HONG KONG LEGISLATIVE COUNCIL―28 February 1979 465
OFFICIAL REPORT OF PROCEEDINGS
Wednesday, 28 February 1979
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 JACK CATER, KBE, 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 ALAN JAMES SCOTT, JP
SECRETARY FOR HOUSING
THE HONOURABLE GARTH CECIL THORNTON, OBE, 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, CMG, JP
SECRETARY FOR THE ENVIRONMENT
DR THE HONOURABLE THONG KAH-LEONG, JP
DIRECTOR OF MEDICAL AND HEALTH SERVICES
466 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
THE HONOURABLE ERIC PETER HO, JP
SECRETARY FOR SOCIAL SERVICES
THE HONOURABLE JOHN CHARLES CREASEY WALDEN, JP DIRECTOR OF HOME AFFAIRS
THE HONOURABLE JOHN MARTIN ROWLANDS, JP
SECRETARY FOR THE CIVIL SERVICE
THE HONOURABLE JAMES NEIL HENDERSON, JP
COMMISSIONER FOR LABOUR
THE HONOURABLE OSWALD VICTOR CHEUNG, CBE, QC, JP THE HONOURABLE ROGERIO HYNDMAN LOBO, CBE, JP
THE HONOURABLE JAMES WU MAN-HON, OBE, JP
THE HONOURABLE HILTON CHEONG-LEEN, OBE, JP
THE HONOURABLE LI FOOK-WO, CBE, JP
THE HONOURABLE JOHN HENRY BREMRIDGE, OBE, JP
DR THE HONOURABLE HARRY FANG SIN-YANG, OBE, JP THE HONOURABLE LO TAK-SHING, OBE, JP
THE HONOURABLE ALEX WU SHU-CHIH, OBE, JP
THE REV. THE HONOURABLE JOYCE MARY BENNETT, OBE, JP THE HONOURABLE CHEN SHOU-LUM, OBE, 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, OBE, SJ, JP THE HONOURABLE PETER C. WONG, JP
THE HONOURABLE WONG LAM, OBE, JP
DR THE HONOURABLE RAYSON LISUNG HUANG, CBE, JP THE HONOURABLE CHARLES YEUNG SIU-CHO, JP
DR THE HONOURABLE HO KAM-FAI
THE HONOURABLE ALLEN LEE PENG-FEI
THE HONOURABLE DAVID KENNEDY NEWBIGGING, JP
THE HONOURABLE ANDREW SO KWOK-WING
ABSENT
THE HONOURABLE FRANCIS YUAN-HAO TIEN, OBE, JP
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 467
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:
Boilers and Pressure Receivers Ordinance.
Boilers and Pressure Receivers (Exemption) (Consolidation) (Amendment) Order 1979 ..................................................................................................... 45
Tax Reserve Certificates Ordinance.
Tax Reserve Certificates (Fourth Series) (Amendment) Rules 1979 ............. 46
Public Health and Urban Services Ordinance.
Food Business (New Territories) Regulations (Exemption from Regulation 31(1))(No 2) Notice 1979............................................................................... 47
Public Health and Urban Services Ordinance.
Hawker (Permitted Place) Declaration No 1/1979 ......................................... 48
Interpretation and General Clauses Ordinance.
Specification of Public Office........................................................................ 49
Public Order Ordinance.
Marine Closed Area (No 3) Order 1979......................................................... 50
Merchant Shipping Act 1974.
Merchant Shipping (Indemnification of Shipowners) (Hong Kong Dollars Equivalents) Order 1979 ................................................................................ 51
Merchant Shipping (Oil Pollution) Act 1971.
Merchant Shipping (Limitation of Liability for Oil Pollution) (Hong Kong Dollar Equivalents) Order 1979 ..................................................................... 52
Merchant Shipping (Oil Pollution) (Hong Kong) Order 1975.
Merchant Shipping Act 1974 (Commencement) Notice 1979........................ 53
468 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
Subject LN NO
Country Parks Ordinance.
Tai Lam, Tai Mo Shan and Lam Tsuen Country Parks (Designation) Order 1979................................................................................................................ 54
Public Health and Urban Services Ordinance.
Pleasure Grounds (Amendment) By-laws 1979 ............................................. 55
Interpretation and General Clauses Ordinance.
Amendment of the Definitions of ‘British Territory’ and ‘Commonwealth’ . 56 Sessional Papers 1978-79:
No 38―Statement of Accounts of the Prisons Department Welfare Fund ended 31 March 1978 (published on 28.2.79).
No 39―Supplementary Provisions approved by the Urban Council during the third quarter of the fiscal year 1978-79 (published on 28.2.79).
No 40―Draft Estimates of Expenditure 1979-80 (published on 28.2.79). No 41―Draft Revenue Estimates 1979-80 (published on 28.2.79).
No 42―Draft Supporting Financial Statements and Statistical Appendices from the Estimates of Revenue and draft Estimates of
Expenditure 1979-80 (published on 28.2.79).
No 43―Report of the Establishment Sub-Committee of Finance Committee for 1978-79 (published on 28.2.79).
No 44―Estimates of Revenue and Expenditure for the year ending 31 March 1980―Report of the Public Works Sub-Committee of Finance
Committee 1978 (published on 28.2.79).
Government business
First reading of bill
APPROPRIATION BILL 1979
Bill read the first time and ordered to be set down for second reading pursuant to Standing Order 41(3).
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 469
Second reading of bill
APPROPRIATION BILL 1979
THE FINANCIAL SECRETARY moved the second reading of:―‘A bill to apply a sum not exceeding $12,454,070,000 to the service of the financial year ending on 31 March 1980.’
He said:―
Paragraphs
MOTION 1 ACKNOWLEDGEMENTS 2 STRUCTURE OF SPEECH 3 - 4
PART I: THE ADJUSTMENT PROCESS
(1) External Dependence and the Adjustment Process:
(a) Theoretical framework 5 - 14 (b) Role of Government Policy:
(i) General 15 - 16 (ii) Social and related policies 17 (iii) Government as an employer 18 (iv) Government expenditure 19 - 22 (v) Land policy 23 - 24 (vi) Regulation of markets 25 - 30 (2) Course of the Adjustment Process, 1972 to 1978:
(a) Introduction 31 (b) Under a fixed exchange rate regime, 1972 to 1974 32 - 34 (c) Under a floating exchange rate regime, 1975 to 1978:
(i) 1975 and 1976 35 - 37 (ii) 1977 (Provisional estimate of GDP) 38 - 44 (iii) 1978 (Preliminary estimate of GDP) 45 - 55 (iv) Implication of differences between the forecast of GDP in 1978
and the preliminary estimate 56 - 62 PART II: MANAGEMENT OF THE PUBLIC FINANCES
(1) General Objectives of Budgetary Policy 63 - 64
(2) Restatement of Budget Guidelines:
(a) Relative size of the public sector 65 - 66 (b) Construction of the annual budget 67 - 68 (c) Balance of the fiscal system 69 (d) Steady progression 70 (e) Fiscal reserves 71 - 72 (f) Summary 73
470 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
Paragraphs
(3) Assessment of Performance, 1972-73 to 1978-79: 74 (a) 1972-73 to 1974-75 75 - 77 (b) 1975-76 78 (c) 1976-77 to 1978-79: 79
(i) 1976-77 80 (ii) 1977-78 (Final Accounts) 81 (iii) 1978-79 (Revised Estimates) 82 - 90
(4) Summary of Present Position:
(a) Growth rate of public expenditure and relative size of public sector 91 - 92 (b) Budget guidelines 93 (c) Balance of the fiscal system 94 - 95 (d) Financial position 96 - 99
PART III: THE ECONOMY AND THE PUBLIC SECTOR, 1979 TO 1982 (1) Introduction 100 (2) Forecast of Expenditure, 1979-80 to 1982-83 101 – 103 (3) Initial Forecast of GDP in 1979 104 - 107 (4) Emphasis of Budgetary Policy in 1979-80 108 (5) Acceptable Expenditure Limits for 1979-80 109-112 (6) Final Forecast of GDP in 1979:
(a) Cash inputs and assumptions 113 (b) Private consumption expenditure 114 - 115 (c) Gross domestic fixed capital formation 116 - 118 (d) Exports 119 - 120 (e) Imports 121 (f) Total expenditure on GDP 122 - 123 (g) Prices 124 (h) Conclusion 125
(7) Outlook for the Economy in the Forecast Period, 1980 to 1982:
(a) Protectionism 126 (b) Anti-inflationary policies of overseas governments 127 (c) Advisory Committee on Diversification 128 (d) Economic relations with China 129 (e) Immigration 130 (f) Trend growth rate 131
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 471
Paragraphs
PART IV: THE BUDGET FOR 1979-80
(1) Introduction 132
(2) Draft Expenditure Estimates:
(a) General 133 (b) Total expenditure 134 - 135 (c) Recurrent 136 - 140 (d) Capital 141 - 142 (e) Pattern of expenditure (broad trends) 143 - 146 (f) Expenditure on selected services 147 - 154
(3) Revenue Estates:
(a) Total revenue 155 (b) Recurrent 156 - 162 (c) Capital 163 - 164
(4) Outturn and Summary 165 - 168
(5) Revenue Proposals for 1979-80:
(a) General 169 - 170 (b) Direct taxation:
(i) Depreciation allowances 171 - 172 (ii) Salaries tax: supplementary personal allowance 173 (iii) Salaries tax: 30% marginal rate 174 - 177 (iv) Estate duty: controlled companies 178 - 182 (v) Estate duty: gifts inter vivos 183 (c) Indirect taxation:
(i) General 184 - 186 (ii) Duty on liquors 187 (iii) Duty on tobacco 188 (iv) Duty on hydrocarbon oils 189 - 192 (v) First registration tax 193 - 197 (d) Fees and charges:
(i) General 198 (ii) Cost-related 199 (iii) Royalty-loaded 200 (iv) Tax-loaded: 201
(A) Motor vehicle licences 202 - 210 (B) Buoy and anchorage fees 211 - 212 (C) Business registration fee 213 - 214 (e) Implementation 215
(6) Revised Outturn for 1979-80 216 - 217
(7) Fiscal Policy in the Future:
(a) Reform of the tax system:
(i) Third Inland Revenue Ordinance Review Committee 218 - 224
472 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
Paragraphs
(ii) Taxation treatment of retirement benefits 225 - 226 (iii) Share options 227 (iv) Stamp Ordinance 228
(b) Rating 229 - 230 (c) Management of public utilities 231 - 233
PART V: ACHIEVEMENT OF GENERAL OBJECTIVES OF BUDGETARY POLICY
(1) Introduction 234 (2) First and Second Objectives: Expenditure Proposals and Fiscal Policy 235 (3) Third Objective: Maintenance of Flexibility of the Cost/Price Structure 236 - 240
(4) Fourth Objective: Monetary Implications of the Government’s Bank Balances
214 - 243
(5) Fifth Objective: Economic Stability 244 - 265 CONCLUSION 266 - 267
MOTION
Sir, I move that the Appropriation Bill 1979, 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 1979-80, and the Revenue Estimates, together with the usual supporting documents, the scope of one of which, namely, the Graphic Guide, has been widened. Yet again, I must publicly acknowledge the diligent efforts of all concerned in their preparation: I refer particularly to my colleagues in the Finance Branch of the Government Secretariat on whom the main burden falls and also to my colleagues in the Economic Services and Monetary Affairs Branches, in the Census and Statistics Department and in the revenue departments; and, of course, on the production side, I refer to the very uncomplaining efforts of secretarial staff in the Finance Branch, to the highly competent team of translators in Chinese and typists assembled for me by the Home Affairs Department and to the Government Printer and his staff in the Printing Department. I must also thank heads of departments for their cooperation and understanding during what was being, in some ways, a
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 473
singularly difficult estimates season. Finally, I am most grateful for the assistance of Unofficial Members of the Economic Review Committee in the preparation of the Economic Background document.
STRUCTURE OF SPEECH
3 Budgetary policy, using that term in its generic sense to include fiscal, economic and monetary policies, must always seek to be at least compatible with the likely movement of various economic aggregates and costs and prices. But, in certain circumstances, namely, a slowing down in the growth rate of the economy and/or a situation of threatened demand pull inflation, the need to ensure compatibility between budgetary policy and the process whereby the economy adjusts to changing internal and external influences assumes a critical importance.
4 In order to stress that my budgetary strategy for 1979-80 has had full regard to the present situation of, and the outlook for, the economy―indeed the economy has been my starting point―this year’s budget speech follows a rather different pattern from those of recent years. Thus, I shall begin by analysing the implications of a floating exchange rate regime for the adjustment process concluding with an analysis of the consequences of the growth rate of total final demand exceeding the growth rate of the economy’s output, there being signs, I now realize with the benefit of hindsight, that this was beginning to happen in early 1978 (PART I). After identifying five general objectives of budgetary policy, I shall then go on to review how successfully, or otherwise, the public finances as such have been managed in recent years in terms of our budget guidelines (PART II). The inescapable emphasis of budgetary policy in 1979-80 will then begin to become apparent and, after surveying the prospects for our economy on the basis of certain assumptions (PART III) I shall spell out the Government’s own budget for 1979-80 concluding with a brief reference to fiscal policy in the future (PART IV). Finally, in assessing the extent to which the five general objectives of budgetary policy are likely to be achieved in 1979-80, I shall explain that, as the beneficial effect of the budget itself on the growth rate of total final demand is limited, other measures of restraint are required if the necessary emphasis of budgetary policy is to be recognized (PART V).
PART I: THE ADJUSTMENT PROCESS
(1) External Dependence and the Adjustment Process
(a) Theoretical framework
5 Our present situation is characterised by an increasing imbalance between demand for the output of the economy and the economy’s ability to supply that output. That is to say, total final demand, defined as private consumption expenditure, Government consumption expenditure, gross domestic fixed capital formation and exports of goods, total final demand is growing faster than the gross domestic product.
474 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
6 The three post-recession years, 1976 to 1978, have seen a higher growth rate of GDP in real terms, and the GDP per capita, than any similar period in the past(1). My concern, therefore, is not so much with our aggregate performance as such, as with the cost at which it has been achieved. Despite the steady deceleration of the growth rate of GDP in the last two of the three post-recession years―from 17% in 1976 down to 12% in 1977 and to 10% in 1978―the growth momentum of the economy has involved a faster growth rate of imports than of exports and thus has only been sustained at the cost of a widening visible trade deficit, a depreciation of the exchange value of the Hong Kong dollar and the very real prospect of accelerating inflation.
7 Thus there are two questions to which we must address our minds: first, how will the economy respond to this situation? Secondly, can the Government help the economy to adjust to a growth rate that is both rapid and sustainable (that is to say, can the Government help to bring about a situation in which the economy is growing as rapidly as it can, consistent with the maintenance of both internal and external equilibrium)? In applying our minds to these two questions, we must obviously have due regard for the different social consequences of particular courses of action.
8 Internal equilibrium involves the demand for, and supply of, the output of the economy remaining roughly in balance without domestic prices changing any faster than is justified by changes in the world prices of Hong Kong’s imports. External equilibrium involves the balance of payments remaining in balance without any need for the relationship between interest rates in Hong Kong and interest rates elsewhere to change or any need for the effective exchange rate of the Hong Kong dollar to maintain the balance.
(1) Or, at any rate, since estimates of expenditure on the GDP have been compiled (ie since 1961), viz:
GDP
GDP (%)
per capita (%)
1962 10.2 5.6 1963 11.7 7.9 1964 8.3 5.7 1965 18.3 15.3 1966 6.2 5.3 1967 8.9 6.2 1968 4.5 2.3 1969 14.0 12.2 1970 5.7 3.2 1971 3.2 1.0 1972 7.2 5.4 1973 14.2 11.6 1974 2.2 ―0.3 1975 2.9 1.1 1976 16.7 15.4 1977(*) 11.9 10.1 1978(**) 10.0 7.8 Notes: (*) Based on provisional estimate.
(**) Based on preliminary estimate.
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 475
9 A growth rate of output which is consistent with the maintenance of external equilibrium is dependent in part on Hong Kong’s export performance which, in turn, is dependent on the growth rate of world trade, on the extent to which the pattern of our exports fits the pattern of demand of the rest of the world and on the extent to which Hong Kong is able, and allowed, to take advantage of export opportunities.
10 However, external equilibrium cannot be considered independently from internal equilibrium. Both to produce for export and to help satisfy domestic demand, Hong Kong must import. Thus, if the growth rate of total demand from these two sources, that is to say, the growth rate of total final demand exceeds the growth rate of GDP and if, at the same time, domestic capacity is fully utilized, there will be a tendency for imports to rise very rapidly, for costs and prices to rise and for firms producing for the domestic market to bid away resources from firms producing for export(2). In other words, external disequilibrium can arise both from external influences and, as at present, from internal disequilibrium.
11 In no economy can disequilibrium be sustained indefinitely and forces will be generated to effect an adjustment. But the longer disequilibrium persists the more severe will be the necessary correction(3). So any government must consider whether there are any steps that it can, and should, take to facilitate and expedite the adjustment process. So far as this Government is concerned we have to think through, at the same time, the implications of the present floating exchange rate regime.
12 Pure economic theory suggests that, under a fixed exchange rate regime, provided the cost/price structure is flexible, deficits and surpluses in the balance of payments will be eliminated by changes in the money supply and in the level of real incomes. By contrast, under a floating exchange rate regime, such deficits and surpluses are seen as being eliminated by changes in the exchange rate with little or no effect on the money supply(4). Under a floating exchange rate regime, the emergence of excess demand which is, indeed, characteristic of our present situation(5), is not constrained, to anything like the same extent, by the loss of foreign exchange reserves that would
(2) Or, at least, to prevail in the competitive bidding for additional resources as they come on to the market.
(3) Indeed, an offsetting over-correction is likely to be required before equilibrium can be restored. (4) More sophisticated analyses modify this simple view by allowing for the interactions between interest rates, exchange rates and international capital movements, but the relatively stark contrast between the implications of the two regimes tends to be maintained.
(5) Such excess demand can arise as a result of an increase in the relative size of the public sector, even if this does not involve a deficit in the public accounts. It can also arise from an overrapid expansion of domestic credit leading to the growth rate of the money supply seriously outrunning the growth rate of the economy’s ability to produce. In the absence of any direct influence by the Government over the creation of credit, the eventual adjustment to a sustainable growth rate may be seriously delayed.
476 HONG KONG LEGISLATIVE COUNCIL―28 February 1979 result, under a fixed exchange rate regime, from a deficit in the balance of payments.
13 Given the problems of being linked to one currency while others are floating, and of choosing a suitable and acceptable currency to be linked to, we have no option but to have the Hong Kong dollar floating relative to all other currencies. However, it does not necessarily follow that the best course of action is to allow changes in the exchange value of the Hong Kong dollar to be the main mechanism through which the adjustment process operates. In an open economy as dependent on external trade as Hong Kong, and given the fact that demand for imports in Hong Kong is price inelastic―because we are so dependent on imports―the exchange rate changes required to correct large deficits in the balance of trade may be very large indeed. They may be even unacceptably large in terms of their inflationary impact on the domestic prices of imported goods and, indeed, on the internal cost/price structure generally.
14 A depreciation of the exchange value of the Hong Kong dollar would not improve the competitiveness of domestic exports if, at the same time as the Hong Kong dollar cost of imports increased, the other elements in the cost of production also increased to the same extent. As these other cost components are mostly wages and profits, what is needed for a depreciation to be fully effective in restoring the competitiveness of domestic exports is for labour costs and/or profit margins to be flexible downwards(6) at least in real terms. In the mature phase of the upswing, when the labour market is tight, the extent to which reductions in labour costs, on the one hand, and a squeezing of profit margins, on the other, assist the adjustment process will be reduced. Thus, it may be appropriate, in the case of such an economy as ours, particularly at present, to seek to spread the burden of the adjustment process by bringing into play other mechanisms.
(b) Role of Government policy
(i) General
15 Before considering what these might be, and the one which springs immediately to mind is interest rates, I must review the role of Government policy in the way the economy develops and in the way the adjustment process operates. This role has always been more limited than in many, perhaps most, other economies, but it is still of some significance.
(6) Historically, the flexibility of Hong Kong’s cost/price structure has largely been a consequence of three inter-related factors. First, the determination of wages has been largely a function of the forces of supply and demand. Hence, money wages are relatively less rigid downwards here than elsewhere. Secondly, the supply of labour here is relatively wage elastic. However, this may be changing. Thirdly, the labour force is mobile, both geographically and between, and within, industry sectors.
Experience elsewhere suggests that, as the overall standard of living improves, workers’ attitudes change. Also, as industries tend to use more capital-intensive and/or skill-intensive techniques, the labour force may become less mobile. If this were to happen here the result would be a less flexible cost/price structure.
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 477
16 Through its social and other policies, as well as its direct role as an employer, the Government strongly influences how the labour market operates. Through Government expenditure it influences the pressure of demand and the distribution of resources within the economy. Through the provision of infrastructural facilities, it contributes directly to the productive capacity of the economy. Through its policy on land production and disposal it has an influence on the availability and price of land. Finally, through the regulation of certain markets, and its influence on other markets, and the taking of such decisions as the decision to allow the Hong Kong dollar to float, the Government alters both the environment within which the adjustment process operates and the form of the mechanism itself.
(ii) Social and related policies
17 The Government must weigh carefully the possible effects of public policy decisions aimed at bettering the social conditions of our labour force on the efficiency of the adjustment process. On the one hand, Hong Kong’s continuing economic prosperity requires that, whenever possible, the flexibility of the cost/price structure and the mobility of resources are preserved. On the other hand, such decisions may have a tendency unintentionally to reduce that flexibility and mobility. As a consequence, the Government may have to take more positive steps to help the operation of the adjustment process to offset any deterioration that may have taken place in the efficiency of its operation flowing from the implementation of social policies.
(iii) Government as an employer
18 The Government directly employs almost 6% of all employees in Hong Kong(7) making it the largest single employer and, although formally, Civil Service salaries and conditions of service are determined by comparisons with salaries in the private sector, there can be no doubt employers in the private sector make comparisons with the Civil Service. Thus there is, in practice, a degree of inflationary leapfrogging, particularly under conditions of labour shortage.
(iv) Government expenditure
19 Because of the extremely open nature of the Hong Kong economy, the scope for using changes in Government expenditure as a means of altering the growth rate of the economy is more limited than in most other economies. An increase or a decrease in the growth rate of Government expenditure will be limited in its effect on the level of domestic demand because of the high import content of such demand but, to the extent that domestic demand would, as a consequence, grow more rapidly or more slowly, an increase or a decrease will tend to alter the growth rate of GDP.
(7) In the third quarter of 1978, employment in the Civil Service was 117,835 and total employment in the economy was 2,003,000, so that 5.9% of employees were employed in the Civil Service.
478 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
20 Should the growth rate of Government expenditure increase during the mature phase of an upswing, not only will this add to the pressure of demand, particularly if it tends to be concentrated in a particular sector of the economy, such as the building and construction sector, but also it may distort the cost/price structure and attract resources away from other sectors.
21 Although the Government’s capital works programmes are essential to the growth rate of the economy in the medium and longer term, their impact in the short-term on the market for the output of the building and construction industry can be considerable and this is particularly so when their relative importance is growing rapidly. In terms of both employment(8) and expenditure(9), the public sector (defined here in national accounts terms and therefore inclusion of the Mass Transit Railway project) now absorbs about half of total output.
22 If a rapid increase in the public sector’s demand for the output of the building and construction industry leads to an increase in the work-load of that industry, it is likely to have a disproportionate effect on prices and the demand for resources(10). This is because, as virtually all machinery must be imported, increased investment in machinery to meet an upsurge in demand takes time to organize, and because the supply of suitably skilled labour is limited. Apart from the higher wages required to attract additional labour, that labour will be unskilled, at least initially and, because of lower productivity, its employment will raise labour costs per unit of output. Although in most markets in Hong Kong, there is some restraint on the rate of increase of prices imposed by competition from imported products, the nature of the building and construction industry ensures that prices for its
(8) Number of manual workers on building and construction sites:
In September Public(*) (MTR) Private Total Public/Total (%)
1976 16,019 (3,442) 28,829 45,848 34.9 1977 27,761 (6,937) 32,879 60,640 45.8 1978 34,808 (7,275) 33,163 67,971 51.2 Note: (*) Including MTR.
(9) Expenditure on building and construction at current prices ($ million): Public(*) (MTR) Private Total Public/Total
(%)
1976 1,815 ( 646) 2,548 4,363 41.6 1977(**) 2,815 (1,382) 3,489 6,304 44.7 1978(***) 4,194 (1,876) 4,345 8,539 49.1 Notes: (*) Including MTR.
(**) Provisional estimates.
(***) Preliminary estimates.
(10) In any market, where one buyer has a dominant role, that buyer’s expenditure will have an important influence on the prices charged by the suppliers and the prices they can offer to attract resources. If total demand for the suppliers’ output is close to their total capacity to supply, any increase in demand will tend to raise prices and/or increase the amount of resources absorbed by this industry. The distribution of these effects will depend on how specialized the resources required are and, in the short run, on the rate at which total demand is increased.
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 479
output are protected from such competition. Thus, the public sector has a dominant influence in an industry which is largely protected from competition from imports, and in which the prices received for its output and the prices paid for its labour inputs will tend to feed through to the rest of the economy. Also, decisions on whether or not to award contracts for public works projects are not taken on purely financial grounds and, therefore, the constraining influence of price increases is limited.
(v) Land policy
23 The market for land is another area in which the Government’s influence is marked and this has been a source of comment, especially recently, as the Government is virtually the only source of new land for industrial, commercial or residential purposes. The Government is not, however, and this is often forgotten, the only source of land. Land already in private hands is continuously being sold for redevelopment. Nevertheless, the Government does have an important influence on the land market. We have generally attempted to exercise that influence in a largely non-interventionist manner, disposing of land to the highest bidder in the belief that this will ensure its most efficient use. But, of course, the Government has inevitably influenced land prices by the rate at which land has been produced, the proportion of land produced which has had to be reserved for public housing and GIC use and, to a lesser extent, by the special payment terms offered to buyers of industrial sites and of large commercial/residential sites.
24 The recent rapid increases in land prices, particularly in the urban areas, reflect not only the fact that the supply of land is limited, but also our recent prosperity and the view currently being taken about the future. The best response to rising land prices is the provision of more land and the Government was able to feed more land on to the market this year 1978-79 than I had thought possible(11); and we expect to make available increasing quantities of land in the coming year(12). However, as most of this land will be in the New Towns, the increased supply may have only a limited influence on land prices in the main urban areas.
(vi) Regulation of markets
25 Finally, the Government is committed to ensuring that markets generally are allowed to respond freely to competitive forces, but within certain constraints and ground rules. Of particular relevance in this context at present is the Government’s attitude towards the financial services sector. Here I think three considerations are central: first, the need to ensure that the financial services sector assists the growth of the economy and does not hinder it; secondly, the need to provide the users of financial services with some protection, particularly where they can be affected by circumstances in which,
(11) See f.n. (98) below.
(12) See Annex (1).
480 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
however intelligent they may be, they cannot be protected to protect themselves; and thirdly, the need to protect Hong Kong’s reputation as a financial centre.
26 There are a number of current issues in this field, such as the determination of interest rates and the minimum liquidity requirements to be observed by deposit-taking companies. But here I would only mention the question of the unification of the stock exchanges.
27 The main functions of a stock exchange are, first, to provide a means of raising capital for industry and commerce; and, secondly, to provide a market in which investors can deal in the securities that are issued as a consequence of the first function. These functions involve an exchange in a responsibility to those who have committed their funds to the market by way of investment and to those who wish to invest. In particular, investors must be satisfied that adequate information about listed companies is available and that the conduct of listed companies and those connected with listed companies is subject to effective regulation; that the conduct of members of a stock exchange is subject to effective regulation; and that the stock exchange itself is conducted efficiently.
28 Hong Kong is unusual in having as many as four exchanges. Most cities with a significant stock market have a single exchange; and the fact that Hong Kong has four has not had a reassuring effect on investors generally and has hampered the development of international confidence in the stock market here(13).
29 So, for some time now, Government policy has favoured unification, preferably arranged by the exchanges themselves. I reported their progress towards this end in answer to a question in this Council on 15 February 1978. I said there had been ‘considerable discussion and some agreement … but as yet nothing (had) actually happened on the ground … however I said I (hoped) that shortly we should see tangible evidence that the exchanges (would) be unified’. I am bound to say that no further ‘tangible evidence’ has been forthcoming.
(13) Three weaknesses stemming from having four exchanges spring immediately to mind: (a) the fact that the four exchanges are in competition for company quotations tends to lead them to adopt a flexible interpretation of their own listing rules. This is in the interests neither of the securities industry nor of investors;
(b) the Commissioner for Securities and the committees of the stock exchanges have greater difficulty in regulating the conduct of members of the four exchanges than they would have if there was only one exchange;
(c) one exchange could be run more efficiently and economically than four exchanges and could make use of more sophisticated means of trading, including electronic data processing. The market itself would be less volatile in that brokers would not be able to indulge in arbitrage between exchanges; it would provide a better service and improved protection for investors in Hong Kong and overseas in that the more unified the market the greater its liquidity; and, with unified rules and procedures, it would be a more attractive market for overseas investors for whom the present fragmented structure acts as a disincentive.
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 481
30 In the circumstances, the Securities Commission has advised that legislation to bring about unification, formulated as far as possible with the advice and agreement of the stock exchanges, should be introduced; and Executive Council has now advised that such legislation should be drafted. Accordingly, a bill will be introduced into this Council later this session.
(2) Course of the Adjustment Process, 1972 to 1978
(a) Introduction
31 Although it is difficult empirically to match the economy’s actual performance(14) with the theoretical framework(15), it is important to try to do so in order to predict what is likely to happen next and to take a view on how the Government might influence events, not that any direct analogies can be drawn between the present situation and past experience. From now on until the time being unless I state otherwise I shall be speaking in real (or constant price) terms.
(b) Under a fixed exchange rate regime, 1972 to 1974
32 In 1973 there was a superficially similar situation to our present situation. The growth rate of GDP at 14% was more rapid than in 1978, the growth rate of domestic demand(16) at 15% was greater than that of exports of goods at 12%, and much greater than that of domestic exports of goods at 7%. The rate of increase of prices was rapid(17), and the balance of trade
(14) Annual growth rates (%) in real terms of:
Private
consumption expenditure
Domestic demand
Exports of goods
Total
final
demand
Imports
Of
goods GDP
GDP
deflator
Consumer prices
1972 4.2 4.6 7.2 5.7 3.8 7.2 7.4 6.1 1973 15.1 15.0 12.2 13.8 9.9 14.2 11.4 18.2 1974 0.8 1.1 ―9.4 ―3.4 ―10.0 2.2 12.2 14.4 1975 3.6 2.5 5.9 3.8 4.0 2.9 2.7 2.7 1976 12.6 13.0 28.0 19.1 24.6 16.7 8.6 3.4 1977(*) 15.6 17.2 5.4 12.0 7.9 11.9 3.8 5.8 1978(**) 15.9 16.1 14.4 15.4 22.1 10.0 5.6 5.9 Notes: (*) Based on provisional estimates.
(**) Based on preliminary estimates.
General Notes: The treatment of trade aggregates in the national accounts differs from that in the trade accounts (see f.ns. (32), (34) and (51)).
(15) A major difficulty in adapting this pure theory so that it provides a usable theoretical framework for understanding what is actually happening in an economy at any point in time is that the adjustment process never takes place smoothly and instantaneously. That is to say, under both exchange rate regimes, the speed and efficiency with which the adjustment process operates to restore equilibrium will depend, in addition to the factors already mentioned, upon the competitiveness of the various markets which make up the economy, the absence of distortions (caused, for example, by public policy decisions) and the mobility of resources. For example, consider a situation in which the level of domestic demand is such as to lead to a substantial widening of the trade deficit: this may continue for some time even after exchange rate has depreciated.
(16) That is, private consumption expenditure, Government consumption expenditure and gross domestic fixed capital formation.
(17) Change over previous year (%) of:
Consumer prices
GDP
deflator
1972 6.1 7.4 1973 18.2 11.4 1974 14.4 12.2
482 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
was moving further into deficit(18). However, the similarity between the situation in 1973 and that of today is not complete. The growth rate of domestic demand was only slightly higher than that of total final demand(19). The growth rate of GDP was actually greater than that of total final demand and the growth rate of imports was less than that of either the GDP or total final demand, suggesting that the economy was still enjoying a margin of surplus capacity.
33 Further, domestic price increases were more a consequence of increases in world prices than of domestic pressures on the cost/price structure. Similarly, the trade deficit did not widen very much and such widening as did occur was the consequence of a slight deterioration in the terms of trade rather than of imports growing faster than exports(20).
34 Thus, the problems facing the economy at the end of 1973 were less severe than those facing it today and there were signs that it was adjusting to such problems as had emerged. Interest rates were raised five times between March and September 1973(21). Thereafter the slow down in world trade and the increases in crude oil prices in October 1973 and January 1974 combined to widen the trade deficit. As one would expect under a fixed exchange rate regime, these developments reduced the money supply(22)
(18) Trade deficit ($ million):
Exports of goods
Imports of goods
Trade deficit
1972 19,400 21,764 2,364 1973 25,999 29,005 3,006 1974 30,036 34,120 4,084
(19) That is, domestic demand plus exports of goods.
(20) Unit value indexes (1973=100):
Domestic
exports Imports
Terms of trade
1972 85 84 101 1973 100 100 100 1974 121 131 92
(21) The Best Lending Rate was increased from 7% where it had been since 15 October 1971 to 9¾%; and the rate paid by principal banks on three months fixed deposits was increased from 4½% to 8%.
(22) Money supply ($ million):
M1(*) M2
End January 1973 15,241 30,525 End June 1973 11,881 27,697 End September 1973 11,555 27,881 End December 1973 11,761 29,329 End June 1974 12,129 32,007 End October 1974(**) 12,013 33,178(***)
End December 1974 11,370 34,207
Notes: (*) Old series.
(**) That is, before the Hong Kong dollar was floated.
(***) The picture here was distorted by capital inflows caused by political changes in South East Asia. Nevertheless, compared with the growth rates of GDP in money terms of 27.2% in 1973 and 14.7% in 1974, the small changes in the money supply are significant.
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 483
and led to a slowing down of the growth rate of the economy in 1974 to 2%. (c) Under a floating exchange rate regime, 1975 to 1978
(i) 1975 and 1976
35 Led by a rapid growth rate of exports which started in the third quarter of 1975, the economy then began to recover from the recession(23). As a result, in 1975 as a whole, the growth rate of total final demand exceeded the growth rate of GDP and so the growth rate of imports accelerated from ―10% in 1974 to +4% in 1975. This was not because of any shortage of productive capacity, but largely because of the extra imports of materials(24) needed to enable production to be increased. With the trade deficit narrowing(25) and the Hong Kong dollar floating, the effective exchange rate strengthened slightly over the year(26).
36 In 1976, the growth rate of GDP accelerated in line with an export-led acceleration in the growth rate of total final demand. Indicative of an above average level of stock building and, possibly of the emergence of some domestic supply bottlenecks, the growth rate of imports was much greater than that of either total final demand or GDP. A further indication of supply bottlenecks was a rapid rise in export prices(27).
37 Despite the rapid growth rate of imports, the more rapid growth rate of domestic exports, combined with an improvement in the terms of trade(27),
(23) Quantum index of domestic exports to all countries (1973=100):
1974 1975 1976
Q1 93 81 113 Q2 103 96 128 Q3 102 111 139 Q4 88 110 137 (24) Quantum index of imports (1973=100):
1974 1975 % change
All imports 90 93 3.3 Foodstuffs 94 100 6.4 Consumer goods 87 85 ―2.3 Fuels 103 96 ―6.8 Raw materials 87 94 8.0 Capital goods 97 97 ― (25) Visible trade ($ million):
Exports of goods
Imports of goods
Trade deficit
1974 30,036 34,120 4,084 1975 29,832 33,472 3,640 (26) As measured by the trade weighted exchange rate index of the Hong Kong dollar (18 December 1971=100):
End December 1974 105.9
End December 1975 107.4
(27) Unit value indexes (1973=100):
Domestic
exports Imports
Terms of trade
1975 117 124 94 1976 129 129 100
484 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
resulted in both the trade deficit narrowing(28) and the exchange rate appreciating(29) further.
(ii) 1977 (Provisional estimate of GDP)
38 Sir, I now turn to the second post-recession year, 1977, and here I shall combine my analysis of the course of the adjustment process with a discussion of the provisional estimates of expenditure on the GDP in 1977(30).
39 At current prices, the provisional estimate of expenditure on the gross domestic product in 1977 is $54,836 million. At constant prices this represents a growth rate of 12% over the final estimate of GDP for 1976. Although less than the rapid growth rate of 17% achieved in 1976(31), it is still significantly higher than the average annual growth rate for the five years 1972 to 1976 of 8.5%.
40 Taking each component of expenditure on the GDP in turn: the growth rate of private consumption expenditure accelerated from 13% in 1976 to 16% in 1977, being partly influenced by the rapid growth rate of GDP in 1976. The growth rate of Government consumption expenditure also accelerated from 8% in 1976 to 13% in 1977. As the post recession building and construction boom got underway, coinciding with large investment outlays on transport equipment and construction machinery, the growth rate of gross domestic fixed capital formation was 25% in 1977, compared with 16% in 1976.
(28) Visible trade ($ million):
Exports of goods
Imports of goods
Trade deficit
1975 29,832 3,640 1976 41,557 43,293 1,736
(29) Trade weighted exchange rate index of the Hong Kong dollar (18 December 1971=100): End December 1975 107.4
End December 1976 114.4
(30) Various estimates of GDP are published from the forecast released in the budget speech to the final estimate published in the half-yearly Economic Report for the following year. Thus: Forecast Budget Speech, 1979
Revised forecast Speech by the Financial Secretary at a public function around September, 1979
Preliminary Budget Speech and Economic Background, 1980 Revised preliminary Half-Yearly Economic Report, 1980 Provisional Budget Speech and Economic Background, 1981 Final Half-Yearly Economic Report, 1981 The latest estimates of expenditure on the gross domestic product are as follows:
At current prices
At constant (1966) prices
$ mn % increase $ mn % increase
1976 (final) 47,226 26.7 23,608 16.7 1977 (provisional) 54,836 16.1 26,415 11.9 1978 (preliminary) 63,686 16.1 29,061 10.0
(31) This was the second highest growth rate since 1961, the first year for which official GDP estimates are available. The highest growth rate (18.3%) was recorded in 1965.
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 485
41 In contrast with these high growth rates of the three components of domestic demand, the growth rate of exports of goods(32) decelerated from 28% in 1976 to a little more than 5% in 1977. This was chiefly the result of unexpectedly depressed demand for textiles and clothing in the EEC, and occurred despite a continued depreciation of the Hong Kong dollar throughout the year(33). Reflecting the state of total final demand, especially export demand, the growth rate of imports of goods(34) also slowed down from 25% in 1976 to 8% in 1977.
42 In line with the rapid growth rate of private consumption expenditure, consumer prices, as measured by the Consumer Price Index (A) increased by 6% in 1977 over 1976, compared with rather more than 3% in 1976 over 1975. The slowing down of the growth rate of exports between 1976 and 1977 meant that there was only limited scope for exporters to increase their prices despite the depreciation of the Hong Kong dollar(35). The rate of increase in the prices of domestic exports fell from 10% in 1976 to 2% in 1977 and, as the rate of increase in import prices remained unchanged at 4%, the terms of trade shifted slightly against us(36). This resulted in the rate of increase in the general price level, as measured by the GDP deflator, falling from rather less than 9% in 1976 to 4% only in 1977.
43 Thus, in 1977, the growth rate of total final demand fell to 12% and GDP grew at the same rate. On the face of it, this could be taken as an indication that the economy was in a state of internal equilibrium, but two factors indicated that this was not so and the situation was not sustainable. The growth rate of GDP at 12% was accompanied by an acceleration in the rate of increase of consumer prices and was only achieved by a fall in unemployment(37). Further, at rather more than 5%, the growth rate of exports had fallen very sharply and was less than that of imports at 8%
(32) Exports of goods, as defined in the national accounts, consists of merchandise exports and re exports and expenditure in Hong Kong of foreign airline and shipping companies on fuel oils.
(33) Trade weighted exchange rate index of the Hong Kong dollar (18 December 1971=100): End December 1976 114.4
End December 1977 106.6
(34) Imports of goods, as defined in the national accounts, consist of merchandise imports (including a percentage of retained imports of gold) and import of water.
(35) The export weighted exchange rate index (18 December 1971=100) fell from 118 at the end of December 1976 to 112.5 at the end of December 1977.
(36) Unit value indexes (1973=100):
Domestic
exports Imports
Terms of trade
1976 129 129 100 1977 132 134 99
(37) Unemployed persons as a percentage of the labour force:
March 1976: 5.6
September 1976: 4.6
March 1977: 4.5
September 1977: 4.1
486 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
and, as a result, the trade deficit widened(38). The depreciation of the Hong Kong dollar(39) reflected this and was the first step towards correcting what in fact was a state of external disequilibrium.
44 However, the growth rates of total final demand and of GDP continued to exceed the growth rate of the economy’s productive potential and thus were contributing to the widening of the trade deficit. At the same time, the growth rate of the money supply continued to be rapid(40), much more rapid than the growth rate of GDP in money terms(41). This discrepancy between the growth rate of the money supply and the growth rate of GDP at current prices or in money term can be partly explained by the change in the composition of total final demand(42); and, at the same time, it must have been the case that the process of credit creation was helping to sustain the rapid growth rate of domestic demand. But the economy had yet to experience the full impact of the rapid growth rate of credit creation which had been encouraged by the reduction in interest rates during 1977(43).
(iii) 1978 (Preliminary estimate of GDP)
45 This was the background against which I made my forecast of expenditure on the GDP in 1978 in last year’s budget speech(44) and I shall now review that forecast in the light of the preliminary estimates which are now available(45), taking each component of expenditure in turn.
46 Last year, I said that there appeared to be little doubt that the growth rate of private consumption expenditure would slow down in 1978 to about 10%. But this did not happen: the preliminary estimate shows that private
(38) Visible trade ($ million):
Exports of goods
Imports of goods
Trade deficit
1976 41,557 43,293 1,736 1977 44,833 48,701 3,868 (39) Trade weighted exchange rate index of the Hong Kong dollar (18 December 1971=100): End December 1976 114.4
End June 1977 112.3
End December 1977 106.6
(40) Money supply ($ million):
M1 %increase M2 % increase
End December 1976 14,050 23.1 48,413 21.0 End December 1977 18,082 28.7 58,451 20.7 (41) GDP (at current prices):
$ mn % increase
1976 47,226 26.7 1977 54,836 16.1 (42) See f.n. (14) above.
(43) The Best Lending Rate was 6% up to 8 January 1977, when it was reduced to 5½%. On 14 April 1977, it was further reduced to 4¾%.
(44) B.S., 1978, paras. 39-54.
(45) For full details, see Tables 1.1―1.3 in 1979-80 Budget: Economic Background.
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 487 consumption expenditure continued to grow as rapidly as in 1977, that is to say, at 16%(46).
47 Last year, I estimated that the growth rate of Government consumption expenditure on goods and services, as defined for national accounts purposes, would be 14%(47). At 15%, the preliminary estimate for 1978 is slightly higher than this.
48 Last year, I forecast that the growth rate of expenditure on gross domestic fixed capital formation would be 15%. The preliminary estimate is 17%. The difference is largely the result of higher than expected investment in plant and machinery: 13% as opposed to the forecast of 10%. I took the view, incorrectly as it turned out, that manufacturers’ plans to expand capacity would be affected by what I thought would be a somewhat uncertain trading environment.
49 My forecasts for investment in building and construction have proved to be reasonably accurate. I forecast a growth rate of about 20%. The preliminary estimate is for a growth rate of 19% made up of a growth rate of construction employment of about 14% and of productivity of about 5%. But I under-estimated the extent to which there would be a further shift in the proportion of the output of the building and construction industry which would be absorbed by the public sector. This proportion now stands at 49%, compared with 45% in 1977 and 28% in 1972(48).
50 I was wide of the mark in my forecast of the growth rate of (total) exports of goods, the preliminary estimate being 14% compared with my forecast of 6%. The preliminary estimate of the growth rate of domestic exports is almost 11% which is more than double my forecast of 5%. The difference is the result of unexpectedly high growth rates of domestic exports to the Federal Republic of Germany and to the United Kingdom(49), thanks to an acceleration of consumer demand in these markets coupled
(46) Partly due to expenditure on household furnishings and equipment being at a high level as completions of flats by the private and public sectors were well up on 1977; and another factor of some importance was purchases by Hong Kong residents of durable consumer goods for gifts to relatives in China following upon some relaxation of Chinese customs regulations.
(47) This estimate was derived from the Draft Estimates for 1978-79 (Consolidated Account: Recurrent).
(48) Growth rates of expenditure on building and construction (%):
1976 1977 1978
Private sector 13 25 10 Public sector 15 42 31 (49) Growth rates of domestic exports (%) to:
1977 1978 forecast
1978
Preliminary
United States 18 6 7 Federal Republic of Germany ―13 4 13 United Kingdom ―8 3 18 Total domestic exports 5 5 11
488 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
with the substantial depreciation of the Hong Kong dollar against the deutschemark and sterling during 1977 and 1978(50).
51 I also under-estimated the growth rate of re-exports. My forecast was 8%, but the preliminary estimate of the actual outturn(51) shows 26%. Similar dramatic surges in the re export trade have been experienced in the past, but have not been sustained. Although it is still too early to say whether the growth in 1978 will be maintained, it may well be that this particular surge is a more permanent manifestation of Hong Kong’s reemerging role as an entrepot based on our modern and efficient port facilities and our growing importance as a financial and communications centre.
52 At 9% I was also wide of the mark in my forecast of the growth rate of imports of goods. The preliminary estimate is 22%. This difference reflects the extent to which my forecasts of the growth rate of private consumption expenditure, of investment in plant and machinery, and of exports(52). This difference reflects the extent to which any forecast of those components of GDP were too low. I shall explain the significance of this difference shortly.
53 Although there are large differences between the forecasts of growth rates given in last year’s budget speech for some of the components of expenditure on GDP and the growth rates shown in the preliminary estimates, the preliminary estimate of expenditure on the gross domestic product as a whole at current prices is $63,700 million and this is virtually the same as my forecast of $63,500 million. This represents a growth rate of 16% which is a little less than my forecast of 17% because, instead of the slight strengthening I forecast for the terms of trade, there was actually a slight deterioration. At constant (1966) prices, the preliminary estimate is $29,100 million, compared with my forecast of $28,800 million. This represents a growth rate of 10%, which is at the upper end of the range of 8% to 10% for growth in real term which I forecast this time last year.
(50) Depreciation of Hong Kong dollars (%) against:
1977 1978
Deutschemark 10 17 Sterling 10 9 (51) In estimating the growth rate of re-exports in real terms in the national accounts, the value of re-exports is deflated by the unit value index of imports. The reason why import prices are used instead of re-export prices is that, in doing so, changes in re-export margins can be taken into account implicitly. When the unit value index of re-exports is used as the deflator, as is the case in the analysis of the trade statistics in the Economic Background, the growth rate in 1978 becomes 21%. The national accounts estimate of re-exports also includes a small element of re-exports of fuel oil, which does not come into the trade statistics. This is derived from estimates of expenditure in Hong Kong of foreign airlines and shipping companies on fuel oils.
(52) Quantum index of imports (1973=100):
1976 % change 1977 % change 1978 % change
All imports 116 24.7 125 7.6 152 21.9 Foodstuffs 107 7.0 112 4.9 119 6.2 Consumer goods 109 28.2 126 15.1 165 32.2 Fuels 115 19.8 124 7.8 129 4.6 Raw materials 124 31.9 129 3.3 162 26.1 Capital goods 114 17.5 129 13.3 151 17.0
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 489
54 Turning to prices, all consumer price indexes(53) and the preliminary estimates of the GDP deflator show an increase of about 6% in 1978. The fact that this is more or less the same as my forecast of 5% for consumer goods and 7% for the GDP deflator is, I regret to say, quite accidental.
55 The reasons for this are as follows: as a matter of convenience, I assumed that the exchange value of the Hong Kong dollar would be stable during 1978; but, in practice, the Hong Kong dollar depreciated by 13%(54). The bulk of this depreciation was against the currencies of the countries from which we buy most of our imports. So, despite lower world prices of primary commodities in 1978 compared with 1977, the Hong Kong dollar import prices of food, raw materials and semi-manufactures increased. In the case of consumer goods, as world prices were increasing, the increases in the Hong Kong dollar prices were fairly rapid. But it does not appear that these increases have been transmitted in full into retail prices of consumer goods(55), the increases in the consumer goods components of the consumer price indexes being relatively modest. Nevertheless, an increase of about 6% in import prices was higher than the 4% I forecast. With the increase in export prices estimated to be about 5% (as forecast) there was a deterioration in the terms of trade but, as I have said, the GDP deflator only increased by 6% instead of my forecast of 7%.
(iv) Implications of differences between the forecast of GDP in 1978 and the preliminary estimate
56 An analysis of the reasons for these differences between my forecast of expenditure on the GDP in 1978 and the preliminary estimate of the GDP in 1978 is very necessary for an understanding of the likely future course of the adjustment process.
57 I under-estimated the growth rate of total final demand in 1978. I under-estimated the growth rate of private domestic demand in 1978(56), because I did not fully appreciate the implications of a switch from a fixed
(53) Increase in 1978 over 1977 (%):
CPI (A) 5.9
CPI (B) 5.9
Hang Seng Index 5.7
(54) Trade weighted exchange rate index of the Hong Kong dollar (18 December 1971=100): End December 1977 106.6
End December 1978 93.2
(55) For a detailed analysis see 1979-80 Budget: Economic Background, Chapter 6. But, briefly:
Import unit value index of consumer goods(*)
Consumer goods component of CPI (A)(**)
1977 Q4 116 114 1978 Q1 118 116 Q2 122 118 Q3 125 120 Q4 128 122 Notes:(*) 1973=100.
(**) July 1973-June 1974=100.
(56) That is, private consumption expenditure plus gross domestic fixed capital formation by the private sector.
490 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
to a floating exchange rate regime for domestic credit creation. Under a fixed exchange rate regime, the widening of the trade deficit to a record figure of $9,147 million would have had powerful repercussions on the banks’ ability to extend credit which, in turn, would have dampened down private domestic demand. This is not the case under a floating exchange rate regime. I also under-estimated the extent to which the growth rate of exports would increase. This increased growth was partly due to the improvement in our export competitiveness as a result of the continuing depreciation of the Hong Kong dollar. Having under-estimated the growth rate of total final demand, I consequently under-estimated the growth rate of imports and thus the widening trade deficit and the depreciation of the exchange value of the Hong Kong dollar (although other factors were influential at times during the year such as the demand for US dollars for gold arbitrage transactions which were not wholly unwound).
58 The more rapid than expected growth rates of exports and of private domestic demand meant that, in the 1978-79 budget, I over-estimated the volume of domestic resources that could be made available to the public sector without putting domestic sources of supply under strain, as reflected in the record low level of unemployment. Although output, as measured by the GDP, grew rather more rapidly than I had expected(57), it did not grow sufficiently rapidly to match the growth rate of final demand and, as a result, there was a disproportionately rapid growth rate of imports(58).
59 Despite the large trade deficit, the growth rate of the money supply showed little sign of being constrained until towards the end of the year and the overall growth rate was rapid(59). Interest rates were increased
(57) As reflected in the number of unemployed persons as a percentage of the labour force: September 1977: 4.1(*)
March 1978 : 3.0
September 1978: 2.7(*)
Note: (*) Gross of school leavers.
(58) See f.n. (14) above.
(59) Money supply:
M1(*) $ mn
% increase over previous quarter
% increase over a year ago
1977 Q4 18,082 6.5 28.7 1978 Q1 18,169 0.5 25.1 Q2 19,348 6.5 22.9 Q3 22,025 13.8 29.7 Q4 22,281 1.2 23.2 M2(**)
1977 Q4 58,451 7.3 20.7 1978 Q1 61,819 5.8 23.3 Q2 66,297 7.2 25.9 Q3 70,869 6.9 30.1 Q4 73,406(***) 3.6 25.6 Notes: (*) M1 = notes and coins in the hands of the non-bank public plus current account deposits with banks.
(**) M2 = M1 plus savings and time deposits with banks.
(***) M3 = M2 plus deposit liabilities of deposit-taking companies to the public less claims by deposit-taking companies on banks and less deposit
taking companies’ holdings of notes and coins. On the basis of returns
submitted for the first time by 241 deposit-taking companies for 31
December 1978, M3=$77,088 million.
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 491
several times during the year(60) but, so far, the growth rate of loans and advances has not been affected and, indeed, is still accelerating(61); over 1978 as a whole the increase in loans and advances by banks accounted for 107% of the increase in M2, compared with 73% in 1977 and 53% in 1976, in which years net acquisitions of foreign currency assets were relatively more important.
60 Sir, I warned Honourable Members on 16 November last that there was ‘a very real threat … (of) an inflationary situation … developing’. Statistics that have become available since then confirm this prognostication and, indeed, the rate at which prices are increasing is accelerating. Consumer prices in the third and fourth quarters of 1978 increased by 6% and rather more than 8% compared respectively with the same quarters in 1977. The rate of increase in the labour and materials cost index for the building and construction industry accelerated from 16% in the third quarter of 1978 over the third quarter of 1977 to about 20% in the fourth quarter of 1978 over the fourth quarter of 1977, which I must have been affecting the cost/ price structure of the economy as a whole. Prices of imported raw materials and semi-manufactures in the third and fourth quarters of 1978 increased by 4% and 9% respectively compared with the same quarters in 1977(62). Partly reflecting this faster rate of increase in the prices of raw materials and partly reflecting higher prices as a result of the shortage of domestic resources,
(60) The Best Lending Rate was increased from 4¾% to 5½% on 1 May, to 6% on 17 July to 7¼% on 30 October and to 8¾% on 9 November 1978; and the rate paid by principal banks on three months fixed deposits was increased from 1¾% to 4½% over the same period.
(61) Loans and advances in Hong Kong:
$ mn
% increase over previous quarter
% increase over a year ago
1977 Q4 36,856 9.2 25.0 1978 Q1 39,833 8.1 28.3 Q2 42,640 7.0 28.8 Q3 46,476 9.0 37.7 Q4 52,814(*) 13.6 43.4(**)
Notes: (*) Net loans by deposit-taking companies in Hong Kong amounted to $3,584 million at 31 December 1978 (on 6.8% of loans and advances by banks).
(**) By categories of borrowers:
C.f. (%)
% increase 1977 1976
Manufacturing 52 16 26 Transport and transport equipment 43 39 ―7 Building and construction 73 34 26 General commerce 31 15 11 Private loans 38 28 24 Others 48 37 29 43 25 18
(62) Unit value index of imports of raw materials and semi-manufactures (1973=100):
1977 1978
Q1 128 127 Q2 127 130 Q3 128 133 Q4 127 138
492 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
export prices increased by 4.5% in the third quarter of 1978 compared with the third quarter of 1977 and then accelerated to 9% in the fourth quarter compared with the fourth quarter of 1977(63).
61 The increases in Hong Kong dollar terms of the prices of imports of primary commodities in 1978 were largely caused by the depreciation of the exchange rate rather than by changes in world prices. However, in 1979, price increases arising from the imbalance between the demand for and supply of real resources may be compounded not only by the effect (delayed or otherwise) of the depreciation of the Hong Kong dollar in 1977-78, but also by accelerating world prices of primary commodities(64) and, of course, oil products(65). Even under a floating exchange rate regime, the export sector is unlikely to be able to absorb this upward pressure on the cost/price structure as easily as the sector catering for domestic demand. In consequence, the imbalance in the distribution of domestic resources between the two sectors is likely to be aggravated to the disadvantage of the export sector.
62 Thus we entered 1979 with the growth rate of total final demand exceeding the growth rate of the economy’s output resulting in a very rapid growth rate of imports. The depreciation of the Hong Kong dollar has had the beneficial effects expected of it on the growth rate of exports, and, indeed, exports may already be growing at a rate faster than can be maintained, but the trade deficit continues to widen(66). The pressure of demand
(63) Unit value index of domestic exports (1973=100):
1977 1978
Q1 131 134 Q2 131 136 Q3 134 140 Q4 132 144
(64) Prices of primary producers’ commodity exports (in US dollars)
Agricultural
% increase Food
industrial materials
Metals and minerals
All
commodities
1977 37 7 7 23 1978 ―9 52 ―4 1979 (forecast) 5 8 10 7 Source: UK National Institute of Economic and Social Research.
(65) Scheduled increases in the prices of crude oil (and, therefore, the minimum increases likely to be experienced in view of current developments):
% increase
over
previous
quarter
1979 Q1 5.0 Q2 3.9 Q3 2.2 Q4 2.7
(66) The point to be stressed here is that the trade deficit is widening, rather than the actual size of the deficit itself. At 15% the ratio of the trade deficit to total imports in 1978 was, in fact, the same as ten years ago in 1968. The ratio fluctuated between 10% and 15% during the period 1969 to 1975. The surge of exports in 1976 reduced it to an all time low of 4%, after which it doubled to 8% in 1977 and almost doubled again in 1978.
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 493
allied with the depreciation of the exchange rate is resulting in a gradual acceleration of the rate of increase in prices. The growth rate of imports is showing itself resistant to the effects of rising import prices and can probably only be reduced by reducing the pressure of demand. Although the pressure on real incomes implicit in rising prices should eventually bring this about, this may be unacceptably and dangerously delayed as long as domestic credit creation continues at its present rate.
PART II: MANAGEMENT OF THE PUBLIC FINANCES
(1) General Objectives of Budgetary Policy
63 Time, and Honourable Members limited patience, do not permit me to analyse in any detail how successful, or otherwise, we have been in recent years in fulfilling the general objectives of budgetary policy which are, first, to implement Government policies and programmes; secondly, to ensure that the required revenue is raised as equitably as possible as between particular classes and groups of taxpayers; thirdly, to minimize any adverse effects of public expenditure and of the fiscal system on the internal cost/price structure of the economy, on the supply of human effort and on private investment decisions; fourthly, so to manage the public finances generally as to minimize the extent to which the monetary environment is disturbed; except when, fifthly, an objective must be to influence the growth rate of total final demand.
64 Obviously, the emphasis of budgetary policy as between these five objectives will vary from year to year but, whatever the emphasis may be, decisions have to be taken each year in respect of: the relative size of the public sector, appropriately defined(67); the construction of the expenditure budget itself; the emphasis of fiscal policy; and the rate at which policies and programmes can be implemented having regard to prevailing capacity and other economic considerations. To assist us in this annual decision-making process, we subject our thinking in each of these four areas to the discipline of certain guideline ratios. As it is necessary for an understanding of our present situation to review our performance over the past seven years in terms of these guideline ratios, I make no apology for restating them, albeit briefly.
(2) Restatement of Budget Guidelines
(a) Relative size of the public sector
65 Given the extent to which the Hong Kong economy is externally oriented and subject, therefore, to volatile conditions in our markets, there is a compelling need to ensure that the relative size of the public sector is
(67) See f.n. (69) below.
494 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
such as to leave the private sector as much room as possible to react to changing trading conditions(68).
66 Quite arbitrarily, but the important thing is to be consistent over time, we define the public sector to include all activities financed from public funds no matter by whom the expenditure is incurred(69). And, incidentally, as I have stressed on other occasions, the acceptable relative size of the public sector is smaller on the upswing phase of the trade cycle than on the downswing, but it will tend to increase again as the recovery phase matures(70). This does not mean, of course, that the growth rate of public expenditure should not be trimmed back on the downswing as part and parcel of the process of the economy deflating out of trouble or when the pressure of demand is such that a situation of demand pull inflation is threatened.
(b) Construction of the annual budget
67 The annual budget itself is set in the context of revenue and expenditure trends in the current year and in preceding years and, also, in the context of a forecast of revenue and expenditure over the three years following the budget year. To begin with, an appropriate relationship between the recurrent and capital accounts has to be determined, because the rate at which our recurrent commitments grow in relation to recurrent revenue must be limited in order to secure the financing of the capital account. Our guidelines are that recurrent expenditure should absorb no more than 80% of recurrent revenue and that at least 60% of capital expenditure should be financed by the surplus on recurrent account. Furthermore, an upper limit is set to recurrent expenditure of 70% of total expenditure. But, as the surplus on recurrent account could finance a quantum of capital expenditure which these ratios do not define, separate absolute guideline figures have to be set for the various components of the capital account and these are revised periodically.
68 Next, we take the view that the residual deficit on capital account, if any, should be financed in a certain way, that is to say, at least 50% by capital revenue and no more than 50% by debt although, as it happens,
(68) In other economies, less dependent on external transactions, there need not be the same emphasis on not diverting resources away from the private sector.
(69) That is, expenditure covered by the Consolidated Account, viz: thus expenditure by the Urban Council and the Housing Authority is included and so is expenditure by institutions in the private or quasi-private sector to the extent of their subventions; and the activities of Government departments which are partly financed by charges raised on a commercial basis are also included (eg Kowloon-Canton Railway, Airport, Waterworks). But excluded are those organizations, including even statutory organizations, in which the Government only has an equity position such as the Mass Transit Railway Corporation.
(70) When the economy is enjoying strong growth, the relative size of the public sector should fall. It will anyway because the growth rate of public expenditure tends to lag behind the growth rate of the economy on the upswing, but room should be left for the public sector to expand relative to the economy as a whole on the downswing.
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 495
capital revenue has always been more than sufficient to finance the residual deficit without recourse to debt(71).
(c) Balance of the fiscal system
69 As regards the financing of expenditure, I have taken the view that the balance of the fiscal system needs to be defined in terms of two ratios: the ratio of direct to indirect taxation (55:45); and the ratio of direct and indirect taxation taken together to all other recurrent revenue (70:30). These ratios serve to remind us of the significance of indirect taxes and fees and charges in our circumstances(72). In a low tax environment, and particularly one which is characterised by very high tax thresholds, public services which can be related to individual needs must be charged for wherever possible, provided adequate remission arrangements are available where required.
(d) Steady progression
70 But the maintenance of a proper balance between the public sector and the economy as a whole, and the construction of budgets which conform (or do not conform for acceptable reasons) which certain guideline ratios, do not, in themselves, ensure the steady implementation of the Government’s policies and programmes. So, we need to have some idea of the rate at which expenditure may be allowed to grow over time in real terms. For the time being, and notwithstanding the need to limit the relative size of the public sector, I have set this rate at 10% which is a little higher than the historical trend growth rate of GDP. In any particular year, the rate may well have to be lower than 10% and it could be higher in others. Indeed, in five of the last seven years the growth rate of expenditure on General Revenue Account has been higher than 10% and higher than the growth rate of GDP(73).
(71) On the only occasion in recent years when it has not been (1974-75), we were able to call upon our fiscal reserves and not resort to debt. But, just in case there is a period of years during which there is a continuous recourse to debt to finance the residual deficit on capital account, I have put on record―admittedly without much logic, as proponents of cost/benefit analysis have been quick to point out―that debt service charges should not, at any time, exceed income earned on our fiscal reserves.
(72) The yields from our system of earnings and profits taxes are income sensitive, and must remain so if the economy’s internal flexibility is not to be damaged, whereas yields from most indirect taxes and fees and charges are, rightly, and by their very nature, much less so.
(73) Annual growth rates in real terms (%):
Expenditure (General
GDP
Revenue Account)
1972/1972-73 7.2 13.2 1973/1973-74 14.2 18.2 1974/1974-75 2.2 10.2 1975/1975-76 2.9 1.4 1976/1976-77 16.7 3.5 1977/1977-78 11.9 15.8 1978/1978-79 10.0 25.1
496 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
(e) Fiscal reserves
71 Needless to say, steady, as opposed to erratic, progress is not just a matter of fixing upon a growth rate of expenditure which is practicable and consistent with the need to contain the relative size of the public sector. It also depends on the extent to which we are able to insulate the management of the public finances from short-term deviations from the trend paths of revenue and expenditure. I say this because such deviations should not, ideally, affect the implementation of the Government’s policies and programmes or involve adjustments to tax rates and charges. Of course, a sudden change of pace is inevitable in a situation in which the world trading environment shifts adversely; or when, perhaps through failure to exercise proper control over expenditure, a risk of persistent deficits emerges; or when the growth rate of expenditure has been accelerating and a period of consolidation is desirable (for instance, on administrative grounds); or when a situation of demand-pull inflation threatens the ability of the economy to maintain internal and external equilibrium. But situations involving a short-lived tendency for expenditure to exceed revenue or for revenue yields to fall below expectations are best dealt with by having available adequate fiscal reserves.
72 To cope with these situations (in short-term situation), our net fiscal reserves (that is to say, net after allowing for contingent liabilities) should bear a certain relationship to General Revenue Account expenditure. I have taken the view that our net fiscal reserves at the beginning of a financial year should always be sufficient to finance at least 15% of estimated expenditure in that year.
(f) Summary
73 In theory, the total effect of our guideline ratios is that, taking one year with another, we should achieve a balance between revenue and expenditure, allowing surpluses to accrue when the economy is growing faster, and revenues flushing, and not seeking to eliminate deficits that arise from a temporary slowing down of the economy’s growth rate. In other words, in theory, the impact of General Revenue Account transactions on the growth of the money supply is, on average, neutral (after making due allowance for any necessary additions to our fiscal reserves in line with the growth of expenditure and our contingent liabilities). But this is not necessarily true of the transactions of the public sector as a whole(74).
(3) Assessment of Performance, 1972-73 to 1978-79(75)
74 Having restated our budget guidelines I turn now to an assessment of their application over the seven years, 1972-73 to 1978-79.
(74) Particularly if the transactions of the Mass Transit Railway Corporation are included within the definition of the public sector for this purpose.
(75) For the basic statistics see the tables in Annex (2).
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 497
(a) 1972-73 to 1974-75
75 In each of the three years 1972-73 to 1974-75 budgetary policy sought to ensure that the relative size of the public sector as a whole(76) responded correctly to the fluctuating course of the economy. The relative size of the public sector was 16.1% in 1972-73 and increased only slightly to 16.4% in 1973-74, as the growth rate of the economy (in real terms, of course) accelerated from 7% in 1972 to 14% in 1973. The relative size of the public sector then increased to 18.8% in 1974-75 as the growth rate of the economy slowed down to between 2-3% in 1974.
76 The annual estimates(77) in each of these three years were constructed so as not to breach our guidelines. But, while capital expenditure remained fairly close to the estimates(78), there was a tendency for recurrent expenditure to exceed the estimates in each of the three years(79) and to grow at a faster rate than recurrent revenue(80). By 1974-75, recurrent expenditure absorbed more than 80% of recurrent revenue and, as capital expenditure was close to the estimate, the surplus on recurrent account met only 52% of capital expenditure as opposed to at least 60% required by the guideline. As capital revenue did not make up the difference, a deficit was the inevitable result.
77 In real terms, actual total expenditure increased at an average annual growth rate of 14%(81) over this period, which was higher than the steady progression guideline of 10%.
Expenditure on Consolidated Account(*) (76) GDP at current prices × 100
Note: (*) See f.n. (69) above.
(77) General Revenue Account.
(78) Approved Estimates
($ mn)
Actual
Expenditure ($ mn)
1972-73 1,112 1,081 1973-74 1,369 1,413 1974-75 1,833 1,798
(79) Approved Estimates
($ mn)
Actual
Expenditure ($ mn)
1972-73 2,295 2,469 1973-74 2,814 3,231 1974-75 3,632 4,175 (80) Annual Increases (in money terms)
Recurrent Expenditure (%)
Recurrent Revenue (%)
1972-73 25.1 29.8 1973-74 30.9 13.5 1974-75 29.2 13.3
(81) Annual Increases
$ mn In money terms (%)
In real terms (%)
1972-73 1973-74 1974-75
3,550 4,644 5,973
30.6 30.8 28.6
13.2 18.2 10.0
498 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
(b) 1975-76
78 As we ran into a deficit situation in 1974-75―I budgetted for a surplus of $98 million, but the outturn was a deficit of $380 million―and as the economic future looked ominous, the 1975-76 budget sought to trim the growth rate of expenditure (in real terms) back from nearly 20% in 1974-75 to around 7%. In the event, we underspent the cash limits by $583 million and the deficit I budgetted for of $431 million was converted into a surplus of $224 million(82). As this was largely due to underspending on capital account, recurrent expenditure, at 74% of total expenditure, exceeded the guideline of 70%. Actual total expenditure in real terms increased by just over 1% only of virtual standstill―and the relative size of the public sector therefore fell back from 18.8% 74/75 to 17.6% 75/76 since the economy’s growth rate remained at between 2-3%.
(c) 1976-77 to 1978-79
79 In each of the three post-recession years the emphasis of budgetary strategy changed from containing the relative size of the public sector to attempting to make up for ground lost during the year of the so-called recession budget, 1975-76.
(i) 1976-77
80 In 1976-77 I budgetted for an increase in expenditure of 16%(83) (the equivalent of what I believed to be about 10% in real terms) with a view to allowing the relative size of the public sector in this first post-recession year to rise to 20%. I budgetted for a deficit of $355 million(84) as I was prepared to see recurrent expenditure absorb a larger proportion of recurrent revenue (and hence to represent a larger proportion of total expenditure) than the guideline ratios permitted. But the economy whipped out of recession earlier and much faster than forecast(85) with the result that the relative size of the
(82) Approved Estimates
($ mn)
Actual Results ($ mn)
Revenue 6,184 6,256 + 72 mn Expenditure 6,615 6,032－583 mn Deficit/Surplus ― 431 + 224
(83) ($ mn) Revised estimates of expenditure in 1975-76 6,222 Approved Estimates, 1976-77 7,212 Increase 990) (=16%)
(84) ($ mn) Revenue 6,857 Expenditure 7,212 Deficit ― 355
(85) The actual growth rate (in real terms, of course) being nearly 17% as opposed to the forecast of 9%.
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 499
public sector fell back further to 15.6% back from 17.6%. Moreover, we underspent the cash limits by $621 million (and so actual total expenditure in real terms increased by only 3.5%). As actual revenue exceeded the estimate by $636 million, we ran an overall surplus of $902 million(86). The only guideline breached was the ratio of recurrent expenditure to total expenditure, which was as high as 79%.
(ii) 1977-78 (Final Accounts)
81 Thus, when I came to prepare the 1977-78 budget, I sought to lift the level of expenditure to a new plateau: the Approved Estimates envisaged an increase in expenditure of nearly 21% on the revised estimates for 1976-77(87), the equivalent of what I believed to be about 15% in real terms. However, although actual expenditure at $8,174 million was very close to the estimate of $8,245 million, the growth rate of the economy did not slow down as much as I had forecast(88) with the result that the relative size of the public sector came out at 16.7% as opposed to the 17.6% I had anticipated.
(iii) 1978-79 (Revised Estimates)
82 This, combined with the fact that we ran an ‘automatic’ surplus of $1,236 million(89), compared with the surplus I budgetted for of $30 million, and the concomitant fact that only the guideline relating to the ratio of recurrent expenditure to total expenditure was (again) breached(90) meant that, when I came to construct the budget for 1978-79 I was, for the third year running, less concerned than perhaps I should have been with purely financial considerations. Thus I budgetted for an increase in expenditure of 26% on the revised estimates for 1977-78(91), the equivalent of what I believed to be about 21% in real terms.
(86) Approved Estimates
($ mn)
Actual Results ($ mn)
Revenue 6,857 7,493 = +636 Expenditure 7,212 6,591 =－621 Deficit/Surplus ― 355 ＋ 902
(87) ($ mn) Revised estimates of expenditure in 1976-77 6,843 Approved Estimates, 1977-78 8,245 Increase 1,402 (=21%)
(88) The actual growth rate (in real terms) was 12% compared with the forecast of 7%. (89) Recurrent revenue was almost sufficient to finance total expenditure of $8,174 million and thus the surplus on recurrent account was sufficient to finance virtually all our capital expenditure of $1,955 million.
(90) At 76% compared with the guideline of 70%.
(91) ($ mn) Revised estimates of expenditure in 1977-78 8,160 Approved Estimates, 1978-79 10,266
Increase 2,106 (=26%)
500 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
83 Effectively, I budgetted for a balance for the second year running: after taking account of my revenue proposals(92), the difference between estimated expenditure of $10,266 million and estimated revenue of $10,246 million was only $20 million.
84 The revised estimates of revenue and expenditure for 1978-79 are $12,374 million and $11,162 million respectively. Thus the year’s operations will result in a surplus of $1,212 million(93). This figure is lower than the estimate of the surplus derived from the Treasury’s cash book at 20 February last of $1,750 million, but I have a feeling that the truth lies somewhere between these two figures and so I shall use a figure of $1,600 million as my prediction of the surplus when considering our cumulative financial position at 1 April next(94).
85 In analysing our revenue and expenditure performance this year, I shall have to use the revised estimates as printed. In any case, a surplus of $1,212 million compared with a $20 million deficit or surplus I can’t remember now that I budgetted before (laughter). A surplus of $1,212 million deserves an explanation, particularly as, if it turns out to be $1,600 million, it will be the highest on record(95). For the second year running the surplus is due to a flush of revenue rather than a failure of expenditure(96). By contrast, in
(92) At a cost to the revenue of $120 million: see B.S., 1978, paras. 195-222. (93) $ mn $ mn Recurrent Account: O/AE RE O/AE RE Revenue 9,010 9,932 ― ― Expenditure 7,323 7,444 +1,687 +2,488 Capital Account:
Revenue 1,236 2,442 ― ― Expenditure 2,943 3,718 ―1,707 ―1,276 Overall Deficit/Surplus ― ―― 20 +1,212
Notes: O/AE = Original/Approved Estimates.
RE = Revised Estimates.
(94) Paragraph 98 below. I think the difference between $1,212 million and $1,600 million will be equally divided between (increased) revenue and (reduced) expenditure.
(95) Surplus ($ mn)
% of total revenue
1976-77 902 12.0 1977-78 1,236 13.1 1978-79 (RE) 1,212 9.8 In the two years affected by the recession, namely, 1974-75 and 1975-76 we incurred a deficit of $380 million (=6.4% of total expenditure) and a small surplus of $224 million (=3.6% of total revenue) respectively.
(96) Revenue ($ mn) Expenditure ($ mn) OE Actual AE Actual
1976-77 6,857 7,493 7,212 6,591 1977-78 8,275 9,410 8,245 8,174 1978-79 10,246 12,374 (RE) 10,266 11,162 (RE) Notes: OE = Original Estimates.
AE = Approved Estimates.
Deficit/Surplus ($ mn)
Budget Actua
1976-77 ―355 + 902 1977-78 + 30 +1,236 1978-79 ― 20 +1,212
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 501
1976-77 the turn-round from a budgetted deficit of $355 million to an actual surplus of $902 million was almost equally shared between excess revenue and under-spending.
86 At $12,374 million the revised estimate of revenue exceeds the original estimate of $10,246 million by $2,128 million, or by 21%.
87 Recurrent revenue is up by a net $922 million, or by 10% on the original estimate(97). Capital revenue is up by $1,206 million, or I regret to say by 98% on the original estimate as premia from land transactions have yielded $1,166 million more than I expected due to 249 acres of land being sold instead of what I was told was going to be sold of 88 acres(98); and to land prices being higher than expected(99) and to pronounced tendency for purchases to pay premia in a lump sum rather than by instalments. Three very good reasons why I was wrong. (laughter)
88 At $11,162 million the revised estimate of expenditure is $896 million, or nearly 9%, up on the approved estimate which is in sharp contrast to experience in recent years when actual expenditure has been below the approved estimates(100).
89 On recurrent account, there is net over-spending of $121 million largely due to the 1978 salaries revision which cost us $340 million(101).
(97) Of $9,010 million. No less than $385 million of this excess is from Stamp duties: despite a drastic reduction in the number of documents subject to stamp duty, receipts are 97% up on the original estimate due to higher than expected turnover on the stock exchanges, and in the number and value of assignments; interest earnings on Government cash balances and investments are up by $162 million for obvious reasons; receipts from earnings and profits taxes are up by $144 million (which is only 4% above the original estimate); motor vehicle taxes have yielded an extra $89 million (or 54% more than the original estimate, reflecting the boom in personal spending on consumer durables generally); but revenue from dutiable commodities is up by $24 million only (or by only 3% more than the original estimate). 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.
(98) In BS, 1978, paragraph 94, I envisaged that 68 acres of non-industrial land and 20 acres of industrial land would be sold. In the event, 63 acres of non-industrial land were sold (26 acres in the urban areas and 37 acres in the New Territories) and no less than 186 acres of industrial land (of which 133 were in the New Territories, including 114 acres of dockyard land in Tsuen Wan).
(99) To explain the greater part of this large increase over the original estimate another way: sales of urban lots in 1978-79 and instalments of premia in respect of sales in previous years fetched $600 million more than expected, while private treaty grants fetched an extra $376 million; modifications brought in an additional $121 million.
(100) $ million 1975-76 ―583 1976-77 ―621 1977-78 ―71(*)
(1974-75) (+508) Note: (*) After extracting $823 million for transfers to the Mass Transit Fund and the Home Ownership Fund for the payment of land premia.
(101) The fact that net over-spending is not closer to the cost of the salaries revision is due to the fact that the assumptions made regarding the filling of vacant and new posts were not borne out in practice. So the provision inserted in the Approved Estimates proved to be excessive.
502 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
90 On capital account there is net over-spending of $775 million(102) which is more than accounted for by over-spending of $837 million on the two Public Works Programme components of the capital account(103). Having regard to what I thought was the spending capability of the Public Works Department and the Housing Authority, only $2,008 million was inserted in the estimates for these two components of the capital account compared with the absolute guideline figure of $2,530 million(104). In the event, expenditure is likely to be $2,845 million. Of the excess of $837 million, $220 million is to enable total drawings from the Development Loan Fund by the Housing Authority to be increased to $616 million(105), probably another $288 million
(102) Approved Estimates
Revised Estimates
Component 1978-79 ($ mn) 1978-79 ($ mn) (1) Public Works Programme (other than New
Towns and Housing) 858 1,150 (2) Public Works Programme (New Towns and
Housing, including transfers from General
Revenue to the Development Loan Fund for
on-lending to the Housing Authority) 1,150 1,695 (3) Subventions 114 73 (4) UPGC 71 41 (5) Departmental Special Expenditure 201 123 (6) Defence Costs Agreement: Capital Works 29 35 (7) Home Ownership Fund 399 399 (8) Miscellaneous 121 202 2,943 3,718
Notes: Capital subventions and capital expenditure by the UPGC are down by $71 million on the approved estimate of $185 million owing to slippage. Departmental special expenditure is down by $78 million on the approved estimate of $201 million―largely, again, because of delayed deliveries―and the Miscellaneous component is up by $81 million on the approved estimate of $121 million because of a new commitment of $75 million in respect of the re siting of the Little Sai Wan Communications Centre and a grant of $20 million to the Urban Council in respect of the 1978 salaries revision.
(103) In the first two post-recession years, there was net under-spending on the Public Works Programme components of the capital account, viz:
$ mn
1975-76 ―354 1976-77 ―474 1977-78 + 73 (104) BS, 1978, paragraph 98.
(105) Capital expenditure by the Housing Authority in 1978-79 on the rented housing programme and ancillary facilities is likely to be $709 million financed as follows: $ mn
Authority’s own resources (difference between rent income and running
expenses plus premia from commercial lettings) 93 Drawings from Development Loan Fund 616 709 (*)
Note: (*) Total capital expenditure on housing=this figure of $709 million plus $298 million on the Home Ownership Scheme plus $162 million by the Public Works Department=$1,169 million.
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 503
is required for unprovided for cost increases and about $312 million is required because the Public Works Department were able to let contracts, on authorized projects of course, earlier than anticipated. This improved ability to plan and design projects and bring them forward to the stage when they are ready to be put out to tender is to be welcomed but, of course, there is a limit to the number of contracts which can be in hand at any one time; and the fact that such an exceptionally large number of new contracts have been let this year has certain implications for the number of new contracts which can be let in 1979-80, having regard to the acceptable level of expenditure on capital account generally.
(4) Summary of Present Position
(a) Growth rate of public expenditure and relative size of public sector 91 To sum up, therefore, I budgetted for an increase in expenditure in 1978-79 of 26% with a view to achieving a growth rate of expenditure in real terms of 21% and thereby bringing the average annual growth rate for the five years 1974-75 to 1978-79, virtually up to the guideline figure of 10%. I believed this could be done without crowding out the private sector, even though I estimated that the relative size of the public sector as a whole would increase from 17.2%, calculated on the basis of the revised estimates for 1977-78 then before me would increase from 17.2%(106), to 18.4%.
92 In the event, the revised estimates of expenditure for 1978-79 on General Revenue Account as opposed to Consolidated Account, envisage an increase in expenditure of the order of 37% in money terms: on recurrent account, the increase is 20%; and on capital account it is 90%. The increase of 37% overall in money terms is the equivalent of 25% in real terms: on recurrent account, the increase is 13% and on capital account it is as high as 67%. So the average annual growth rate of expenditure for the five years 1974-75 to 1978- 79 in real terms will be 11%, by any standards a remarkable performance. As a consequence, the relative size of the public sector as a whole is likely to increase to 19.6% and, and even though the growth rate of the economy in real terms is, at 10%, relatively healthy, this increase in the relative size of the public sector is contrary to our oft-declared aim of leaving room during the upswing for an increase in the relative size of the public sector on the downswing to enable us to maintain a steady growth rate of expenditure throughout the course of a cycle of activity.
(b) Budget guidelines
93 But at least we are not in breach of any of our guidelines relating to the desirable relationship between recurrent and capital expenditure and the role
(106) The actual percentage turned out to be 16.7%.
504 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
which recurrent revenue should play in the financing of the capital account(107), all this thanks to the buoyancy of both recurrent and capital revenue. But I must stress that the yield from the main item of capital revenue, namely of capital revenue, namely, land sales varies widely and even most unpredictably from year to year. In other words, unlike most items of recurrent revenue which can be forecast, more or less accurately, from trend growth factors, the revenue from land sales depends on such factors as completion dates of development works, the prevailing state of the property market and the extent to which buyers opt for their own somewhat obscure reasons sometimes to pay by instalments. Thus we must not be overly impressed with the figures of outturn for 1978-79.
(c) Balance of the fiscal system
94 I explained, Sir, last year(108) that there is now no alternative to a relatively high dependence on direct taxation for the financing of recurrent services and to help finance the deficit on capital account and that this dependence is likely to grow rather than diminish in the future. I, therefore, revised the ratios for assessing the balance of the fiscal system: the ratio of direct to indirect taxation became 55:45 and the ratio of direct and indirect taxation taken together to all other recurrent revenue became 70:30. This did not alter the purpose of these ratios, which is to remind us of the importance of trying to maintain the yield from indirect taxes and from fees and charges.
95 Already we are drifting away from these revised ratios. Just taking the three post recession years the first ratio has slipped from 55:45 in 1976-77 to 56:44 in 1978-79; and the second ratio has slipped from 72:28 in 1976-77 to 75:25 in 1978-79. I shall return to this gloomy subject in Part IV of this speech.
(d) Financial position
96 Turning finally to our cumulative financial position: paradoxically, perhaps, the surge of expenditure in the last two years has not been accompanied by any breaching of the guideline which defines adequate fiscal
(107) $ mn % Guidcline (1) Recurrent revenue 9,932
Total expenditure = 11,162= 89 At least 88% (2) Recurrent expenditure 7,444
Recurrent revenue = 9,932= 75 No more than 80% (3) Surplus on recurrent account 2,488
Capital expenditure = 3,718= 67 At least 60% (4) Recurrent expenditure 7,444
Total expenditure = 11,162= 67 No more than 70% (5) Capital revenue 2,442
Capital expenditure = 3,718= 66 At least 20% (108)BS, 1978, paras. 154-159.
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reserves, thanks to the way in which revenue (on both recurrent and capital account) has flushed simultaneously with the surge of expenditure(109).
97 Calculating our fiscal reserves on the same basis as at present, that is to say, by reference to the General Revenue Balance only(110), and allowing for differences in exchange values and in the book values of fixed interest bearing assets in the relevant period(111), the following picture emerges(112): our fiscal reserves at the 1 April 1972 represented as much as 85% of budgetted expenditure in 1972-73, but at 1 April 1976 they represented only 39% of budgetted expenditure in 1976-77. When I decided in 1977 that we had to make specific provision to secure our significantly larger contingent liabilities(113), on the basis of a gearing of three, our ‘free’ reserves stood at $1,213 million(114), or nearly 15% of budgetted expenditure in 1977-78 of $8,245 million. This 15% was equal to the guideline I then selected. Since then the size of our fiscal reserves improved to $1,749 million(115) or 17% of budgetted expenditure in 1978-79 of $10,266 million.
98 At the beginning of the financial year ahead of us, I estimate that our fiscal reserves will stand at $6,549 million(116). After allowing, say, $3,200 million as cover for our formal contingent liabilities (which peak at the
(109)
Revenue % increase Expenditure
%
increase
Surplu s/Defi cit
($ mn) ($ mn) ($ mn)
1972-73 4,769 40.2 3,550 30.6 +1,219 1973-74 5,017 5.2 4,644 30.8 +373 1974-75 5,593 11.5 5,973 28.6 ―380 1975-76 6,256 11.9 6,032 1.0 +224 1976-77 7,493 19.8 6,591 9.3 +902 1977-78 9,410 25.6 8,174 24.0 +1,236 1978-79 (RE) 12,374 31.5 11,162 36.6 +1,212
(110) This balance is the excess of the Government’s financial assets over its short-term liabilities and is available, if needed, over and above the general revenues of the Colony for appropriation. (111) That is, in the period up to 31 March 1976, since when virtually all the General Accounts foreign currency assets were transferred to the Exchange Fund against interest bearing debt certificates: see B.S., 1976, paras. 75-84. Incidentally, the Hong Kong dollar balances of the General Account over and above the Treasury’s current cash requirements are also now held in the Exchange Fund debt certificates in accordance with the concept of the Exchange Fund being effectively banker to the Government.
(112) Fiscal Reserves
Budgetted Expenditure
(1) as % of (2)
($ mn) ($ mn)
(1) (2)
1 April 1972/1972-73 2,916 3,407 86 1 April 1973/1973-74 3,089 4,183 74 1 April 1974/1974-75 2,809 5,465 51 1 April 1975/1975-76 2,522 6,615 38 1 April 1976/1976-77 2,810 7,212 39 (113) BS, 1977, paragraph 106.
(114) Fiscal reserves at 1 April 1977=$3,713 million, minus $2,500 million being 1/3rd of contingent liabilities at 31 March 1981 (ie end of the then forecast period) =$1,213 million.
(115) Fiscal reserves at 1 April 1978=$4,949 million, minus $3,200 million being 1/3rd of contingent liabilities at 31 March 1982 (ie end of the then forecast period) = $1,749 million.
(116) That is $4,949 million plus predicted surplus of $1,600 million =$6,549 million.
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31 of March 1982 at $9,700 million falling to $9,100 million a year later, that is to say at the end of the new forecast period(117), after allowing, say, $3,200 million as cover for our formal contingent liabilities we shall have 'free' reserves of around $3,350 million to finance our seasonal deficits on General Revenue Account(118) and any unexpected short term difficulties which cannot be―and, indeed, should not be―dealt with by a revision of expenditure authorities or by fiscal measures. Thus our 'free' reserves at 1 April 1979 will be the equivalent of 27% of estimated expenditure next year of $12,454 million, which is distinctly better than our guideline of 15% of estimated expenditure in the ensuing year. In other words, we are now very well placed to maintain a given level of expenditure if and when a purely financial constraint emerges (and/or emergency situations befall us). By a given level of expenditure, I mean a level necessary for administrative and social reasons and appropriate in terms of the capacity of the economy.
99 The available assets in the Development Loan Fund and the Lotteries Fund are not included in our fiscal reserves for they are committed to approved loan allocations(119). Nor are the net proceeds from the sale of our
(117) At 31 March:
1979 ($ mn)
1982
($ mn)
1983
($ mn)
Guarantees of MTRC debt 2,703 5,868 4,967 Export Credit Insurance Corporation: outstanding
amounts 1,680 2,220 2,270 Home Ownership Scheme: guarantees to banks ― 842 989 ADB: uncalled capital 227 463 463 Gold coins 100 170 194 Building and Loan Agency: guaranteed notes 165 165 165 Demonetized currency notes 10 10 10 4,885 9,738 9,058
(118) These normally peak in October after which EPT receipts begin to flow in. (119) Available assets in the Development Loan Fund at 1 April 1979 will be $69 million against outstanding allocations of $791 million, of which $395 million is for housing (*), $11 million for non-profit making schools, $27 million for loans to students and $341 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 1979-80, estimated at $1,118 million (including a further drawing of $550.6 million in excess of the approved allocation for the Housing Authority), a sum of $1,000 million has been entered in the commitment and provision columns under Head 84―Transfers to Funds Subhead 351 Payment to Development Loan Fund. Available assets in the Lotteries Fund at the same date will be $52 million to which must be added estimated receipts during the year of $36 million. Payments in 1979-80 against approved and new allocations are likely to be $41 million, leaving a balance in the Fund of $47 million at 31 March 1980. Outstanding allocations will amount to $18 million. However, it is expected that the accumulating surplus in the Fund will be exhausted within the forecast period as a result of increased demand on the Fund's resources in connection with proposals in the Social Welfare White Paper.
Note: (*) Housing Authority ($316 million for public housing and $35 million for the commercial elements of the Home Ownership Scheme); Housing
Society ($30 million for the Urban Improvement Scheme); Local
Government Officers' Housing Scheme ($7 million); and Hong Kong
Building and Loan Agency Ltd ($7 million for guaranteed notes).
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gold coins: when the accounts for the Year of the Goat coin have been finalized the surplus in the Special Coin Suspense Account is expected to be about $65 million(120), and I expect when the Lunar New Year series of gold coins is completed, the surplus in the Suspense Account should exceed $300 million.
PART III: THE ECONOMY AND THE PUBLIC SECTOR, 1979 TO 1982
(1)Introduction
100 Obviously, Sir, when I came to prepare the 1979-80 budget, one of my main preoccupations was to ensure that the level of public sector expenditure(121) provided for would not be such as further to aggravate the present situation. So I began by asking the econometricians to work out for me the implications for the economy of meeting all departmental demands on General Revenue Account, as revealed by the returns submitted to the Finance Branch in connection with the annual forecasting exercise, plus other expenditure provided for in the Consolidated Account.
(2) Forecast of Expenditure, 1979-80 to 1982-83
101 For the purpose of forecasting total expenditure on General Revenue Account for 1979-80 and for the following three years 1980-81 to 1982-83, departments were required to submit returns at the end of July last which distinguished between, on the one hand, commitments in respect of maintaining present services and of expanding them to meet demand at existing standards(122) and, on the other hand, new services(123). After the returns were submitted, other unavoidable commitments came to light provision for which had to be added in(124). All the figures were then corrected by Finance Branch for errors and omissions and separately compiled forecasts for the two Public Works Programme components of the capital account were then added in.
102 I shall refrain from offering Honourable Members a detailed analysis of the results of this exercise. Suffice it to say that the exercise threw up total bids for 1979-80 on recurrent account of $8,720 million and on capital
(120) As the state of the secondary market clearly indicates that none of the coins will be returned to the Treasury for redemption, this surplus will be progressively available for public purposes and when the series is completed the surplus in the Suspense Account should exceed $300 million. So far we have earmarked $13 million for the Morrison Hill Indoor Stadium(*) and $25 million for the Jubilee Sports Centre at Sha Tin.
Note: (*) Of the total cost of $43.45 million, the balance of $30.45 million is being financed as follows: General Revenue, $15.15 million; Urban Council,
$5.3 million; Royal Visit Commemorative Fund, $10 million.
(121) As defined in f.n. (69) above.
(122) Appendices I and II referred to in the circular at Annex (3).
(123) Appendices III and IV, ibid.
(124) For example, staff for the Immigration Department for the hydrofoil service to Canton.
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account of $5,600 million representing increases of 17% and 51% in money terms of course respectively on the revised estimates for 1978-79(125).
103 In order to arrive at figures of cash inputs for an initial forecast of expenditure on the gross domestic product in 1979, estimates of expenditure by the Urban Council and the Housing Authority financed from their own resources and of expenditure charged to existing balances in, and income accruing to, the Development Loan Fund, the Lotteries Fund and the Home Ownership Fund, had to be added on to the forecast of expenditure on General Revenue Account. The cash input figures so calculated were $9,800 million for recurrent expenditure(126) and $6,500 million for capital expenditure(127), and these two figures together comprise what I call public sector expenditure as a whole.
(3) Initial Forecast of GDP in 1979
104 Now, these cash inputs, when converted into national accounts terms and appropriately deflated, imply a growth rate of Government consumption expenditure of 14% in 1979, compared with the preliminary estimate of 15% in 1978, and a growth rate of Government expenditure on building and construction of 30%, compared with 43% in 1978. For convenience, the heroic assumption was made that the exchange rate of the Hong Kong dollar against the US dollar would remain constant throughout 1979. In effect, taking account of the likely changes in 1979 in the exchange value of the US dollar against the currencies of our major trading partners, this assumption implies a further depreciation in the effective exchange rate of the Hong Kong dollar of about 5%. The likely effect on the import prices of oil products of the announcement on the 17th of December last by OPEC relating to crude oil prices in 1979 was also allowed for.
105 This initial forecast exercise yielded the following growth rates for the | various components of GDP: private consumption expenditure: 10%, compared with the preliminary estimate of 16% in 1978; gross domestic fixed
(125) For the three years of the new forecast period the bids came to:
Recurrent Capital Total
($ mn) ($ mn) ($ mn)
1980-81 9,661 5,934 15,595 1981-82 10,414 5,549 15,963 1982-83 11,114 5,262 16,376
(126) $ million General Revenue Account 8,720 Other public sector expenditure 1,067 Total expenditure on Consolidated Account, say 9,800
(127) $ million General Revenue Account 5,600 Other public sector expenditure 878 Total expenditure on Consolidated Account, say 6,500
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capital formation: 13%(128), compared with 17% in 1978; exports of goods: 8%, compared with 14% in 1978; and imports of goods: 11%, compared with 22% in 1978. These growth rates, when combined with the assumed growth rate of Government consumption expenditure of 14%, result in a forecast of the growth rate of total expenditure on the GDP of 8%, compared with 10% in 1978.
106 The implications of this initial forecast are fairly self-evident: first, the growth rate of total final demand at 10% exceeds the growth rate of GDP at 8%. As a consequence, the growth rate at which imports are sucked in continues to be very rapid at 11%. Secondly, the growth rate of domestic demand at 11% exceeds the growth rate of exports at 8%, involving a relative worsening of the share of resources for exports compared with 1978 (when the growth rates of domestic demand and exports were 16% and 14% respectively). Thirdly, within domestic demand there is a further increase in the share of resources used by the public sector (including, of course, the MTR for I am here talking of the public sector in national accounts terms): the growth rate of public sector demand at 17% exceeds the growth rate of private domestic demand at 10%. Fourthly, and of critical importance, the growth rate of imports at 11% still exceeds the growth rate of exports at 8%. As a consequence(129), the visible trade deficit, which had already widened to over $9,000 million in 1978 continues to widen. Fifthly, such a further widening is almost certainly inconsistent with the original assumption that the exchange rate of the Hong Kong dollar against the US dollar remains stable, although it is consistent(130) with the implicit assumption of a further depreciation in the effective exchange rate of the Hong Kong dollar. The original assumption could be validated in circumstances in which there was a widening of the invisible trade surplus and/or substantial capital inflows. But, on balance, there is likely to be continuing downward pressure on the exchange value of the Hong Kong dollar. Sixthly, with the growth rate of total final demand continuing to exceed the growth rate of GDP, the imbalance between the demand for, and the supply of, domestic resources is likely to persist, with certain consequences for the rate at which prices increase. Even on the basis of the optimistic assumption about the exchange value of the Hong Kong dollar, this initial forecast, which takes into account also the likely changes in world prices in 1979, shows an acceleration in the rates of increase of prices. For example, the forecast rates of increase in the prices of imports and exports fall within the range of 8% to 10%. These rates of increase are roughly in line with the trends which became apparent
(128) Based in part on the assumed growth rate of Government expenditure on building and construction of 30%. When the intentions of the Mass Transit Railway Corporation and private sector demands on the building and construction industry are allowed for, together with a forecast for investment in plant and machinery by the economy as a whole, the forecast for expenditure on this component (g.d.f.c.f.) works out at 13%.
(129) And with a forecast of no change in the terms of trade.
(130) At least in direction, if not in magnitude.
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towards the end of 1978. The forecast for the consumer price index shows a rate of increase of 10% and that for the GDP deflator shows a rate of increase of 11%. No doubt these rates of increase would be even higher if, in addition, the Hong Kong dollar depreciated against the US dollar.
107 Clearly, the economy cannot be allowed to develop this way in 1979. If the present pattern and the growth rate of demand is allowed to continue to distort the structure of the economy, both the magnitude and the duration of the subsequent adjustment is likely to be very painful indeed in terms of its consequences for individuals. And before this adjustment takes place, continuing inflation will erode the real incomes of many groups within the community.
(4) Emphasis of Budgetary Policy in 1979-80
108 So, in these circumstances, the emphasis of budgetary policy in 1979-80 must be to slow down the growth rate of total final demand in order to bring it more into line with the growth rate of the economy's output(131) and to do this in such a way as to facilitate a relative shift and resources in favour of exports. This requires us: first, inasmuch as it is a component of domestic demand, to slow down the growth rate of Government expenditure, thereby preventing the relative size of the public sector as a whole increasing and, ideally, reducing it below the present record high of 19.6%(132); secondly, so to arrange the slow down in the growth rate of Government expenditure as to minimize the distortions within individual markets (eg the market for the output of the building and construction industry); and thirdly, to constrain the growth rate of private domestic demand by reducing the growth rate of the money supply in the hands of the non-bank private sector.
(5) Acceptable Expenditure Limits for 1979-80
109 So I asked the Finance Branch to calculate the level of vote provision required, first, to maintain our existing services and to expand them as necessary to meet demand at present standards, secondly, to provide for some new services, to meet contractual commitments in respect of on-going
(131) Fifth objective in paragraph 63 above.
(132) Annual increases in real terms (%):
Relative size of public sector CA
GDP CA Expenditure (GDP × 100)
1972/1972-73 7.2 13.6 16.1 1973/1973-74 14.2 17.7 16.4 1974/1974-75 2.2 12.0 18.8 1975/1975-76 2.9 ―0.2 17.6 1976/1976-77 16.7 6.0 15.6 1977/1977-78 11.9 16.4 16.7 1978/1978-79 10.0(*) 24.9(**) 19.6 Notes: (*) Preliminary estimate.
(**) Revised estimate.
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 511
contracts(133) and, thirdly, to let new contracts for projects which we are obliged, for various reasons(134), to complete by certain dates.
110 As regards recurrent expenditure: for the maintenance of existing services and their expansion to meet demand at present standards, I took the view that they could be adequately provided for within a figure of $8,050 million. Heads of departments were then advised to prepare their Draft Estimates submissions for existing recurrent services within this figure.
111 Having regard to the likely outturn for 1978-79, the likely size of the capital account in 1979-80 and several policy decisions in the social services field, in particular in relation to the White Paper on Senior Secondary and Tertiary Education, I took the view that some $150 million could be afforded for new proposals contained in the forecast returns for 1979-80. 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 $150 million. The total acceptable limit for recurrent expenditure thus became $8,200 million. The total of departmental estimates submissions came to $8,667 million. Careful pruning by Finance Branch reduced this, with the agreement of departments, to $8,160 million. It was a very amicable process. By agreement, this figure was reduced to $8,160 million, (laughter) which was $40 million below the limit I had set. To this figure, I added myself $200 million to cover additional commitments(135), likely to arise during the year and at present unforeseen but not additional commitments of any substantial nature. To this figure, I added $200 million to cover additional commitments which might arise during the year making the total estimate for recurrent expenditure of $8,360 million.
112 As regards capital expenditure: Finance Branch took as their starting point the guideline figure of $3,100 million(136). This implied expenditure of $2,600 million on the two Public Works Programme components of the capital account, including transfers from General Revenue to the Development Loan Fund for on-lending to the Housing Authority, leaving $500 million for all other components. Another $400 million had to be added on
(133) Including the letting of new contracts for projects which are 'linked' for technical, economic or financial reasons to these contracts.
(134) That is, for socio-political reasons, eg housing and dangerous slopes; on account of public commitments which have led to decisions by other organizations, eg Sha Tin Hospital; by virtue of contractual obligations, eg HQ British Forces; or as inevitable consequences of the Government's support of infrastructural projects undertaken by other organizations, eg MTRC and HKIEC.
(135) Already I am aware of possible calls on this subhead amounting to about $80 million. If the proposals concerned, which were included in the forecast submissions, and accorded a 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.
(136) This is an updated version of the absolute guideline figure of $2,790 million set in 1977 for the second year of the then forecast period (see BS, 1977, paragraph 99).
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to cover other inescapable commitments, mainly in respect of increased compensation payments for land resumptions in the New Territories(137). In the event, and taking into account the financial implications of a serious bunching of public works projects, and the Housing Authority's construction programme, a figure of $3,599 million had to be inserted in the Draft Estimates in respect of the two Public Works Programme components of the capital account (including a transfer of $1,000 million from General Revenue to the Development Loan Fund for on-lending to the Housing Authority). For all other components of the capital account, departmental submissions came to $744 million which, after scrutiny by the Finance Branch, was reduced to $495 million, or within $5 million of the guideline figure. Thus the total estimate for capital expenditure came out at $4,094 million.
(6) Final Forecast of GDP in 1979(138)
(a) Cash inputs and assumptions
113 After combining these estimates of recurrent and capital expenditure on General Revenue Account with estimates for other public sector expenditure, the cash input figures used for a final forecast of expenditure on the gross domestic product in 1979 became $9,427 million(139) and $4,972 million respectively for recurrent and capital expenditure(140). When converted into national accounts terms and appropriately deflated, these cash inputs imply a growth rate of Government consumption expenditure of 9% in 1979 and of Government expenditure on building and construction of 4%, compared
(137) Under the revised Letter B scheme approved by Finance Committee on 5 July 1978: see paragraph 142 below and Annex (4).
(138) The details are at Annex (5). This forecast (and the initial forecast) has been derived from: first, a crude econometric model designed to forecast trade aggregates. The model consists of 34 equations relating relevant economic aggregates of Hong Kong's major trading partners with Hong Kong's trade aggregates. Because of the lack of historical data, the specifications and the quality of some of the equations in the model are not satisfactory; and, because the system of equations is not fully articulated, the results thrown up may not agree with the original assumptions put in. Secondly, results from another simple income determination model which is built upon two functional relationships: between private consumption expenditure and GDP and between imports and GDP. When Government consumption expenditure, gross domestic fixed capital formation and exports are exogenously determined, a forecast of GDP can be arrived at. Thirdly, results from a survey of economic prospects conducted by the Census and Statistics Department. At the end of the day, personal judgments are invoked to qualify the end products of these statistical calculations.
(139) $ mn General Revenue Account 8,360 Other public sector expenditure 1,067
Total expenditure on Consolidated Account 9,427
(140) $ mn General Revenue Account 4,094 Other public sector expenditure 878 Total expenditure on Consolidated Account 4,972
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 513
with the growth rates of 14% and 30% respectively used in the initial forecast. Apart from these changes, the assumptions used in the initial forecast were also used for this final forecast. To the extent that the growth rate of total final demand is reduced, the assumption that the exchange rate of the Hong Kong dollar against the US dollar will remain constant throughout 1979 is that much more reasonable. So, taking each of the other components of expenditure on the GDP, in turn, I shall now give my final forecast; and I should say here that reductions in the growth rates of the various components in the final forecast compared with the initial forecast arise as a consequence of the slower growth rate of Government expenditure defined in terms of the consolidated account.
(b) Private consumption expenditure
114 As far as the determination of private consumption expenditure is concerned, in Hong Kong the major influence is income; but also important, at least in the short-run, are the effects of wealth and of credit availability. The so-called 'wealth effect' results in people spending more on consumption the wealthier they feel. Thus, if, for example, the index of share prices rises, holders of shares will feel better off and spend more, even if they do not realize their capital gains. A similar effect will influence the owners of property in periods when property prices are rising. As regards credit availability, the more easily and cheaply credit is available, particularly in real terms, the greater consumption expenditure is likely to be. As cheap credit will be associated with low interest rates (sometimes negative interest rates in real terms) on savings, there will tend to be, at the same time, a lower propensity to save.
115 In arriving at the forecast for the growth rate of private consumption expenditure, it was assumed that both the 'wealth effect' and the effect of credit availability would be neutral (despite the further increase in interest rates effective from 2 January 1979(141). By this, I mean no sharp appreciation or depreciation of financial and fixed assets held by consumers and a growth rate of the money supply roughly consistent with the growth rate of the economy in money terms, as measured by the growth rate of GDP at current prices. The forecast for the growth rate of private consumption expenditure is now about 9%, compared with 10% in the initial forecast.
(c) Gross domestic fixed capital formation
116 The growth rate of investment in plant and machinery in 1979 will be around 8%. This represents a slowing down when compared with the growth rate of 13% achieved in 1978 and is lower than the initial forecast of 9% in 1979. As regards the comparison with 1978, first, the fact that the growth
(141) The Best Lending Rate was increased from 8¾% to 9½% and the rate paid by the principal banks on three months fixed deposits was increased from 4½% to 5¼%. The latest increase in the Best Lending Rate to 10½% effective from 19 February was announced after the forecast had been completed.
514 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
rates of investment in plant and machinery in the past three years have been significantly higher than the trend growth rate of 7% for the seven years 1972 to 1978, suggests a slowing down is likely in 1979, particularly as, secondly, the growth rate of GDP is not expected to be as high as in 1978. But, thirdly, there is a likelihood of increases in imports of transport equipment.
117 As for investment in building and construction by the private sector, although a better balance between supply and demand is generally expected in the property market, in particular in residential property, so that building starts in terms of floor area may fall in 1979, the rapid increase in the volume of work arising from projects already started in 1977 and in 1978 will still entail a high level of activity in 1979. Against this background and having regard, on the one hand, to the revised growth rate of public sector demand on the building and construction industry (including here the intentions of the Mass Transit Railway Corporation). Against this background and having regard, on the one hand, to the revised growth rate of public sector demand on the building and construction industry of 7% and, on the other hand, to the possibility of further expansion in the capacity of the industry, a growth rate of 12% may be possible in private investment in building and construction.
118 So, as far as total investment in building and construction is concerned, the final forecast is for a growth rate of about 10%, probably made up of a 5% growth rate in building and construction employment and a 5% growth rate in productivity. Combining this with the forecast of investment in plant and machinery, the final forecast for the growth rate of gross domestic fixed capital formation is 9%, compared with 13% in the initial forecast.
(d) Exports(142)
119 Turning now to exports: the growth rate of domestic exports to the United States in 1979 is likely to be affected by the mixed economic prospects in this market and the constraints we have been obliged to accept on our exports of textiles and clothing. The outcome of the recent negotiations sought by the United States to modify the bilateral agreement entered into in 1977, provides an additional threat. So I forecast a slowing down in the growth rate of Hong Kong's domestic exports to this market to about 5% (c.f. 1978: 7%). In contrast, order books suggest that domestic exports to the Federal Republic of Germany may be rather buoyant in 1979, particularly during the first half of the year. For the second half of the year, there is
(142) Distribution of domestic exports by main markets in 1978:
Market $ mn % of total US 15,125 37.1 Germany 4,426 10.9 UK 3,871 9.5 Japan 1,856 4.6 Rest of world 15,433 37.9 Total 40,711 100.0
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 515
some uncertainty about prospects in this market because, for certain key items of clothing and textiles, quotas may, by then, have been exhausted. Nevertheless, it appears that a growth rate of about 10% may be possible (c.f. 1978: 14%). Our domestic exports to the United Kingdom face much the same problem, except that the likely growth rate of demand in this market appears to be less rapid. On balance, I feel that a forecast of a growth rate of about 7% is reasonable (c.f. 1978: 18%). My forecast for the growth rate of domestic exports to the rest of the world is 8% (c.f. 1978: 12%), giving a final forecast for the growth rate of domestic exports overall of 7% (c.f. 1978: 11%) which compares with an actual out turn of 17% in 1978.
120 With my forecast for the growth rate of re-exports at 12%, which compares with the out-turn for 1978 of 27%, the final forecast for the growth rate of exports of goods for total exports is 8%, which compares with final out-turn for 1978 of 14%. This final forecast involves no change from my initial forecast. But there is a possibility that the slower growth rate forecast for domestic demand may relieve, somewhat, the upward pressure on the domestic cost/price structure and, at the same time, result in a depreciation of exchange rate the effective exchange rate smaller than that assumed. Although the extent to which the effects are likely to offset each other is difficult to determine, the net outcome may be that domestic exports will remain as competitive in 1979 as they were in 1978, thus leading to a rather better performance than I am now forecasting. But, in view of the inevitable leads and lags in the adjustment process, I do not think it is necessary to alter the forecast.
(e) Imports
121 The growth rate of imports that is consistent with the final forecasts for the other components of GDP becomes 10% compared with 11% in the initial forecast, and I might add of 22% in 1978.
(f) Total expenditure on GDP
122 After making due allowance for exports less imports of services and for adjustments to stocks, the final forecast for the growth rate of GDP is 7% compared with 8% in the initial forecast. Thus the final forecast of GDP at constant (1966) prices is $31,160 million.
123 Although the final forecast is an improvement on the initial forecast, its implications are still unsatisfactory in terms of the necessary emphasis of budgetary policy in 1979-80. First, the growth rate of total final demand at rather less than 9% exceeds the growth rate of GDP at 7%. As a consequence, the growth rate at which imports are sucked in continues to be rapid at 10%. Secondly, the growth rate of domestic demand at 9% exceeds the growth rate of exports at 8%: this is an improvement on the initial forecast, but it still represents a relative worsening in the share of resources going to exports compared with 1978. But, thirdly, within domestic demand there is actually
516 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
a slight decrease in the share of resources used by the public sector (including the MTR): compared with the growth rate in the initial forecast of 17% and 10% respectively, the growth rate of public sector demand at 8% is less than the growth rate of private domestic demand at 9%. Fourthly, the growth rate of imports at 10% still exceeds the growth rate of exports at 8%: as a consequence although, again, there is an improvement on the initial forecast, the visible trade deficit continues to widen. Fifthly, as a result of the trade deficit widening less than in the initial forecast and with the growth rate of total final demand being reduced from 10% in the initial forecast to under 9%, the downward pressure on the exchange value of the Hong Kong dollar should be less. But the terms of trade may deteriorate slightly(143). Sixthly, with the growth rate of total final demand still in excess of the growth rate of GDP, the imbalance between the demand for, and the supply of, domestic resources still persists. But, with some slackening of the pressure of demand on resources, the rate of increase in prices should be less than shown in the initial forecast.
(g) Prices
124 Consumer prices should show a rate of increase of about 9% compared with 10% in the initial forecast, but the GDP deflator should show a rate of increase of only 8% compared with 11% in the initial forecast(144). This implies a forecast of the growth rate of GDP at current prices of just under 16% (c.f. 1978: 16%) bringing it to a value of $73,600 million.
(h) Conclusion
125 So, as a result of reducing the growth rate of Government expenditure, this final forecast represents an improvement over the initial forecast, particularly as regards the implied threat of inflation. But there is still a need for a further restraint of domestic demand before the growth rate of the economy is sustainable particularly in respect of the trade deficit and I shall revert to this subject in Part V of this speech.
(7) Outlook for the Economy in the Forecast Period, 1980 to 1982
(a) Protectionism
126 Turning now to the outlook for the economy in the forecast period, 1980 to 1982: last year(145), I drew attention to the threat to the longer term prospects for our economy of the shift to protectionism that was apparent in our major markets. In 1978, quotas for certain key clothing products to major markets were exhausted before the end of the quota year. As the growth rates for quotas permitted in the present agreements are low, quotas are likely to constrain the growth rate of exports of textiles and clothing in
(143) Depending on the course of export prices.
(144) This is a very useful reduction, but it is still higher than the average annual rate of increase of 7% for the seven years 1972 to 1978.
(145) BS, 1978, paras. 56-58.
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 517
the years to come, even if world trade continues to expand and the terms of existing agreements remain unaltered; and I do not need to remind Honourable Members that textiles and clothing still constitute around 45-50% of the total value of our domestic exports(146). Although there was no substantial tightening of restrictions during 1978, there are very few signs that protectionist pressures are easing. Indeed, there are some signs that the likely consequence of the tariff reductions which emerge from the present Multilateral Trade Negotiations will be yet further moves towards yet further quantitative restrictions. This is despite the fact that a number of studies have shown that the impact on the levels of output and employment in the economies of our major markets of imports from, say, Hong Kong, is significantly less important than other factors(147).
(b) Anti-inflationary policies of overseas governments
127 The fear of accelerating inflation causing the United States to adopt less expansionary policies and relatively little evidence that unemployment levels in OECD countries will be reduced, add support to the view that there is little likelihood that the strength of protectionist sentiments will lessen. The series of price increases for crude oil presently scheduled by OPEC, and any other increases over and above these, made the adoption of reflationary policies even less likely. Thus, we face a situation in which the growth rate of world trade in manufactures will be no more than 6% compared with the trend growth rate of 9% experienced from the mid-1960s to the mid-1970s at a time when we shall be severely restricted in the extent to which we are allowed to take advantage of such growth as there is.
(c) Advisory Committee on Diversification
128 One response by the Government to the shift to protectionism, but within the context of our general commitment to the market-based free enterprise system, was the setting up of the Advisory Committee on Diversification. It was initially hoped that the Committee would have reported to you, Sir, by now, but the task you set us has proved to be very time consuming, and has had to be fitted in with other pre-occupations. Two of the six sub committees on country studies, vocational education and training, land, industrial development, financial facilities, and shipping, two of these sub-committees have now completed their reports and the other four will complete theirs shortly. I hope the Advisory Committee will assemble its ideas during the next few months and report to you, Sir, in definitive terms, by this Autumn.
(146) Textiles and clothing as a percentage of total domestic exports by value: %
1976 53
1977 47
1978 44.5
(147) Such as imports from other developed countries and increased productivity in the importing countries.
518 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
(d) Economic relations with China
129 One development which is only just getting underway but which appears to have significant implications for Hong Kong's economy is the change in the relationship of China's economy with the rest of the world. I do not intend to speculate here on the direct and indirect implications for the pattern of our domestic exports of China's emergence as an exporter of light manufactures. I would only point out that, to the extent that China's international trade expands, Hong Kong's role as an entrepot must tend to expand. Hong Kong is ideally situated as a port for China and as a base for those doing business with China. Thus the shift in the relative importance of the tertiary services sector in our GDP that has been such a feature of our diversifying economy in the 1970s, can be expected to continue and, even, accelerate.
(e) Immigration
130 The present medium population projection, based on the 1976 By-Census, envisages an average annual growth rate of the population over the period 1976 to 1986 of 1.5% compared with an actual growth rate of 1.8% over the period 1966 to 1976. Thus the expectation was that the growth rate of the population of working age would decline from 3.1% a year to just over 2% a year between these two ten-year periods. However, the 1976 population projection was based on an assumption that the rate of net immigration would be only 12,000 a year, which is very much lower than the estimated net intake of 33,000 in 1977 and of 96,000 in 1978. These figures are seen in a very worrying perspective if one compares them with the figures of natural increase of 56,500 in 1977 and 56,900 in 1978. Furthermore, our present expectation must be for a very large number of immigrants in 1979 also. If the present high level of net immigration is maintained for any length of time, and on the basis of certain assumptions about the demographic characteristics of immigrants and labour participation rates, the effect will be to raise the growth rate of the labour force itself. But this is not an unmixed blessing even in economic terms (and I am, of course, not over-looking the grave social and other implications of the present rate of net immigration not just from China, but potentially from elsewhere as well; and already, of course, we have over 15,000 refugees held on boats and in camps pending determination of their future).
(f) Trend growth rate
131 Although these historic developments relating to China should benefit Hong Kong in the long run, neither they nor the present high rate of net immigration seem likely to affect the growth rate of productivity(148) in the forecast period, 1980 to 1982, very much. Thus, a higher growth rate of the labour force will raise the growth rate of the productive potential of the economy and could help to maintain, in the forecast period, the trend growth
(148) That is GDP per head of the employed labour force.
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 519
rate of GDP experienced so far in the 1970s of about 9% (on the basis of all sorts of assumptions, of course, about the future course of world trade). But I do not rate our chances of maintaining the present rate of improvement in real living standards (of which real GDP per capita is an inadequate measure) I do not rate our chances of maintaining the present rate of improvement in real living standards over the next few years very highly in the face of the multiplicity of pressures caused by further increases in the population such as we experienced in 1978, of 3.4%, the highest increase by far since 1962; and this is what I meant when I said that the effect of net immigration on the growth rate of the labour force is not an unmixed blessing even in economic terms.
4.45pm
HIS EXCELLENCY THE PRESIDENT:―Perhaps at this point, Members might like a short break. Council will resume in 10 minutes.
5.00pm
HIS EXCELLENCY THE PRESIDENT:―Council will resume, Financial Secretary. THE FINANCIAL SECRETARY:
PART IV: THE BUDGET FOR 1979-80
(1) Introduction
132 Sir, before returning to the question of slowing down the growth rate of total final demand―which, as I have said, must be the main emphasis of budgetary policy in 1979- 80(149)―I must present to Honourable Members the Draft Estimates of Expenditure, the Revenue Estimates and my revenue proposals for 1979-80 and thereafter. At the same time, I hope I shall be able to satisfy them that we shall be continuing to implement satisfactorily Government policies and programmes on the basis of agreed priorities(150); to demonstrate that it is our intention to continue to pursue fiscal policies which seek to be equitable(151); and yet at the same time to assure them that the budget is not likely to be detrimental to the stability of the economy(152) or inconsistent with the main emphasis of budgetary policy generally.
(2) Draft Expenditure Estimates
(a) General
133 The Draft Estimates of Expenditure are supported as usual by compendious Memorandum Notes which I commend to Honourable Members
(149) See paragraph 108 above.
(150) That is, the first general objective of budgetary policy referred to in paragraph 63 above.
(151) Ibid, the second objective.
(152) Ibid, the third objective.
520 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
and to serious students of our affairs for close study. This year some of these Notes have been re-written ab initio with a view to making them reflect, and describe, more accurately the programmes in which the department concerned is participating. I should also like to draw attention to the inclusion, for the first time, of the title of the officer in whom this Council will vest responsibility for the control of the funds voted. Taken together with the establishment last year of the Public Accounts Committee and a bill which I hope to be introducing later this session to provide for a system of statutory control over public expenditure, the Controlling Officer concept represents a further step in the reorganization of our system of financial administration.
(b) Total expenditure
134 Actual expenditure seven years ago in 1972-73 was only $3,550 million. In the first post-recession year, 1976-77, it was only $6,591 million. At $11,162 million the revised estimate of expenditure in 1978-79 is 37% up on actual expenditure of $8,174 million in the second post-recession year, 1977-78.
135 The Draft Estimates for 1979-80 provide for total expenditure of $12,454 million. This represents an increase of $1,292 million, or nearly 12% over the revised estimate for 1978- 79. So, although I cannot disguise my general concern with the growth rate of public expenditure in recent years, I am satisfied with the extent to which the growth rate has been slowed down in the year ahead of us.
(c) Recurrent
136 The provision for expenditure on recurrent services(153) is $8,360 million, including $200 million for additional commitments of an unavoidable nature arising during the year(154). This represents an increase of $916 million, or 12%, over the revised estimate for 1978-79 of $7,444 million.
137 Personal emoluments and allowances (but not on-costs) at $3,151 million account for 38% of recurrent expenditure, compared with an average of 40% for the four years 1975-76 to 1978-79. But, as regards next year, I would make two points: first, although the estimate includes $80 million
(153) That is to say:
Personal Emoluments
Departmental Other Charges
Public Works Recurrent
Recurrent Subventions (including UPGC)
Pensions
Defence
Public Debt
Miscellaneous
See Annex (6).
(154) Head 52 Miscellaneous Services, Subhead 100 Additional commitments.
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 521
for about 6,500 posts which have not yet been approved by Finance Committee, a special effort has been made to calculate the provision under the personal emoluments subheads more accurately(155). It is unlikely, therefore, that the total cost of any salaries revision in 1979 and of recommendations of the Standing Commission on Civil Service Salaries that the Government may accept can be absorbed within available provision. I shall return later to the implications of having to seek additional appropriations for Civil Service emoluments for the outturn for which I am budgetting(156). Secondly, the Civil Service has grown rapidly over the past three years. At 1 April 1976 the approved establishment stood at 114,692. We shall begin 1979-80 with a total establishment of 133,422 posts(157) and it is at least arguable that management overheads are now too thinly stretched.
138 Provision for all other recurrent expenditure amounts to $5,209 million, but I shall only mention here three components(158): Departmental other charges(159) at $1,222 million have been kept to just under 15% of recurrent expenditure, which is roughly the same as the average for the past four years.
139 Public Works Recurrent expenditure(160) at $503 million accounts for 6% of recurrent expenditure, a little below the average of the past four years. Normally, I think we should allow about 7% of total recurrent expenditure for the maintenance of our various assets and to operate the services covered by this component.
140 Recurrent subventions (including the UPGC) at $2,153 million will absorb just under 26% of recurrent expenditure, compared with an average
(155) I do not anticipate that Finance Branch will process any applications for new posts other than those for which the Appropriation Bill seeks provision. Hopefully, internal redeployment should alleviate any really pressing manpower difficulties.
(156) See paragraph 246 below.
(157) Of which 121,200 are likely to be filled.
(158) Expenditure on pensions at $332 million accounts for 4% of recurrent expenditure, compared with an average of 3.7% for the past four years. Our contribution to the cost of the Armed Forces stationed here will be $392 million (*) or 3.1% of total expenditure in 1979-80 compared with 3.6% in 1978-79 (revised estimate) and 1.6% in the last year of the previous Agreement (1975-76).
Note: (*) This figure excludes the reprovisioning and related exercises referred to in note (****) to f.n. (161) 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.
The cost of our public debt (interest charges and actual repayments or sinking fund contributions), will represent just 0.4% of total expenditure, which is the same proportion as this year although it was over 0.1% in 1974-75.
(159) 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.
(160) 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.
522 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
of 26.2% for the past four years. Overall, taking recurrent and capital subventions together, almost 20% of total expenditure on General Revenue Account is disbursed by subvented organizations.
(d) Capital(161)
141 The provision for capital expenditure is $4,094 million made up of $1,299 million for the Public Works Programme, other than New Towns and Housing, $2,300 million for the Public Works Programme (New Towns and Housing) and $495 million for all other components.
142 A comparative analysis of the capital account by component is provided in f.n.(161) to the printed version of this speech. I should point out that the guideline figure for the New Towns and Housing component of the capital account $1,300 million(162) had to be revised upwards by $400 million to $1,700 million, mainly to meet the higher cost of land resumptions in the New Territories(163). The figure of $1,700 million had to be revised
(161)
Component
(1) Public Works Programme (other than New
Guideline figures(*) ($ mn)
Draft
Estimates 1979-80 ($ mn)
C.f. Revised Estimates 1978-79
($ mn)
Towns and Housing) 1,300 1,299 (**) 1,150 (2) Public Works Programme (New Towns
and Housing, including transfer from
General Revenue to the Development Loan
Fund for on-lending to the Housing
Authority) 1,700
3,000
2,300 (***)
3,599
1,695
(3) Subventions 100 107 73 (4) UPGC 80 85 41 (5) Departmental Special Expenditure 200 500 184 495 123 (6) Defence Costs Agreement, Capital Works 30 30 35 (7) Home Ownership Fund ― ― 399 (8) Miscellaneous 90 89 (****) 202 3,500 4,094 3,718
Notes: (*) At 1978 prices.
(**) Under present accounting arrangements that part of expenditure on three projects met from loans from the Asian Development Bank amounting to $44.1 million in 1979-80 is not included here (see Memorandum Note on Head 61 Public Debt, paras. 2-4 on page 434 of the Estimates and the Memorandum Note on Asian Development Bank Loans on page 830 of the Estimates).
(***) Includes $1,000 million for transfer to the Development Loan Fund for on-lending to the Housing Authority. It is estimated that the Authority will draw $1,005 million from the Fund for the construction of public housing for renting ($932 million: interest free, repayable over 40 years), for the construction of flatted factories ($45 million: on terms still to be approved by Finance Committee) and for the construction of commercial facilities for estates built under the Home Ownership Scheme ($28 million: 8% repayable over 20 years).
(****) Public debt repayments, reprovisioning of Victoria Barracks and RAF Kai Tak and Lyemun and Sham Shui Po Barracks, other additional capital works for the Armed Forces outside the terms of the Defence Costs Agreement and transfers from General Revenue to the Emergency Relief Fund and the Mass Transit Fund.
(162) See also paragraph 112 above.
(163) See Annex (4).
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 523
further upwards by $600 million, for drawings on the Development Loan Fund by the Housing Authority in 1979-80 will be as high as $1,005 million of which $932 million will be required by the Housing Authority for the rented public housing programme alone. So, total estimated expenditure on the New Towns and Housing component of the capital account is $2,300 million which is $605 million, or 36%, more than the revised estimate for 1978-79 and $1,150 million, or 100%, more than the approved estimate for 1978-79. This very substantial increase has meant that expenditure on the Public Works Programme, other than New Towns and Housing, has had to be constrained by a rephasing of the start dates of contracts for some new projects.
(e) Pattern of expenditure (broad trends)(164)
143 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 again draw attention to certain developing trends, now that expenditure has grown so dramatically, that is to say, from $3,550 million in 1972-73 to $6,591 million in 1976-77 to $12,454 million in 1979-80.
144 The pattern of expenditure provided for in the Draft Estimates for 1979-80 is as follows: general services (including law and order)(165) will absorb 16.4% of total expenditure; economic services(166) 7.7%; community services(167) 22.5%; social services(168) 42% (and remember that, additionally, housing is partly financed outside the General Revenue Account from the Housing Authority's own resources); and all other services(169) will absorb 11.4%.
145 Over the four years 1975-76 to 1978-79 the pattern was rather different(170) with general services absorbing as much as 18.8% of total
(164) See Annex (7).
(165) Administration, law and order, defence, public relations, revenue collection, financial control.
(166) Primary products, airport and harbour, commerce and industry, communications, statistics, land and survey, Royal Observatory, certain miscellaneous subventions.
(167) Transport, roads and civil engineering, water, fire services, amenitices and related services.
(168) Education, medical and health, housing (including commercial facilities for estates of the Home Ownership Scheme and flatted factories), social welfare, labour.
(169) 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.
(170) That is: % General services 18.8 Economic services 7.9 Community services 22.0 Social services 41.6 Other 9.7 100.0
524 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
expenditure and social services 41.6%, but with economic services and community services absorbing about the same. I expect the current emphasis on social services to remain with us for some time to come.
146 The pattern of expenditure by groups of services in 1979-80 seems satisfactory to me. But, even though we have managed actually to reduce expenditure on general services in 1979-80 by $53 million compared with the revised estimate for 1978-79, we must never be complacent about the cost of general services and the various services in the residual group, which have risen by 57% and 118% respectively since 1976-77, the first post-recession year, for we must maximize our efforts in respect of the economic, community and social services groups(171). Expenditure on the latter, I might add on social services, has risen by 98% since 1976-77 and by 321% since 1972-73.
(f) Expenditure on selected services
147 That is the broad picture. The Government's intentions, on both recurrent and capital account, in respect of certain services in the coming year and how they are provided for in the Draft Estimates are spelled out in Annex (8) to the printed version of this speech. I can only draw attention to a few salient points.
148 As regards law and order: it is intended to increase the size of the Police Force by some 2,100 posts, accompanied by improvements to amenities for policemen and their families.
149 As regards education: an extra 4,000 places will be provided for handicapped children in special schools and classes. The current rapid expansion of junior secondary places will continue (there will be an additional 30,000 places) so that we can meet our target of a place for every child aged 12 to 14 by the beginning of the school year beginning September 1980. At the senior secondary level, a further 4,250 places will be provided as part of our overall policy to provide places for every child leaving Form III who is capable of benefiting from education at this level. For the first time, certain registered post secondary colleges will receive financial assistance so that they can participate in the meeting of White Paper targets for the provision of education at this level. With a view to improving the
(171) % increases on
Draft
Estimates
1979-80
% $ mn
Revised Estimates 1978-79
Actual
Expenditure 1976-77
General services 16.4 2,047 ― 2.5 57 Economic services 7.7 959 24 71 Community services 22.5 2,806 13 96 Social services 42.0 5,228 10 98 Other 11.4 1,414 36.5 117.5 100.0 12,454 12 89
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 525
quality of secondary education we also intend to bring about 70 private non-profit making schools onto full Government subsidy with effect from September 1979. Although no specific provision for this has been made in the Draft Estimates, allowance has been made within the $200 million for additional commitments of an unavoidable nature.
150 As regards medical and health services: we shall provide an additional 450 hospital beds, bringing the total number to 18,000 by March 1980. The Community Nursing Service, hitherto operating on an experimental basis, will become a permanent feature of our medical facilities and will be expanded through the provision of an additional 75 nurses.
151 As regards social security: 1979-80 will be the first full year of the implementation of the proposal to reduce the minimum qualifying age for the non-means tested Old Age Allowance from 75 to 70 years. This will cost us an additional $39 million and is one of the main factors contributing to the 13% increase in social security expenditure next year. Provision for social security represents an increase of 65% since 1975-76, the first year of the four year period I have been using largely for comparative purposes.
152 As regards infrastructural facilities: major projects in progress or nearing completion at Kai Tak Airport include the new departure baggage handling system for 68 check-in positions. Work will commence on the electrification of the railway to Lo Wu, and will continue on a number of major highways projects. Development of the new towns and of public housing will continue apace, and I would remind Honourable Members that the provision sought in the Draft Estimates for 1979-80 is double that in the Approved Estimates for this year.
153 As regards public housing for renting and as regards also related facilities: the Draft Estimates provide for expenditure of $1,100 million but, if drawings from the Home Ownership Fund are also taken into account, total disbursements will be of the order of $1,450 million(172), an increase over the revised estimate for 1978-79 of $373 million or 35%. No less than $932 million, representing an increase of $417 million or 81% over the revised estimate for 1978-79 of $515 million, is to be transferred to the Development Loan Fund for on-lending to the Housing Authority for the
(172) That is: $ mn $ mn Drawings from Development Loan Fund:
Rented housing 932 ― Commercial facilities, Home Ownership Scheme 28 ― Flatted factories 45 1,005 PWD expenditure 95 ― Drawings from Home Ownership Fund 350 1,450
Add:expenditure by Housing Authority from own resources 150 1,600 (*)
Note: (*) Equals total expenditure on all public housing and ancillary facilities in 1979-80 (c.f. $1,169 million in 1978-79).
526 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
rented housing programme. This substantial increase is necessary for the first year of a four-year construction programme aimed at achieving a level of production of public housing(173) of some 35,000 flats a year, for which total drawings from the Development Loan Fund of $3,260 million at mid- 1978 prices will be required. This four-year construction programme will be reviewed and rolled forward annually.
154 As regards the Government’s Home Ownership Scheme, I would make two points: first, there may be a case, eventually, for increasing the proportion of public housing produced for sale, if this can be justified by increased demand and if adequate mortgage facilities can be found to back up increased purchases, for the cash flow advantages implicit in re-cycling a given allocation of funds at a much faster rate than in the case of the rented housing programme are obvious. Secondly, the income limit for eligibility for home ownership in the public sector of $3,500 a month was set in February 1977. As incomes have increased in both real and money terms over the last 2 years, the income criterion of eligibility needs to be revised. Otherwise, the scheme obviously will be catering for a lower income group than it was originally meant to assist.
(3) Revenue Estimates
(a) Total revenue
155 The Revenue Estimates as printed anticipate that total revenue collections will be $13,882 million which represents an increase of $1,508 million, or over 12%, over the revised estimate for 1978-79 of $12,374 million.
(b) Recurrent
156 My estimate of recurrent revenue is $11,470 million, an increase of $1,538 million, or 15.5%, over the revised estimate for 1978-79 of $9,932 million.
157 Earnings and profits taxes account for $5,070 million or 44% of recurrent revenue. This represents an increase of $936 million, or nearly 23%, over the revised estimate for 1978-79 (which was $777 million, or 23%, up on actual collections in 1977-78).
158 The estimate makes due allowance for the effect of bringing the taxation treatment of profits of banks and similar institutions into line with the treatment of all other profits generated by businesses located in, and
(173) Defined in this context as domestic flats (including ancillary commercial facilities) produced by the Housing Department and the Public Works Department for the Housing Authority’s rented housing programme, and domestic flats for sale produced by the Housing Department for the Government’s Home Ownership Scheme.
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 527
operating in, Hong Kong(174), the reintroduction of dependent parent relief(175) and the exemption of clubs from the payment of property tax(176).
159 On rates, Honourable Members will recall that, because of the significant increases in rateable values resulting from the 1976 revaluation, a scheme of relief was introduced whereby, irrespective of the increases in the values, the rates payable by a ratepayer in 1
1977-78 did not increase by more than 33 % of the rates paid by him in 1976-77, and the
3
1
rates payable in 1978-79 did not increase by more than 33 % of the rates paid by him in 3
1977-78. For pre-war rent-controlled premises, the relief scheme will continue after 1978- 79 so that, in each successive year, the rates actually payable will not increase by more than 33 % of the amount paid in the immediately preceding year(177). But, for all other premises,
1
3
the rates payable with effect from 1 April 1979 will be the full rate based on the rateable value of the premises.
160 The cessation of the scheme of relief will restore some $9 million to the yield from rates and after allowing for increased percentage charges in respect of the phasing-in of rates for new areas in the New Territories, I estimate that rates revenue should increase from $807 million in 1978-79 (revised estimate) to $882 million in 1979-80, or by nearly 9.3%. It is for this reason that, other than in regard to the phasing-in programme of the New Territories, I shall not be proposing any change in the General Rate which was reduced to 7½% with effect from 1 April 1977.
161 I have assumed that the yield from stamp duties will be up from $780 million(178) in 1978-79 (revised estimate) to $800 million and I have assumed that the yield from bets and sweeps taxes will be up from $502 million in 1978-79 (revised estimate) to $630 million in 1979-80, for obvious reasons
(174) After taking into account the two instalment system, the yield will be about $144 million in 1979-80 (from final assessments 1978-79 and provisional assessments 1979-80) and $80 million in a full year. See paragraph 218 below and Annex (9).
(175) The loss of revenue is now estimated at $69 million in 1979-80 (final 1978-79 plus provisional 1979-80) and $42 million in a full year. See Annex (10).
(176) The loss of revenue will be about $2 million a year.
(177) In 1978-79, some 10,800 ratepayers enjoyed the benefit of the scheme of relief. Of these, some 5,800 in pre-war rent-controlled premises will continue to enjoy the benefit in 1979-80 and thereafter. The remaining 5,000 will cease to enjoy any relief as from 1 April 1979.
But, notwithstanding the cessation of the scheme of relief for these 5,000 ratepayers, the payment of full rates will not involve an increase in the rates payable by the majority in excess of the increase that would have applied had the scheme continued. In other words, for some 3,600 of these ratepayers the increase in the rates payable for 1979-80 will not in fact be more than 33 % of the rates paid in 1978-79, and for about half of them the
1
increase will be no more than 10%. In effect, therefore, 87% of all those currently
3
enjoying relief will not have to pay more than 33 % more, in 1979-80, than they paid in
1
1978-79. The remaining 13% will have increases in excess of 33 % of what they paid in
3
1
1978-79.
3
(178) Original estimate: $550 million. As stamp duty is now only levied on transfers of property, including shares and marketable securities, there is a case for regarding stamp duty revenue as capital revenue.
528 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
(contributing, I might add for those Honourable Members with a vested interest in the subject, 5.5% to total recurrent revenue).
162 The estimated yield from excise duties in 1979-80 at $791 million is only $25 million up on the revised estimate for 1978-79 of $766 million which was only $25 million higher than the original estimate. But excise duties are important and will contribute, nevertheless, 6.9% to total recurrent revenue, which is not all that far short of the contribution from Rates of 7.7%
(c) Capital
163 My estimate of capital revenue is $2,412 million which is a decrease of $30 million on the revised estimate for 1978-79 of $2,442 million. Within the estimate of $2,412 million, land transactions are expected to bring in $1,972 million, taxi concessions may be $293 million and estate duty may be $135 million.
164 Within the estimate of $1,972 million for land transactions, land sales should yield $1,300 million from the sale of 135 acres(179), compared with the revised estimate for 1978- 79 of $1,184 million from the sale of 58 acres(180); private treaty grants should yield $322 million, down on the revised estimate for 1978-79 of $477 million; and modifications and regrants should yield $350 million, again down on the revised estimate from 1978-79 of $381 million(181).
(4) Outturn and Summary
165 The difference between my estimate of revenue of $13,882 million shown in the Revenue Estimates as printed and the Draft Estimates of Expenditure amounting to $12,454 million is $1,428 million. This is the surplus I am budgetting for on General Revenue Account(182).
(179) Industrial Non-industrial Total Urban areas 16.1 41.3 57.4 New Territories 24.2 52.9 77.1 Total 40.3 94.2 134.5
(180) Industrial Non-Industrial Total Urban areas 8.1 17.0 25.1 New Territories 18.8 13.6 32.4 Total 26.9 30.6 57.5
(181) Due to fewer expiry of leases next year and an assumption that more owners will opt to pay premia by instalments.
(182) $ mn $ mn Revenue:
Recurrent 11,470 ― Capital 2,412 13,882 Expenditure:
Recurrent 8,360 ― Capital 4,094 12,454 Surplus on recurrent account ― 3,110 Deficit on capital account ― 1,682 Overall surplus ― 1,428
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 529
166 The budget I have just presented conforms with all five guidelines relating to the relationship between the recurrent and capital accounts. Indeed, the ratios are well within the guidelines(183), thanks again to the buoyancy of capital revenue and the slowing down of the growth rate of recurrent expenditure compared with the growth rate in recent years and in relation to the growth rate of recurrent revenue(184). In real terms, the provision in the Draft Estimates of Expenditure implies a growth rate of about 5% compared with 25% in 1978-79 (revised estimates).
167 However, I have to admit that I have failed to reduce the relative size of the public sector as a whole. But, at 19.6% next year(185), it will at least be no greater than this year(186). This is not good enough either in terms of the part the public sector should play in helping to reduce the growth rate of total final demand, or in terms of the need to leave room for the public sector to expand relative to the economy as a whole should the growth rate of the economy be below my forecast (in response, say, to a recession in world output and trade).
(183) $ mn % Guideline
Recurrent revenue 11,470
(1)Total expenditure = 12,454= 92 At least 88% Recurrent expenditure 8,360 (2)Recurrent revenue = 11,470= 73 No more than 80% Surplus on recurrent account 3,110 (3)Capital expenditure = 4,094= 76 At least 60% Recurrent expenditure 8,360 (4)
Total expenditure
=
12,454
= 67 No more than 70%
Capital revenue 2,412
(5)Capital expenditure = 4,094= 59 At least 20%
(184) Actual 1977-78 (*)
(%)
RE
1978-79 (%)
Estimate 1979-80 (%)
Recurrent expenditure +19.0 +19.7 +12.3 Recurrent revenue +19.0 +21.9 +15.5 Note: (*) On actual 1976-77.
(185) $ mn
Consolidated Account expenditure (*) 14,399
Final forecast of GDP at current prices in 1979 = 73,600 = 19.6% Note: (*) Draft Estimates for 1979-80.
General Note: The reason why the relative size of the public sector as a whole will not be less in 1979-80 compared with 1978-79, despite the fact that the growth rate of
expenditure on General Revenue Account at 5% is less than the forecast growth
rate of GDP at 7% is as follows: the growth rate of expenditure on
Consolidated Account will be as high as 7.5% because, unusually, owing to the
rate of drawings on resources already lying in, for example, the Home
Ownership Fund, the relative importance of expenditure on General Revenue
Account in the Consolidated Account will be only 86.5% rather than 89.2% in
1978-79 (c.f. 89% in 1977-78 and 89.5% in 1976-77).
(186) $ mn Consolidated Account expenditure (*) 12,514
Preliminary estimate of GDP at current prices in 1978 = 63,686 = 19.6% Note:(*) Revised Estimates for 1978-79.
530 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
168 As regards the balance of the fiscal system, the Revenue Estimates, as printed, show a ratio of direct to indirect taxation of 58:42 and a ratio of direct and indirect taxation taken together to all other recurrent revenue of 76:24. So we shall continue to deviate from the guidelines of 55:45 and 70:30 respectively, and I shall have more to say about this subject in just a moment.
(5) Revenue Proposals for 1979-80
(a) General
169 I turn now to my revenue proposals for 1979-80 and would begin by making three points: first, in view of the value to our economy of a stable and predictable tax environment and the problem of assessing precisely the impact of particular tax changes, it is not my intention to use fiscal weapons to drain off purchasing power in order to slow down the growth rate of private domestic demand. But, certainly, it would be quite inconsistent of me not to propose compensating increases in other taxes and charges, if they can be justified, to offset the cost of any reforms of the tax system thought desirable on equity or administrative grounds. Secondly, the balance of our fiscal system does not adhere even to the guideline ratios as revised in last year’s budget speech(187). I have just pointed out they are likely to slip even further next year. Whilst there is an inherent tendency for the relative importance of earnings and profits taxes to increase, this should not deter us from at least trying to maintain the yield from indirect taxes and charges. This leads me on to my third point which is that our system of fees and charges―be they cost-related, only partly cost-related(188), royalty-loaded or tax-loaded―our system of fees and charges should be continually updated in response to cost/price changes. (I am not, incidentally, referring here to the prices charged by the various public utility type undertakings(189) owned and operated by the Government for I do not regard the pricing policies followed by these undertakings as being subject to ordinary fiscal considerations. Thus, for this reason, the recent revision of water charges was announced outside the context of the annual budget(190).
170 Accordingly, I have nine proposals to put to Honourable Members: one is a reform measure of interest to accountants and industrialists; two are reform measures designed to reduce the tax liability of certain taxpayers; one is a revision of an out-of-date allowance in the Estate Duty Ordinance;
(187) See paragraph 94 above.
(188) Because, for one policy reason or another, the costs of the services concerned are borne in part by General Revenue.
(189) Lion Rock Tunnels
Government car parks
Kowloon Canton Railway
Airport
Post Office
Waterworks
(190) See Annex (11).
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 531
one is designed to close a loophole in the Estate Duty Ordinance; and four others are designed to update certain indirect taxes and charges.
(b) Direct taxation
(i) Depreciation allowances
171 The Third Inland Revenue Ordinance Review Committee noted the relatively high administrative cost of keeping track of individual items of plant and equipment for the sake of making a balancing allowance or charge in the event of a disposal. The Review Committee thought that there might be scope for ‘pooling’ the capital expenditure on two or more assets ranking for the same rate of annual allowance. Then, if one of those assets was disposed of, a balancing allowance or charge would not have to be made as a separate operation: instead, the same broad result could be achieved, in the long run, by diminishing the so-called ‘pool’ for the purpose of later annual allowances by the amount of the proceeds of disposal for the asset no longer represented in the ‘pool’. The Review Committee made no specific recommendation on this mildly esoteric subject, but I do accept that the existing method of calculating capital allowances involves complicated record keeping. Subject, therefore, to consultations with the Hong Kong Society of Accountants on technical details, I propose that a ‘pooling’ system should be introduced as soon as practicable(191).
172 The administrative savings from a ‘pooling’ system are greater when the number of separate ‘pools’ ranking for the same rate of allowance is fewer. At present, for the purpose of ascertaining the annual allowance to be made under the Ordinance, the rates of depreciation as prescribed in the third column of the First Part of the Table annexed to the Inland Revenue Rules range between 5% and 30%(192). I propose, therefore, to invite the Board of Inland Revenue to make a new Table to Rule 2 so that the existing 20% rate of depreciation allowance, which applies to 11 heads, will be increased to 25%. The number of heads attracting this rate will thus become 15 out of a total of 33 heads in the table. The principal beneficiaries of this proposal will be in the manufacturing sector. After allowing for the two instalment system, the cost to the revenue in 1979-80 will be $22.5 million, for both final 1978-79 assessments and provisional 1979-80 assessments will be involved, and roughly $12.5 million will be the cost in an ordinary full year(193).
(ii) Salaries tax: supplementary personal allowance
173 With effect from the year of assessment 1976-77, single and married taxpayers have been given an additional or ‘supplementary’ personal
(191) Amendments to sections 37(2) and 37A(2) of the Inland Revenue Ordinance will be necessary.
(192) The Table was last revised in 1974 (see BS, 1974, paras. 144-146). (193) In the long term, the cost will be nil for the effect is simply to accelerate the rate at which allowances are granted, although the beneficial cash flow effect should not be overlooked.
532 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
allowance of $2,500 and $5,000 respectively which is reduced or ‘clawed back’ by 15% of the amount by which the taxpayer’s income exceeds $12,500 and $25,000 respectively until the point is reached where the entire ‘supplementary’ allowance disappears. Thus the ‘supplementary’ personal allowance is eliminated when the single taxpayer’s income reaches $29,167 and when the married taxpayer’s income reaches $58,334. I propose to reduce the ‘claw-back’ to 10% effective for final salaries tax (and for personal assessment also) for the year of assessment 1978-79 and for provisional salaries tax for 1979-80(194) at a cost to the revenue in 1979-80 of $37 million, after allowing for the two instalment system(195). A full year’s cost will be around $22 million. The ‘supplementary’ allowance will now not disappear until a single taxpayer earns $37,500 which may be compared with the present point of $29,167 and the ‘supplementary’ allowance will not now disappear until a married taxpayer earns $75,000 a year which may be compared with the present point of $58,334.
(iii) Salaries tax: 30% marginal rate
174 In addition, I propose the scrapping of the 30% rate applicable to net chargeable income in excess of $50,000 a year(196). Again, the scrapping of this rate will be effective for final salaries tax and personal assessment for the year of assessment 1978-79 and for provisional salaries tax for 1979-80. The cost to the revenue in 1979-80 will be $20 million after allowing for the two instalment system. A full year’s cost will be $13 million. Thus the top marginal rate will be, in future, 25% on net chargeable income in excess of $40,000 a year. Although there has always been an arithmetic relationship between the top marginal rate and the standard rate, the former being twice the latter, I can see no logic in this and I think the level of income at which the standard rate applies should be lifted and the progression of effective rates stretched out. Thus a single taxpayer will enter the standard rate zone on an income of $75,000 a year in future (c.f. $70,000 at present), a married taxpayer will enter the standard rate zone in future on an income of $100,000 (c.f. $90,000 at present) and a married taxpayer with two dependent children will enter the standard rate zone in future on an income of $117,500 (c.f. $104,000 at present).
175 The effect of these two proposals together will be to reduce the effective rate of tax payable by a single taxpayer on, say, $20,000 a year from 2.16% to 2.06% and on $30,000 a year from 5% to 4.75%; by a married taxpayer on, say, $30,000 a year from 0.96% to 0.92%, on $60,000 a year from 8.33% to 7.83%, on $80,000 a year from 13.13% to 12.5%, and on $90,000 a year from 15% to 13.89%; and by a married taxpayer with two dependent
(194) An amendment to section 42B of the Inland Revenue Ordinance will be necessary. (195) Provisional tax does not apply to personal assessment.
(196) An amendment to the Second Schedule of the Inland Revenue Ordinance will be required.
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 533
children on, say, $60,000 a year from 6% to 5.5%, on $90,000 a year from 12.67% to 11.94% and on $104,000 a year from 15% to 13.7%(197).
176 I cannot refrain from mentioning here that, after allowing for the two instalment system, the total cost to the revenue in 1979-80, of the reintroduction of the Dependent Parent Allowance already approved by this Council, the proposed reduction of the ‘claw back’ of the supplementary personal allowance to 10% and the scrapping of the 30% top marginal rate (all proposals applicable to final assessments for 1978-79 and provisional assessments for 1979-80), the total cost will be $126 million in 1979-80; and a full year’s cost will be $77 million.
177 Before I am again told how hard pressed Hong Kong taxpayers are (particularly middle class taxpayers) I would ask Honourable Members to study carefully the firm evidence to the contrary in Annex (13) to the printed version of this speech.
(iv) Estate duty: controlled companies
178 The unrivalled complexity of some of the provisions of the Estate Duty Ordinance are aimed, so it is said, at combatting avoidance. But our system of estate duty is based on two very simple concepts: first, only assets situated in Hong Kong are taken into account for estate duty purposes; and, secondly, provided the deceased had divested himself of his estate three years before death the property so divested is not chargeable to duty.
179 Although estate duty makes a most useful contribution to the revenue―$135 million this year―for some time it has been claimed that in Hong Kong it is virtually a voluntary tax. This is because duty is only levied on assets located in Hong Kong, irrespective of whether the deceased was domiciled in Hong Kong. So, provided timely action is taken, Hong Kong assets can be exchanged for foreign assets and removed from the ambit of the charge.
180 In recent years, the effectiveness of the Ordinance has been further undermined by a fairly simple device dreamt up by lawyers. This device consists of the transfer of Hong Kong assets to a company specially incorporated for the purpose in a tax haven. Shares in these companies are not assets located in Hong Kong and, therefore, escape duty.
181 Sections 35―45 of the Ordinance were introduced in 1958 to bring to charge assets of companies controlled by a deceased person, to the extent to which he took benefit or had power to take benefit. This amendment was aimed at countering avoidance which involved the transfer, during the lifetime of a person, of a person’s assets to a company in which he held only a few shares, but which was effectively controlled by him, whether
(197) See Annex (12).
534 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
the company was incorporated in Hong Kong or elsewhere. The amendment was based on United Kingdom legislation, despite the fact that estate duty in the United Kingdom was based largely on domicile (as is the new capital transfer tax) and not on the location of the assets as in Hong Kong.
182 The loophole which exists arises from a combination of the application of sections 10(b) and 35 and 40(4) of the Ordinance whereby, in effect, where the value of a deceased person’s own shares in a company located outside Hong Kong exceeds the amount of what would otherwise be a valid controlled company claim, no Hong Kong duty can be levied, thus vitiating the underlying intent of the controlled company provisions. Subject, therefore, to the advice of the Executive Council, I intend to introduce an amending bill into this Council shortly to reinstate the original intention of the Ordinance.
(v) Estate duty: gifts inter vivos
183 But, by way of demonstrating that I am as anxious to update the value of concessions, exemptions and allowances in our tax laws as to tighten administration in the interests of maintaining the productivity of the system and thus avoiding the need for increases in tax rates, I propose that the duty free limit of $5,000 on gift inter vivos made less than three years before death (or one year in the case of charitable donations) provided for under section 6(1)(c) of the Ordinance be raised to $50,000 in respect of estates of persons dying on or after the 1 April 1979. The present limit was set in 1959 and since then the exemption limit for estates as a whole has gone up from $50,000 to $400,000(198). I hesitate to mention this, but I am happy to report that the cost to the revenue of this most imaginative gesture will only be about $200,000 a year. (laughter)
(c) Indirect taxation
(i) General
184 Having regard to the present imbalance in our fiscal system as between direct taxation, on the one hand, and indirect taxation, on the other, I began my search for compensating revenue by examining the extent to which the yield from our main sources of indirect taxation might be improved. In doing so, I was as conscious of the need to avoid wandering beyond the point of diminishing returns, as I was of the need to try to restore the balance between direct and indirect taxation by increasing the yield from the latter as well as conceding as I have just done on the former.
185 I have already said that I shall not be proposing any change in the General Rate(199) as I consider the yield from this source is quite satisfactory,
(198) BS, 1977, paragraph 221.
(199) See paragraph 160 above.
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 535
but I shall deal later with the question of a reassessment of rateable values. Similarly, I consider the yields from stamp duties and from taxes on bets and sweeps and on entertainment are such as not to require any increases at this time.
186 So I looked specifically to the remaining major source of indirect taxation, namely, excise duties. The yields from duties levied under the Dutiable Commodities Ordinance have grown very slowly in recent years compared with the yields from earnings and profits taxes(200). This may be due to the fact that after the various increases in the rates of duties in 1974, 1975, 1976 and 1978(201) we have reached a plateau of yields from some duties, higher disposable incomes being offset by consumer resistance to higher retail prices generally and changing habits. Nevertheless, the increases in retail prices which were experienced in recent months and years have resulted in a decline in the incidence of duty on liquor, tobacco and hydrocarbon oils declining.
(ii) Duty on liquors
187 The specific rates of duty on intoxicating liquors were last revised in February 1975 in order to restore a loss of revenue resulting from a fall in consumption. The rates were further increased in December 1975 partly to eliminate Commonwealth preference margins and partly to raise additional revenue(202), and these rates have remained unchanged since then. The retail prices of some categories of intoxicating liquor have increased during the past three years, and the incidence of the duty has fallen in consequence. However, the degree of erosion is not yet so serious as to warrant a revision, so I do not propose any increase in the rates of duty at this time.
(iii) Duty on tobacco
188 The retail prices of certain brands of imported cigarettes have also recently been increased, by as much as 20 cents a packet, thus eroding the duty incidence here as well. I have considered whether this should be rectified, but I have come to the conclusion that an immediate increase in the rate of duty is not necessary, particularly as I increased the rate on manufactured tobacco in imported cigarettes by $1.65 per pound, to $20.15 per pound, as recently as last year.
(200)
Actual
1976-77
(%)
Actual 1977-78 (%)
Revised Estimates 1978-79 (%)
Estimates 1979-80 (%)
Earnings and profits taxes +21 +24 +23 +23 Duties under the DCO +22 +8 +4 +3 (201) 27 February 1974 : liquor and tobacco
26 February 1975 : liquor and tobacco
3 December 1975 : liquor and tobacco
25 February 1976 : hydrocarbon oils
1 March 1978 : imported cigarettes
(202) BS, 1976, Annex (4).
536 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
(iv) Duty on hydrocarbon oils
189 The rates of duty on hydrocarbon oils were last revised in 1976(203). The objectives then were two-fold: first, partially to restore the duty element in the retail price of both petrol and automotive diesel fuel; and, secondly, to restore the contribution of duty on hydrocarbon oils to total recurrent revenue.
190 The incidence of the duty in 1966 was 54% for both petrol and automotive diesel fuel, following increases made to the rates in that year. By 1976, ten years later, the duty element had fallen to 31% and 29% respectively, and the effect of the 1976 increase was partially to restore the incidence to 35% and 34% respectively. These percentages have been reduced as a result of price increases since 1976 and, following the announcement by OPEC that the price of crude oil will be increased in stages beginning on the 1 January 1979, by a total of some 14.5% in 1979, the price of petrol has recently been increased again by 40 cents per gallon and of automotive diesel fuel by 35 cents per gallon(204). The incidence of duty is now only 32% in the case of petrol and 31% in the case of automotive diesel fuel.
191 Over the years, the contribution to total recurrent revenue of duty on hydrocarbon oils has also fallen, from nearly 3% in 1976-77 to just over 2% in 1979-80(205).
192 Having regard to the 1976 objectives, I should seek not only to restore the incidence of duty to at least 35%, but also to restore the contribution of duty on hydrocarbon oils to recurrent revenue to at least 3%. To restore the incidence of duty to about 35% would require an increase in the rates of duty of about 30 cents per gallon, from $2.20 to $2.50 for petrol, and from $1.60 to $1.90 for automotive diesel fuel. But the contribution of duty on hydrocarbon oils to recurrent revenue would still remain somewhat less than 3%. And as the likelihood is there will be further increases in retail prices during 1979, the incidence of the duty will again be eroded requiring yet another increase in the rates of duty next year. So for all these reasons, I think the rates of duty should be left as they are until the present position is clearer.
(203) BS, 1976, paras. 191-197.
(204) See f.n. (65) above; and, incidentally, the increase of 40 cents is 6.3% and of 35 cents is 7.2% on the previous retail prices.
(205) (a) Recurrent Revenue
and Receipts
($ mn)
(b)
Revenue from hydrocarbon oils ($ mn)
(b) as % of (a)
1976-77 (Actual) 6,849 188 2.74 1977-78 (Actual) 8,151 217 2.66 1978-79 (Revised Estimate) 9,932 225 2.27 1979-80 (Estimate) 11,470 232 2.02
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 537
(v) First registration tax
193 Having failed to persuade myself that immediate increases in at least some of the rates of excise duties should be introduced, I am left with one source of indirect taxation in my desperate search for compensating revenue ―that is to say, first registration tax on motor vehicles. The revenue from this source has increased steadily from $102 million in 1976-77 to $148 million in 1977-78 to $254 million in 1978-79 (revised estimate); and the estimate for 1979-80 is over $300 million. We are clearly nowhere near the point of diminishing returns, and I consider that this is one source which could and I am afraid, will contribute more to the revenue.
194 At present, non-enfranchised buses(206), goods vehicles and taxis attract an ad valorem rate of tax of 15%. These categories of vehicles were brought within the scope of the Motor Vehicle (First Registration Tax) Ordinance for the first time in December 1975, when Commonwealth preference on motor vehicles was abolished. The 15% rate of tax levied was the same as that previously levied on such vehicles of non-Commonwealth origin. I do not think it is yet time for this particular rate of tax to be increased.
195 But private cars attract an ad valorem rate of tax in accordance with a scale which was introduced last year. This scale distinguishes between basic cars, for which the rate of tax is 30%, semi-luxury cars, for which the rate of tax is 35%, and luxury cars, for which the rate is of tax 40%. I defined 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; I defined a semi luxury car as one which costs between $20,000 and $30,000, and I defined a luxury car as one which costs more than $30,000.
196 The 30% rate of tax was previously applied to all private cars. So, in effect, the scale introduced last year was designed not only to bring in a degree of progressivity, which was already an established feature of our system of personal taxation and of our system of annual tax on the ownership of motor vehicles, but also to impose a higher rate of tax on the more expensive cars. I argued that the purchaser of an expensive car, such as a Cadillac or Rolls Royce, should be taxed at a higher rate than the person who can just afford, say, a Honda Civic.
197 Whereas increases in landed costs have not been such as to make it necessary to re define the scale which defines basic, semi-luxury and luxury cars, I propose that the rate of tax should now be increased as follows: for the basic car from 30% to 35%; for the semi luxury car from 35% to 40%; and for the luxury car from 40% to 45%. In line with the new rate of tax for basic cars, I propose that the rate for motor cycles and motor tricycles should be increased from 30% to 35%(207). The value of imports of cars
(206) That is, non-enfranchised public buses, private buses, public light buses and private light buses.
(207) Amendments will be required to the Schedule to the Motor Vehicles (First Registration Tax) Ordinance.
538 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
increased by 41% in 1977 over 1976, and by 76% in 1978 over 1977. Clearly, the existing rates of First Registration Tax are no discouragement to aspiring car-owners. I do not think that the proposed rates will be significantly more discouraging, which is very encouraging for the revenue to the tune, probably, of $35 million in 1979-80. The possible effect of these increased rates on the retail prices of a sample of new vehicles is shown in Annex (14) to the printed version of this speech.
(d) Fees and charges
(i) General
198 I said earlier, Sir, that our system of fees and charges be they cost-related, partly cost related only, royalty-loaded or tax-loaded should be continually updated in response to cost/price changes. A failure to do so means, inevitably, that an increasing burden is placed on general taxation.
(ii) Cost-related
199 The Finance Branch monitors over some 1,500 cost-related fees and charges of various kinds, to ensure that the responsible departments take appropriate action on a regular basis to review and up-date them. Inevitably, because of the numbers involved, the tendency is to place greater emphasis on the up-dating of cost-related fees and charges for the services most in demand; and those fees and charges which are only partly cost-related, for policy reasons, tend to be reviewed and up-dated less regularly. Even so, I am not satisfied that even our cost-related fees and charges are reviewed frequently enough, and so I shall be asking Finance Branch to consider ways of improving their system of monitoring.
(iii) Royalty-loaded
200 There are several royalty-loaded fees which really ought to be up-dated, but I have decided not to propose any changes on this occasion, partly because I am not satisfied that we have yet identified all cases where a royalty-loading should apply.
(iv) Tax-loaded
201 As far as tax-loaded fees and charges are concerned, a recent review by the Management Accounting Services Division of the Treasury has revealed that, with cost increases over the years, there has been a significant erosion of the tax-loading element. So I have decided that those most seriously affected should be revised upwards to offset this erosion.
(A) Motor vehicle licences
202 Fees for motor vehicle licences were deliberately tax-loaded in 1974(208); that is to say, they cover the administrative costs of the licensing process and,
(208) BS, 1974, paras, 158-165.
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 539
additionally, include a tax element. As I have an uneasy feeling that I shall be misunderstood, I must here stress that my proposals have nothing whatsoever to do with future transport policy; nor do they partly anticipate any measure that might be taken in pursuance of that policy. They are justified in their own right, and they are being put to Honourable Members for fiscal reasons alone.
203 Fully to restore the tax-loading, existing fees would have to be increased by between 23% and 26%. However, it would not be appropriate to apply a flat increase to all fees and I propose to make certain other adjustments to remove some of the anomalies that now exist(209).
204 As regards private cars, I propose to increase the fees by 20%, with the exception of the fee for the small car of up to 1,000 c.c. which I propose to round down to $400. This will result in the following increases in the six rates―
Up to 1,000 c.c. from $ 350 to $ 400
Up to 1,500 c.c. from $ 500 to $ 600
Up to 2,500 c.c. from $ 750 to $ 900
Up to 3,500 c.c. from $1,000 to $1,200
Up to 4,500 c.c. from $1,250 to $1,500
Over 4,500 c.c. from $1,500 to $1,800
205 Applying the same order of increase to motor cycles, and maintaining the existing 50% differential with small cars of up to 1,000 c.c., raises the fee from $175 to $200 and I so propose.
206 As regards goods vehicles, the present fee for a vehicle not exceeding 20 cwt unladen is $300. I can see no reason why the fee for this type of vehicle should continue to be less than that for a private car with an engine capacity of up to 1,000 c.c. So I propose to set the fee for a goods vehicle not exceeding 20 cwt at the same level as will apply to a private car 1
in the lowest category, that is to say $400. This represents an increase of 33 % and I 3
propose to apply the same rate of increase to the other three fees, in order to maintain the existing percentage differentials between the fees, as follows―
Up to 20 cwt from $ 300 to $ 400
Up to 45 cwt from $ 600 to $ 800
Up to 75 cwt from $ 900 to $1,200
Over 75 cwt from $1,200 to $1,600
207 The only adjustment I propose to make for public service vehicles relates to taxis, and that is because the present fees are quite anomalous. The present fee for a Hong Kong and Kowloon taxi is $20 for the driver
(209) Amendments will be required to the Third Schedule to the Road Traffic (Registration and Licensing of Vehicles) Regulations.
540 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
and $60 for each permitted passenger seat in the vehicle, making a total of $320. The present fee for a New Territories taxi is $500.
208 I am mindful that the licence for a Hong Kong and Kowloon taxi is granted after a public tender (the licence for a New Territories taxi being granted after a ballot)and that taxi fares have recently been increased. But the annual fee charged for the licence is a charge for road use. And a taxi occupies road space for about 10-15 times longer than the average private car. I can see no reason, therefore, why the fee for a taxi should not have regard to the fee for a private car, or why there should be any distinction between Hong Kong and Kowloon taxis and New Territories taxis. Generally speaking, the engine capacity of the average taxi lies between 1,500 c.c. and 2,500 c.c., that is to say the third platform for private cars. So I propose that the fee for all taxis should be set at $900 a year.
209 Finally, to remove one further anomaly, I propose to increase the fee for a private light bus licence. I am sure someone would get that wrong. (laughter) I propose to increase the fee for a private light bus licence which has remained at its present level of $480 since 1 September 1969, to $900. Again, the engine capacity of these vehicles generally falls within the third category for private cars.
210 I estimate that the additional revenue accruing from these various increases and adjustments in 1979-80 will be $41 million.
(B) Buoy and anchorage fees
211 In 1975 I referred to a suggestion made by a certain Member of this Council that the yield from the hire of buoys in the harbour might be improved by a 400% increased in the fees of $150 a day for an ‘A’ buoy and $100 a day for a ‘B’ buoy(210). I felt that this was perhaps too steep an increase to make at one time and, instead, increased the fees by 300%, (laughter) to $600 a day for an ‘A’ buoy and $400 a day for a ‘B’ buoy. I also increased the anchorage fees by the same percentage, from $3 to $12 per 100 tons a day inside the harbour limits, and from 80 cents to $3.20 per 100 tons a day elsewhere in Hong Kong waters. Thus revenue from these two fees increased from $4.4 million in 1974-75 to $15.4 million in 1975-76; but over the three years 1976-77 to 1978-79 the yield has levelled out at just over $17 million a year.
212 I estimate that an increase of at least 16% is now necessary to restore the tax-loading. So I propose to increase the buoy fees to $700 a day for an ‘A’ buoy and to $450 a day for a ‘B’ buoy, and to increase the anchorage fees to $14 per 100 tons a day inside the harbour limits and $4.00 per 100 tons a day elsewhere in Hong Kong waters(211). I estimate the additional revenue next year from these increases will be at least $3 million.
(210) BS, 1975, paragraph 128.
(211) An amendment will be required to the Shipping and Port Control Regulations.
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 541
(C) Business registration fee
213 A business registrable under the Business Registration Ordinance pays an annual fee. This fee was last revised in 1975 when I introduced a taxloading element thereby increasing it from $50 to $150. In effect, I restored, but only partially, a charge introduced in 1952 at $200 a year, but subsequently reduced to $25 in 1959 and then raised to $50 in 1974 simply to cover increased costs. The introduction of a tax-loading element was designed to obtain a contribution to the public revenue from the proprietors of businesses who do not pay profits tax because their chargeable profits are covered by allowances available under personal assessment.
214 To restore the tax-loading would require an increase in the fee of about 20%. I, therefore, propose that the fee should be increased to $175 a year(212). I do not consider that this will constitute a hardship at today’s prices and the additional yield will be $6.5 million in 1979-80.
(e) Implementation
215 As Your Excellency this morning signed the necessary Orders under the Public Revenue Protection Ordinance, the increased rates of first registration tax on private cars and motor cycles and the increased vehicle licence fees will be effective from midnight tonight. The increase in the business registration fee will be effective from 1 April next and the proposed increases in buoy and anchorage fees will become effective as soon as the necessary regulations are made, probably in the middle of April.
(6) Revised Outturn for 1979-80
216 The cost to the revenue of the four concessions I have proposed under the Inland Revenue Ordinance and the Estate Duty Ordinance amount to $79.7 million in 1979-80 (or $47.7 million in a full year) and the additional revenue yields I expect from first registration tax, vehicle licences, buoy and anchorage fees and business registration fees amount to $85.5 million. So, effectively, I am budgetting for a surplus of $1,434 million; and I might just add that this surplus will mean that the level of our ‘free’ fiscal reserves at 31 March 1980 will be not far short of $5,000 million, providing us with a welcome and necessary degree of security in these uncertain times.
217 These revenue proposals for 1979-80 will have the effect of slightly improving the balance of the fiscal system compared with what it would have been without them: the ratio of direct to indirect taxation will be 57.7:42.3 compared with 58.3:41.7 on the basis of the Revenue Estimates and the ratio of direct and indirect taxation taken together to all other recurrent revenue will be 75.4:24.6 compared with 75.8:24.2.
(212) An amendment will be required to the Schedule to the Business Registration Ordinance.
542 HONG KONG LEGISLATIVE COUNCIL―28 February 1979 6.09pm
THE CHIEF SECRETARY:―Sir, in accordance with Standing Order 68, I move the suspension of Standing Order 8(2), so that today’s business may be concluded.
Question put and agreed to.
THE FINANCIAL SECRETARY:―Thank you very much.
(7) Fiscal Policy in the Future
(a) Reform of the tax system
(i) Third Inland Revenue Ordinance Review Committee
218 So much for my immediate proposals. I turn now to fiscal policy in the future. An up to-date summary of the Government’s position on the various recommendations of the Third Inland Revenue Ordinance Review Committee is at Annex (15) to the printed version of this speech. During 1978 the Working Party set up to examine the Review Committee’s recommendations was concerned with the preparation of drafting instructions for the bill, introduced into this Council on 12 April 1978, to amend the Inland Revenue Ordinance so as to bring to charge profits from interest arising from business carried on in Hong Kong by banks and other financial institutions not already brought to charge(213). The bill was passed on 16 August last and its provisions came into effect for the year of assessment 1978-79.
219 In September 1978, the Commissioner of Inland Revenue issued Departmental Interpretation and Practice Notes for the information and guidance of taxpayers. As modern international banking is highly complex and as practice will vary from company to company, it is not possible for the Commissioner to lay down a comprehensive formula governing what profits are or are not chargeable. The Commissioner will, nevertheless, endeavour to process the returns of financial institutions for 1978-79 as speedily as possible to enable them to know where they stand. But let me stress, yet again, no new tax has been imposed; the amendment to the Ordinance did no more than to correct an existing anomaly by bringing the profits tax liability of financial institutions in line with that of other businesses carried on in Hong Kong.
220 So far 29 new banking licences have been granted to international banks very prestigious international banks that satisfy the Government’s licensing criteria. The amendment to the Ordinance has not apparently deterred foreign banks from coming to Hong Kong. However, it is possible that, due to anticipatory fears, the loan portfolios of some banks have
(213) See Annex (9).
HONG KONG LEGISLATIVE COUNCIL―28 February 1979 543
undergone changes; offshore lending has shown certainly in statistics something of a decline(214). Not until the returns are assessed, can the precise impact of the amendment to the Ordinance be known.
221 There are three recommendations of the Review Committee which have been looked at by the Working Party in recent months which deserve a special mention.
222 First, with a view to rationalizing the present law, the Review Committee made several specific recommendations(215) for increasing the potential tax yield from shipping profits without straining the territorial ambit of the charge. Whilst existing legislation admittedly has limitations, the recommendations of the Review Committee would be of little benefit to the revenue. So long as tax havens continue to exist, a change to taxing the whole of the profits of resident shipping companies would not be very productive to revenue (perhaps the yield might be $10 million a year). There would also be difficulties of enforcement, and the amending legislation would be still open to avoidance measures unless steps were taken to go considerably beyond the Review Committee’s recommendations. The Government has concluded, therefore, that the Review Committee’s recommendations should not be implemented.
223 Secondly, the Review Committee pointed out an anomaly in the application of the withholding system(216) adopted for interest tax purposes. That is to say, a trustee receiving interest that has already suffered withholding tax is obliged to deduct tax a second time from interest paid by him to the beneficiaries of the trust fund. The Review Committee recommended that relief should be available where trustees both receive and pay out interest. The Government agrees that the anomaly is capable of being removed and an amending bill is now being drafted.
224 Thirdly, the statutory description of interest within the charge to tax refers to interest arising or derived ‘on any debenture, mortgage, bill of sale, deposit, loan, advance or other indebtedness whether evidenced in writing or not’. This all sounds very comprehensive, but it may be inadequate to render liable to tax the surplus thrown up on the redemption or realization of certificates of deposit and similar entitlements to receive a stated sum of money. The Review Committee recommended that any gap in the interest tax charge on surpluses arising from certificates of deposits should be closed(217). Whilst the Government agrees that a possible lacuna in the Ordinance should be rectified and the question of chargeability put beyond doubt, the subject matter is complex and is being further examined.
(214) From a peak of $19,634 million at the end of February to $16,411 million at the end of December 1978 ( = - 16%).
(215) Paras. 184, 185, 187 and 190 of TIRORC Report.
(216) Paragraph 93 of TIRORC Report.
(217) Paragraph 94 of TIRORC Report.
544 HONG KONG LEGISLATIVE COUNCIL―28 February 1979
(ii) Taxation treatment of retirement benefits
225 In this Council on 2 August 1978, Sir S. Y. CHUNG spoke on the subject of taxation treatment of retirement benefits. He questioned the discretionary powers exercised by the Commissioner of Inland Revenue in withholding approval from unfunded and self administered retirement schemes. He proposed that a second category of approved schemes should be given official recognition, that is to say, non-contributory retirement schemes, the funds of which are not separately funded and administered, but are left in the company’s own business.
226 I undertook to look into this question but, after careful consideration, I am afraid that, both the Commissioner of Inland Revenue and I have come to the conclusion that there would be as many objections to Sir S. Y.’s proposals as there are said to be to the present arrangements.
(iii) Share options
227 I have received representations that the treatment of share options granted to employees should be altered. Under the existing provisions of the Inland Revenue Ordinance the recipient of share options becomes liable to tax at the time he exercises his option to buy shares, and the amount of tax is assessed on the basis of the difference between what he pays for the shares and their market value at the time. So, on a rising market, the tax liability increases the longer the exercise of the option is deferred. I do not necessarily accept that this is unfair, as the employee is obtaining the benefit of shares with a higher market value at no additional cost. But I would not wish to dispute the idea of encouraging the giving of share options to employees and I have, therefore, asked the Commissioner of Inland Revenue to see whether anything can be done to alleviate the tax liability; but, I must say, I do not see too much prospect of our being able to devise an acceptable and administratively simple scheme which would not be open to abuse. At the same time, I have been advised by the Commissioner of Inland Revenue that there are signs that even the existing charge is being avoided. So a review of the relevant provisions of the Ordinance is called for anyway, particularly as they are based on a recommendation of the Second Inland Revenue Ordinance Review Committee which reported as long ago as 1966.
(iv) Stamp Ordinance
228 Following the proposals I put forward in last year’s budget speech(218), the ambit of the Stamp Ordinance was drastically reduced, so that the Ordinance now applies only to three major sources of duty: namely, transactions in shares and marketable securities, assignments of immovable property and leases and agreements for leases. As I said last year(219), despite this major surgical exercise, there are still unsatisfactory features in the
(218) BS, 1978, paras. 214-217.
(219) BS, 1978, paragraph 218.