6.
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It will
officials did not like the borrowing and reserve constraints imposed by the agreement, but thought they could live with them. Their main preoccupation was how to do so, both in terms of budgetary choices and of financing arrangements for different components of the project. be necessary to ensure that making the latter attractive does not undermine the economic benefits. There are also decisions to be made about phasing -such as whether to provide a railway at the outset. It is not too late to bring somewhat greater rigour to bear on appraising some of these issues, which will, incidentally, shed light on questions, such as the basis of traffic forecasts, over the original appraisals.
Financing
7.
HKG published some medium term budgetary projections in the 1991-92 Budget report in March. These have been revised to shed light on the implications of the agreement with China. They assume revenue growth in line with GDP growth of 5% pa in real terms, current spending growth of 4%, public works spending growth of 7% (including over 60% of ACP costs), and general inflation at 8.5% and PW inflation at 10.5%.
8. Tang explained the rationale for these assumptions. Revenue normally grew in line with GDP. He believed that trend potential output had fallen from some 7% pa in the 1980s to around 5.5% in the 1990s, but to be on the safe side they were assumimg 5%. This is the crucial assumption. Real output growth fell from double figures in 1986 and 1987 to a little over 2% in 1989 and 1990, and outside forecasters expect 3.5% in 1991. Unemployment fell to a little over 1% by the beginning of 1991, rising by 1% since. Tang was confident that all of this was readily explained as unwinding after a period of severe overheating. He agreed that a falling investment ratio and the exodus of skilled labour, combined with changes in the economy's structure, would have lowered the growth in productive potential but only by a little once confidence is restored. It will be important to monitor this as the economy recovers.
9.
The projections also take account of additional public sector ACP costs in the form of equity injections of HK$30bn and expenditure on the LFC of HK$14.5 bn, offset by revenue from its sale of HK$15bn. With HK$25bn set aside, borrowing of no more than HK$5bn, and small increases in taxation yielding HK$13bn over four years, the HKG is left with a margin of HK$17bn - about 1.5% of GDP and 9% of government revenue in one year.
10. The implications of these sums are not altogether comfortable. The HKG's finances will be vulnerable to a dip in the GDP growth rate below 5% and to substantial cost escalation in the project (although some pessimism is already built in). Constraining recurrent government spending to 4% real growth in the face of burgeoning public expectations and the experience of recent years of more than 6% pa may also be difficult. But Mr Yeung thought the problem could be managed through careful budgeting. He was keen to draw on HMT experience of forecasting and budgeting and of project appraisal, since some hard choices would have to be made among proposed public works projects during the period of ACP construction. (He may also have a little more to play with if a query over the forecasts can be resolved).
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