11.
Forecasting is carried out in constant budget year prices and adjusted by forecast inflation. Although the MRF presentation in budget documents does not explicitly assume different inflators by type of expenditure, HKG officials have indicated that some allowance is made for relative price changes. For example, capital prices are assumed to rise at a higher rate than current expenditure prices.
12. Government borrowing, excluding exchange fund bills for monetary management purposes, was undertaken in 1976 and 1984 to fund the capital works programme. In March 1991 there was no outstanding government debt. In the 1991/92 budget the Financial Secretary announced the intention to raise funds with 2-3 year bills for the capital works fund and capital investment fund.
13.
Since inception the MRF has provided a good guide to the medium term public sector fiscal stance. In general the outcome of public expenditure/GDP ratio has clossely related to the first year forecast. Only in one year out of five has the outcome of the exp/GDP ratio overshot the first year forecast. The MRF's have tended to assume a near constant Ex/GDP ratio in years 2-4 of the forecast (table 1).
14. Outturns have deviated from earlier forecasts primarily as a result of actual GDP growth divergng from assumed trend GDP. Thus slower than anticipated growth during 1989/90 and 1990/91 raised the Exp/GDP ratio above prior expectations and lowered revenue against the forecast, particularly in 1989/90. Given that the causes of the economic slowdown were in part external this cannot be seen as a fundamental flaw in the MRF exercise. Indeed the MRF stresses that the exp/GDP ratio will vary over the course of business cycles. There is no evidence to suggest the MRF has consistently over-estimated GDP growth.
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