c. but does not exceed 4,500 c.c. 1,250 (f) Exceeds 4,500 c.c. 1,500
(200) Under Section 4 of the Motor Vehicles (First Registration Tax) Ordinance, the value of the vehicle for First Registration Tax is, in practice, calculated as follows: (a) in the case of a new vehicle, the price of the manufacturer’s invoice plus insurance and freight;
(b) in the case of used cars, the value as determined under (a) less depreciation calculated at the rate of 25% p.a. for petrol-driven vehicles and at the rate of 20% p.a. for diesel-driven vehicles.
554 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
$20,000 and $30,000, and a luxury car one which costs more than $30,000. I must stress that these figures refer to the cost to the importer, which is not the same as the retail prices as this includes both first registration tax and needless to say the importer’s mark up. (laughter)
207 I propose to apply to the basic car a rate of 30%, that is to say, buyers of such cars will not be required to pay more by way of first registration tax than they are paying at present. Incidentally, sales of basic cars represent about three-quarters of total sales of cars in Hong Kong. In respect of semi-luxury and luxury cars, I propose to apply new rates of 35% and 40% respectively. Your Excellency this morning signed the necessary Order under the Public Revenue Protection Ordinance bringing the new rates into effect as from tomorrow morning. (laughter)
208 I estimate the additional revenue yield to be of the order of $15 million per annum. As regards retail prices, my proposals will have of course no effect on basic cars. For those in the semi-luxury and luxury categories the maximum effect of my proposals will be to increase retail prices between 2% and 6% respectively(201).
(f) Post Office charges
209 Earlier(202), I said that some of the cost centres within the Post Office are presently making a loss. While I accept the need for some of these to be cross-subsidised (and here I should mention that inland letters are operating at a loss), I can see no good reason why certain other loss-making services should not pay their way.
210 The first of these is inland printed papers: the accounts for 1976-77 indicate that a substantial loss is being incurred. This kind of postal traffic has been largely encouraged by the fact that the current rates of postal charges are low even by comparison with inland letters, and the traffic has grown to such proportions(203) that it has tended to have a down grading effect as it were on the postal service as a whole. Accordingly, the Postmaster General proposes to increase the present rates by 10 cents per item in respect of those weighing up to eight ounces, by 20 cents per item in respect of those weighing a pound and by 40 cents per item in respect of those
(201) The table in Annex (18), which is based on a sample of new vehicles registered in December 1977, shows the possible effect of these proposals on retail prices.
(202) See paragraph 194 above.
(203) In 1976-77 the posted traffic consisted of some 64.8 million items (c.f. 83.7 million letters).
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 555
weighing more than a pound, but not exceeding two pounds(204). These increases will not eliminate present losses entirely.
211 Another service currently operating at a loss is the re-direction of mail. There is no good reason why this service should be subsidised since it is provided for the benefit of individual persons or companies. To eliminate the loss, the Postmaster General proposes to increase the present charges to $60 for each period of 12 months following the initial three month period for which fees are not charged(205).
212 Finally, in respect of the Business Reply Service, it is proposed to increase the handling fee from 5 cents to 10 cents per item. This service is currently operating at a loss and there is no good reason why it should be subsidised, given that the service is provided for the convenience of individual businesses.
213 These proposals will come into effect on 1 April and appropriate Government Notices will be published during March. The Postmaster General expects little reduction in the use of postal services and I estimate the additional revenue for next year at rather more than $8 million.
(g) Stamp duties: general(206)
214 Stamp duty dates from the early part of the 17th century, being the brainchild of a Dutchman. It was first imposed in Hong Kong in 1866 on receipts, promissory notes and a number of other commercial documents. The present Stamp Ordinance was enacted in 1921 since when it has been amended over 60 times. As a tax on legal documents it has been extended over the years to a wide range of documents at relatively high rates by international standards.
(204) The present and proposed rates are as follows:
Present $
Proposed $
Increase $
2 oz. 0.10 0.20 0.10 4 oz. 0.20 0.30 0.10 8 oz. 0.40 0.50 0.10 1 lb. 0.80 1.00 0.20 2 lb. 1.30 1.70 0.40
(205) That is to say:
Present charges $
Proposed charges $
First three months Free First three months Free Next 12 months 15.00 Each succeeding 12 months 60.00 Each succeeding 12 months 30.00
(206) Meeting the third requirement in paragraph 160 above.
556 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
215 Statute law cannot keep pace with commercial practice and economic reality in a rapidly changing world. Our Stamp Ordinance has been amended no less than 21 times in the last ten years alone, but it remains, despite our best efforts, I fear, a somewhat archaic piece of tax legislation. Some of its provisions are arbitrary in their effect, some are difficult to interpret in relation to present-day documents and some are quite unenforceable. This latter point has been recognised elsewhere (e.g. in the United Kingdom) where the stamping of documents is largely voluntary. Here in Hong Kong stamping has always been compulsory, but now that there is such a multiplicity of different documents―and literally millions of documents are stampable― the application and attempted enforcement of the provisions of the Ordinance are complicated and expensive tasks. As I doubt whether a wholesale redrafting of the Ordinance would be worthwhile, and as it is axiomatic that a revenue law should not, if at all possible, impede economic development, I have concluded that the ambit of the ordinance should be drastically reduced. That is to say, I think the Ordinance should, in future, apply only to three major sources of duty, namely, contract notes on shares and marketable securities, assignments of movable property and leases and assignments of leases. The cost to the revenue of this reform measure in 1978-79 will be $130 million(207).
216 I have just explained, Sir, why I think the ambit of the Stamp Ordinance should be drastically reduced. As for the practical benefits of doing this: I must say this the Collector of Stamp Revenue will benefit in that much needed staff can be redeployed on other duties. Administrative savings will also be enjoyed by those businesses such as banks which, whilst not actually bearing the incidence of stamp duties themselves, employ a large number of staff to calculate and collect duty and professional staff to advise them on how not to fall foul of an esoteric and antiquated revenue law. One must never overlook the fact that the cost of collecting a tax is not restricted to the cost to the Government. This is particularly so in the field of indirect taxation where the cost to the private sector can be substantial.
217 In addition, however, to the administrative savings to both the public and private sectors, there will be other more positive benefits. For example, the development of Hong Kong as a financial centre will be facilitated for
(207) Yield from contract notes,
assignments and
leases
($mn)
Total
yield
of stamp duty
($mn)
(1) as a % of (2)
(1) (2) (3)
1974-75 227 303 75 1975-76 284 383 74 1976-77 300 428 70 1977-78 (Revised Estimate) 364 490 74 1978-79 (Estimate) 420 550 76
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 557
I accept the argument, often advanced by financial institutions and their professional advisers, that the imposition of an ad valorem duty on foreign exchange transactions(208) and the issue of marketable securities has been an impediment. Importers and exporters will be freed of duty on foreign currency transactions and so will tourists whose representatives have claimed that the payment of stamp duty by visitors on currency transactions is a major irritant. Aspirant home owners will no longer have to pay duty on mortgages; the construction industry will no longer have to be concerned about the possibility of having to pay an ad valorem duty on performance bonds; charities will no longer have to stamp pledges under seal; and last, but not least, the man in the street will be freed of the duty of 30 cents on cheques.
218 In spite of this major surgical exercise there will still be unsatisfactory features in what is left of the Stamp Ordinance and it is my intention, subject to the approval of Finance Committee, to appoint a stamp duty specialist in the Inland Revenue Department to undertake a residual tidying up exercise of the Ordinance towards the end of this year.
(h) Stamp duty on contract notes(210)
219 My last revenue proposal for 1978-79 will be of interest to investors in the stock market. (laughter) But let me say, straight away, that I have nothing further to say about the taxation of trading profits beyond what I said in this Council on 9 November last(211).
220 In 1973, I increased the rate of stamp duty on contract notes in respect of share transactions from 0.2% to 0.4% on each note, that is to say, from 0.4% to 0.8% on each transaction (or, rather, from $4 to $8 per mille). I did this for two reasons: first, to raise additional revenue from this source at a time when reported daily turnover was many times what it is today(212); and, secondly, because I thought it prudent to introduce a regulatory element though this element was not such as to have more than a slight effect on the market.
(208) Thus, too, the licensing of money changers will no longer be necessary.
(209) Full details of the proposed amendments to the Schedule to the Stamp Ordinance are contained in Annex (19).
(210) Meeting the second requirement in paragraph 160 above.
(211) See Annex (20).
(212) Average daily turnover on the four exchanges:
$ mn
1972-73 270
1977-78 (Estimate) 23
558 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
221 I do not believe that a case for reduction in the rate of stamp duty can be argued on quantitative grounds, that is to say, I do not believe that turnover is so rate-sensitive that a reduction of X% in the rate would lead to such an increase in turnover that the net effect on total yield would be minimal. However, i accept that professional traders contemplating narrow margin arbitrage or other short-term transactions involving large sums may well find the present rate of $8 per mille discouraging. Furthermore, I admit that this rate was introduced in a trading climate very different from the present day and I am not indifferent to the importance of the stock market as a source of equity capital. Accordingly, I propose to reduce the present rate on each transaction from $8 per mille to $6 per mille at an estimated cost to the revenue in 1978-79 of $25 million.
222 Your Excellency this morning signed three Orders under the Public Revenue Protection Ordinance to give effect to the proposals to repeal various heads of charge in the Schedule to the Stamp Ordinance and to reduce the rate of duty on contract notes. Three separate Orders are, I am afraid, necessary because there will be three effective dates. I would have liked to have made all the various changes effective immediately, but a few days will be needed to provide and issue stamps of appropriate denominations as well as advise literally hundreds of money changers that duty on foreign currency transactions has been repealed. So, duty on bank notes will be repealed with effect from today as this is payable monthly; duty on cheques will be repealed with effect from tomorrow; and the repeal of the other heads of charge and the reduction in the rate of duty on contract notes will take effect next Monday. The Revenue Protection Orders, including the Bills to amend the Stamp Ordinance, will be published in an issue of the Gazette Extraordinary this evening.
(6) Estimated Outturn in 1978-79
223 The net cost to the revenue in 1978-79 of these proposals will be about $120 million, thus reducing estimated revenue from $10,366 million to $10,246 million. As estimated expenditure is $10,266 million, this leaves me with a small deficit of $20 million and so, effectively, I am obviously still budgetting for a balance.
CONCLUSION
224 That concludes, Sir, my presentation of the Draft Estimates of Expenditure and my revenue proposals for the Year of the Horse, and my present view of budgetary and fiscal strategy for the three years of the new forecast period. I hope I have provided Honourable Members with sufficient food for thought for the debate on this motion.
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 559
225 But may I make, Sir, one last point? As we move towards the end of the 1970s and start thinking about the early years of the next decade, we should begin to assess the implications for our system of financial administration and, indeed, for the organization of the Government’s internal administration as a whole, of the present size and scope of our activities. Whether one considers the total volume of General Revenue Account transactions of over $20,000 million in 1978-79 or of Consolidated Account transactions of over $23,000 million (not to mention the activities of the Mass Transit Railway Corporation), it is obvious that our situation has changed out of all recognition. Then, again, let us not forget that the civil service now comprises nearly 126,000 posts and the number will have to increase further during 1978-79. Building on the foundations laid by our predecessors in the 1950s and 1960s, the public sector, and the economy of which it forms such a vital part, have been lifted, by all concerned, to a new order of magnitude. So, whilst our financial and administrative systems have stood us in good stead over the years, and overhead costs have been kept very low by international standards, they may not be entirely suitable for present day circumstances. It will, therefore, be necessary for careful thought to be given to the way in which our Administration might be adapted to meet the challenges of the years ahead of us.
226 With that said, Sir, I now have much pleasure in moving that the debate on this motion be adjourned.
560 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 Annex (1)
NOTE ON PREPARATION OF GDP ESTIMATES
In the annual budget speech in late February/early March the Financial Secretary announces the preliminary estimates of expenditure on the gross domestic product for the previous year and the provisional estimates for the year before that (e.g. in the 1978 budget speech the preliminary estimates are for 1977 and the provisional estimates for 1976). Even though the preliminary estimates are for a year that has finished they are, to some extent, a forecast because they have to be prepared before all the statistics for the final quarter have arrived. This is true, for example, of the trade statistics from which are derived the statistics for expenditure on exports and imports; and the import statistics are used in calculating private consumption and investment in plant and machinery. For these and other reasons, the estimates given in the budget speech for the immediately preceding year are called preliminary which serves as a marker that a revision will almost certainly take place.
2 The next formal revision for the year concerned produces the provisional estimates which are published in the next year’s Economic Background to the Budget. Between the preliminary and the provisional estimates are published revised preliminary estimates in the Half-Yearly Economic Report. Then, finally, the provisional estimates are gone over again and final estimates are published in the next Half-Yearly Economic Report.
3 However, these final estimates are only final in the sense that there is not a standard routine procedure that automatically leads to a revision. But it does not mean that the estimates are not capable of being improved―far from it. The Government is committed to a substantial programme to improve and expand the statistics on the economy. So various surveys of production are in hand to enable the GDP to be measured via output as well as expenditure statistics and plans are in hand to improve the coverage and quality of statistics relating to imports and exports of services. This does not mean that estimates of the GDP based on expenditure statistics alone are completely unreliable. They are certainly good enough to tell us where we are in the cycle of economic activity and from which sector the growth is derived. But they are not good enough, for example, to make international comparisons or fine judgments about changes in expenditure on some components such as building and construction. In short, they are useful provided they are not used in ignorance of their limitations. The limitations on their use will be diminished as their range and sophistication improve.
HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978 561 Annex (2)
FORECAST INCREASES IN GROSS DOMESTIC PRODUCT AND PRICES, 1978 ON 1977
Real
increase (%)
Price
increase (%)
Private consumption expenditure +10 + 5 Government consumption expenditure +14 + 5 Gross domestic fixed capital formation: +15 +10
Building and construction +20 +13 Plant and machinery +10 + 7 Exports of goods: + 6 + 5
Domestic exports + 5 + 5 to U.S. + 6 + 5 F.R.G. + 4 + 6 U.K. + 3 + 4 Other countries + 4 + 5 Re-exports + 8 + 5 Imports of goods + 9 + 4 Exports less imports of services +10 + 5 Increase in stocks + 6 + 4 Gross Domestic Product + 9 + 7
Consumer Price Index + 5
Annex (3)
TERMS OF REFERENCE OF THE ADVISORY COMMITTEE ON DIVERSIFICATION (a) Given:
(i) the importance of maintaining the growth rate of the economy;
(ii) the considerations underlying established fiscal policies;
(iii) the availability of industrial land as forecast by the Special Committee on Land Production:
(b) The Advisory Committee on Diversification is required to consider: (i) the principal factors which have contributed to Hong Kong’s economic growth over the past 15 years;
(ii) the past, present and likely future course of the regulation of international trade in textiles and the implications for the growth of the economy;
562 HONG KONG LEGISLATIVE COUNCIL ― 1 March 1978
(iii) the factors which have been influential in attracting or deterring the establishment of new activities in the manufacturing and other sectors of the economy in recent years, including:
(A) financial facilities
(B) fiscal policies
(C) land policies and procedures
(D) policies relating to education and industrial training
(E) arrangements for the promotion of trade in overseas markets, and of investment and joint ventures from overseas;
(iv) comparative practices in comparable economies which have successfully encouraged the establishment of new industries.
(c) And to advise:
whether the process of diversification of the economy, with particular reference to the manufacturing sector, can be facilitated by the modification of existing policies or the introduction of new policies.
Annex (4)
SUMMARY OF REVENUE AND EXPENDITURE, 1971-72 AND 1974-75 TO 1978-79
With effect from 1 April 1975 expenditure on services provided by the Government on behalf of the Urban Council and the Housing Authority, comprising mainly personal emoluments and public works non-recurrent projects, and reimbursements from the Urban Council and the Housing Authority were taken below-the-line. For purposes of comparison, the figures given in the summary in respect of 1971-72 and 1974-75 have been adjusted also to exclude these transactions.
1971-72 Adjusted actual
($ mn)
1974-75 Adjusted actual
($ mn)
1975-76
Actual ($ mn)
1976-77
Actual ($ mn)
1977-78 Revised Estimates ($ mn)
1978-79 Draft
Estimates ($ mn)
Recurrent Revenue 3,088 5,156 5,843 6,849 8,074 9,130 Less Recurrent Expenditure 1,973 4,175 4,450 5,224 6,248 7,323
Surplus on Recurrent Account 1,115 981 1,393 1,625 1,826 1,807 Capital Revenue 314 437 413(*) 644 1,161(†) 1,236 Less Capital Expenditure 745 1,798 1,582 1,367 1,912(‡) 2,943 Surplus/deficit 684 -380 224 902 1,075 100
Total Revenue 3,402 5,593 6,256 7,493 9,235 10,366 Total Expenditure 2,718 5,973 6,032 6,591 8,160 10,266 (*) Excluding loans and grants totalling $264 million credited to General Revenue. (†) Excluding a loan of $27 million, and land premia of $335 million from the Mass Transit Railway Corporation and of $528 million from the Home Ownership Scheme, credited to General Revenue.
(‡) Excluding payments of $335 million to the Mass Transit Fund and $528 million to the Home Ownership Fund.