HONG KONG LEGISLATIVE COUNCIL―25 February 1981 443 OFFICIAL REPORT OF PROCEEDINGS
Wednesday, 25 February 1981
The Council met at half past two o’clock
PRESENT
HIS EXCELLENCY THE GOVERNOR (PRESIDENT)
SIR CRAWFORD MURRAY MACLEHOSE, G.B.E., K.C.M.G., K.C.V.O.
THE HONOURABLE THE CHIEF SECRETARY
SIR JACK CATER, K.B.E., J.P.
THE HONOURABLE THE FINANCIAL SECRETARY
SIR CHARLES PHILIP HADDON-CAVE, K.B.E., C.M.G., J.P.
THE HONOURABLE THE ATTORNEY GENERAL
MR. JOHN CALVERT GRIFFITHS, Q.C.
THE HONOURABLE THE SECRETARY FOR HOME AFFAIRS
MR. DENIS CAMPBELL BRAY, C.M.G., C.V.O., J.P.
THE HONOURABLE DAVID AKERS-JONES, C.M.G., J.P.
SECRETARY FOR THE NEW TERRITORIES
THE HONOURABLE LEWIS MERVYN DAVIES, C.M.G., O.B.E., J.P.
SECRETARY FOR SECURITY
THE HONOURABLE DAVID WYLIE McDONALD, C.M.G., J.P.
DIRECTOR OF PUBLIC WORKS
THE HONOURABLE KENNETH WALLIS JOSEPH TOPLEY, C.M.G., J.P.
CHAIRMAN. COMMITTEE TO REVIEW POST-SECONDARY AND TECHNICAL EDUCATION
THE HONOURABLE DAVID GREGORY JEAFFRESON, C.B.E., J.P.
SECRETARY FOR ECONOMIC SERVICES
THE HONOURABLE DEREK JOHN CLAREMONT JONES, C.M.G., J.P.
SECRETARY FOR THE ENVIRONMENT
DR. THE HONOURABLE THONG KAH-LEONG, C.B.E., J.P.
DIRECTOR OF MEDICAL AND HEALTH SERVICES
THE HONOURABLE ERIC PETER HO, J.P.
SECRETARY FOR SOCIAL SERVICES
THE HONOURABLE JOHN MARTIN ROWLANDS, C.B.E., J.P.
SECRETARY FOR THE CIVIL SERVICE
THE HONOURABLE JAMES NEIL HENDERSON, J.P.
COMMISSIONER FOR LABOUR
THE HONOURABLE GERALD PAUL NAZARETH, O.B.E., Q.C.
LAW DRAFTSMAN
THE HONOURABLE WILLIAM DORWARD, O.B.E., J.P.
DIRECTOR OF TRADE, INDUSTRY AND CUSTOMS
THE HONOURABLE JOHN MORRISON RIDDELL-SWAN. J.P.
DIRECTOR OF AGRICULTURE AND FISHERIES
THE HONOURABLE GRAHAM BARNES, J.P.
DIRECTOR OF HOME AFFAIRS
444 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
THE HONOURABLE SELWYN EUGENE ALLEYNE, J.P.
DIRECTOR OF SOCIAL WELFARE
THE HONOURABLE MICHAEI LEUNG MAN-KIN, J.P.
DIRECTOR OF EDUCATION (Acting)
THE HONOURABLE OSWALD VICTOR CHEUNG, C.B.E., Q.C., J.P. THE HONOURABLE ROGERIO HYNDMAN LOBO, C.B.E., J.P.
THE HONOURABLE LI FOOK-WO, C.B.E., J.P.
DR. THE HONOURABLE HARRY FANG SIN-YANG, C.B.E., J.P. THE HONOURABLE LO TAK-SHING, O.B.E., J.P.
THE HONOURABLE FRANCIS YUAN-HAO TIEN, O.B.E., J.P.
THE HONOURABLE ALEX WU SHU-CHIH, O.B.E., J.P.
THE REVD. THE HONOURABLE JOYCE MARY BENNETT, O.B.E., J.P. THE HONOURABLE CHEN SHOU-LUM, O.B.E., J.P.
THE HONOURABLE LYDIA DUNN, O.B.E., J.P.
DR. THE HONOURABLE HENRY HU HUNG-LICK, O.B.E., J.P.
THE REVD. THE HONOURABLE PATRICK TERENCE McGOVERN, O.B.E., S.J., J.P. THE HONOURABLE PETER C. WONG, O.B.E., J.P.
THE HONOURABLE WONG LAM, O.B.E., J.P.
DR. THE HONOURABLE RAYSON LISUNG HUANG, C.B.E., J.P. THE HONOURABLE CHARLES YEUNG SIU-CHO, O.B.E., J.P.
DR. THE HONOURABLE HO KAM-FAI, J.P.
THE HONOURABLE ALLEN LEE PENG-FEI, J.P.
THE HONOURABLE DAVID KENNEDY NEWBIGGING, J.P.
THE HONOURABLE ANDREW SO KWOK-WING, J.P.
THE HONOURABLE HU FA-KUANG, J.P.
THE HONOURABLE WONG PO-YAN, O.B.E., J.P.
THE HONOURABLE WILLIAM CHARLES LANGDON BROWN, J.P. THE HONOURABLE CHAN KAM-CHUEN, J.P.
THE HONOURABLE JOHN JOSEPH SWAINE, O.B.E., Q.C., J.P.
THE HONOURABLE STEPHEN CHEONG KAM-CHUEN
ABSENT
THE HONOURABLE ALAN JAMES SCOTT, J.P.
SECRETARY FOR INFORMATION
THE HONOURABLE DONALD LIAO POON-HUAI, O.B.E., J.P.
SECRETARY FOR HOUSING
IN ATTENDANCE
THE CLERK TO THE LEGISLATIVE COUNCIL
MRS. LORNA LEUNG TSUI LAI-MAN
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 445 Papers
The following papers were laid pursuant to Standing Order No. 14(2):― Subject L.N.No. Subsidiary Legislation:
Import and Export Ordinance.
Import and Export (General) (Amendment) Regulations 1981 36
Public Order Ordinance.
Public Order (Public Meetings) (General Conditions) Order 1981 37
Marriage Reform Ordinance.
Marriage Reform (Forms) (Amendment) Regulations 1981 39
Evidence Ordinance.
Evidence (Authorized Persons) (No. 2) Order 1981 40
Legal Practitioners Ordinance.
Admission and Registration (Amendment) Rules 1981 41
Legal Practitioners Ordinance.
Disciplinary Committee Proceedings (Amendment) Rules 1981 42
Legal Practitioners Ordinance.
Legal Practitioners (Fees) (Amendment) Rules 1981 43
Legal Practitioners Ordinance.
Students (Amendment) Rules 1981 44
Air Navigation (Overseas Territories) Order 1977.
Authorization by the Governor 45
Interpretation and General Clauses Ordinance.
Specification of Public Office 46
Interpretation and General Clauses Ordinance.
Specification of Public Office 47
Public Health and Urban Services Ordinance.
Cremation and Gardens of Remembrance (New Territories) (Amendment) Regulations 1981 48
446 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
Subject L.N. No.
Public Health and Urban Services Ordinance.
Exhumation (Fees) (New Territories) (Amendment) Regulations 1981...-- 49
Public Health and Urban Services Ordinance.
Public Cemeteries (New Territories) (Amendment) Regulations 1981 50
Road Traffic Ordinance.
Road Traffic (Parking and Waiting) (Amendment) Regulations 1981 51
Import and Export Ordinance.
Import and Export Ordinance (Amendment of Schedule) Notice 1981 52
Industrial Training (Construction Industry) (Amendment) Ordinance 1981. Industrial Training (Construction Industry) (Amendment) Ordinance 1981 (Commencement) Notice 1981 53
Legal Practitioners (Fees) (Amendment) Rules 1981.
Corrigendum 54
Students (Amendment) Rules 1981.
Corrigendum 55 Sessional Papers 1980-81:
No.37―Nineteenth Annual Report by the Trustee of the Social Work Training Fund for the year ending 31 March 1980.
No.38―Hong Kong Polytechnic Annual Report with Balance Sheet and Income and Expenditure Account for the year ending 31 July 1980.
No.39―Draft Estimates of Expenditure 1981-82.
No.40―Revenue Estimates 1981-82 (Draft).
No.41 ― Supporting Financial Statements and Statistical Appendices from the Estimates of Revenue and Draft Estimates of Expenditure 1981-82.
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 447
Subject L.N.No.
No.42―Estimates of Revenue and Expenditure for the year ending 31 March 1982― Report of the Public Works Sub- Committee of Finance Committee 1980.
No.43―Report of the Establishment Sub-Committee of Finance Committee for 1980- 81.
Government business
First reading of bill
APPROPRIATION BILL 1981
Bill read the first time and ordered to be set down for second reading pursuant to Standing Order 41 (3).
Second reading of bill
APPROPRIATION BILL 1981
THE FINANCIAL SCRETARY moved the second reading of:―‘A bill to apply a sum not exceeding $25,061,846,000 to the service of the financial year ending on 31 March 1982’.
OUTLINE Paragraphs MOTION 1 ACKNOWLEDGEMENTS 2 STRUCTURE OF SPEECH 3－ 7 PART I: THE PRESENT STATE OF THE ECONOMY
(1) Preliminary Estimate of Expenditure on the Gross Domestic
8
Product in 1980:
(a) Total expenditure on the G.D.P. 9 (b) Prices and the G.D.P. at current prices 10
(2) Implications of the Preliminary Estimate for the Economy: 11 (a) Total final demand and the G.D.P. 12
448 HONG KONG LEGISLATIVE COUNCIL―25 February 1981 Paragraphs
(b) Domestic demand and domestic exports 13 (c) Public sector demand versus private sector demand 14 (d) Demand for the output of the building and construction sector 15 (e) Private consumption expenditure and real income 16 (f) Imports and total exports of goods 17 (g) External trade account and the exchange rate 18 (h) Pressure of demand on domestic resources and inflation 19－21 (i) Monetary aggregates 22
(3) Assessment of the Adjustment Process since the Recession:
(a) General 23 (b) Growth with stability: 24 (i) Aggregate demand and supply 25 (ii) Components of demand 26－ 30 (iii) External trade account and the exchange rate 31 (iv) Prices and the monetary aggregates 32－ 39
(4) Implication of Recent Experience for the Management of the Economy: 40－ 45 PART II: THE PRESENT STATE OF THE PUBLIC FINANCES
(1) Introduction 46
(2) General Revenue Account for 1980-81:
(a) Budgetary policy 47－ 48 (b) Revised estimates:
(i) Outturn 49－ 50 (ii) Revenue 51－ 54 (iii) Expenditure 55－ 58 (c) Financial position at 31 March 1981 59－ 61
(3) Assessment of Performance, 1976-77 to 1980-81:
(a) General principles 62－ 63 (b) The public sector and the economy:
(i) Growth 64－ 67 (ii) Relative size of the public sector 68－ 69 (c) Fiscal policy:
(i) Balance of the fiscal system 70－ 71 (ii) Requirements of the tax system 72－ 78 (d) Management of the General Revenue Account:
(i) Budgetary guidelines 79－ 85 (ii) Fiscal reserves 86－ 89 (e) Implications for management in the 1980s 90－ 94
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 449
PART III: THE IMMEDIATE OUTLOOK FOR THE ECONOMY
Paragraphs
(1) The Economy in the Second Half of 1980 95－101
(2) Forecast of Expenditure on the G.D.P. in 1980:
(a) Gross domestic product by component: 102 (i) Private consumption expenditure 103 (ii) Government consumption expenditure 104 (iii) Gross domestic fixed capital formation 105－108 (iv) Total exports of goods 109－118 (v) Imports of goods 119 (vi) Net exports of services 120 (vii) Stocks 121
(b) Total expenditure on the G.D.P. 122－123 (c) Prices and the G.D.P. at current prices 124－127
(3) Implications of the Forecast for the Economy: 128 (a) Total final demand and the G.D.P. 129 (b) Domestic demand and domestic exports 130 (c) Public sector demand Versus private sector demand 131 (d) Demand for the output of the building and construction sector 132 (e) Private consumption expenditure and real income 133 (f) Imports and total exports of goods 134 (g) External trade account 135 (h) Pressure of demand on domestic resources and inflation 136
PART IV: THE BUDGET FOR 1981-82
(1) Introduction 137
(2) Draft Estimates of Expenditure:
(a) Total expenditure 138－140 (b) Recurrent 141－148 (c) Capital 149－152
(3) Revenue Estimates:
(a) Total revenue 153－154 (b) Recurrent 155－165 (c) Capital 166－170
(4) Fiscal Policy:
(a) Equity of the tax system 171－173 (b) Sources of additional revenue 174－177 (c) Management of public utility-type undertakings 178－180 (d) Tax concessions proposed for 1981-82:
(i) Personal taxation (i.e. salaries tax and personal assessment) 181－197
450 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
Paragraphs
(ii) business taxation 198－199 (iii) Depreciation allowances 200－201 (iv) Estate duty 202 (v) Stamp duty on conveyances of low value properties 203－205 (vi) Implementation 206
(5) Outturn and Assessment:
(a) Outturn and state of fiscal reserves 207－208 (b) Budgetary guidelines 209 (c) Balance of the fiscal system 210 (d) Steady progression guideline 211
(6) The Public Sector and the Economy:
(a) Growth and the relative size of the public sector 213 (b) Net balance of the public sector 214
PART V: MANAGEMENT OF THE ECONOMY IN A CHANGING ENVIRONMENT
(1) Introduction 215 (2) Likely Structure of the Economy in the 1980s 216－223
(3) Management of the Economy:
(a) Inflation 224－227 (b) International trade in textiles and clothing 228－231 (c) Regulation of markets: 232
(i) Hong Kong Association of Banks 233－235 (ii) Banking and Deposit-taking Companies Ordinances 236－242 (iii) Bank licensing 243 (d) Taxation treatment of foreign currency deposits 244－245
(4) Management of the Public Finances in the Forecast Period, 1982-83 to 1984-85:
(a) General 246－247 (b) Likely shape of the General Revenue Account 248－254 (c) Budgetary guidelines 255－258
CONCLUSION
APPENDICES Pages I: Paragraphs 9-18 of the printed version of the Budget Speech 1981 535 II: Paragraphs 34-39 of the printed version of the Budget Speech 1981 537 III: Paragraphs 278-283 of the printed version of the Budget Speech 1981 539
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 451
STATISTICAL APPENDIX
TABLES Pages
(1) Expenditure on the gross domestic product by component at current prices 1970 to 1980 542
(2) Expenditure on the gross domestic product by component at constant (1973) prices 1970 to 1980 544
(3) Growth rates in real terms of components of expenditure on the gross domestic product 1971 to 1980 546
(4) The visible and invisible trade account 1970 to 1980 548 (5) The monetary aggregates 1970 to 1980 550 (6) Labour force employment and wages 1975 to 1980 552
(7) Expenditure on building and construction (including civil engineering) 1970 to 1980 554
(8) Rates of increase in prices 1971 to 1980 556
(9) Growth rates of Consolidated Account expenditure (adjusted) and the relative size of the public sector 1970-71 to 1981-82 558
(10) Forecast of expenditure on the gross domestic product in 1981 560
(11) General Revenue Account 1971-72 to 1981-82 (including notes on the adjustments) 562
(12) Consolidated Account expenditure by main functions 1971-72 to 1981-82566 (13) General Revenue by main sources 1971-72 to 1981-82 568
(14) General Revenue Account expenditure by main components 1971-72 to 1981-82 570
(15) Budgetary guidelines 1971-72 to 1981-82 572 (16) Balance of the fiscal system 1971-72 to 1981-82 574
ANNEXES Reference in Speech
(1) Public Works Programme f.n. (174) of the printed version
of the Budget
speech 1981
452 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
ANNEXES Reference in Speech
(2) Expenditure in the main programme areas Paras. 174, 189 & 193 of
the printed
version of the
Budget speech
1981
(3) Summary of the operating accounts for Government owned public utility-type undertakings for 1979-80 f.n. (188)
(4) Examples of salaries tax payable by various taxpayers with same income levels and having regard to proposed increases in personal, child and dependent parent allowances Para. 190
(5) Effect on salaries tax of proposed increases in personal, child and dependent parent allowances Para. 190
(6) Income levels at which salaries taxpayers enter the standard rate zone Para. 190
(7) comparison of tax payable and effective tax rates of taxpayers of similar circumstances and income levels under tax laws of four different administrations f.n. 203
(8) Proposed annual depreciation allowances f.n. 208
(9) Reply by the Financial Secretary to a question from Miss Lydia DUNN in Legislative Council on Wednesday, 3 December 1980 (on the Takeovers Code) f.n. (288) in Appendix III
(10) Speech by the Financial Secretary in Legislative Council on Wednesday, 3 December 1980 (on the Hong Kong Association of Banks Bill 1980) f.n. 234
He said:―
MOTION
Sir, for the tenth time, I move the second reading of an Appropriation Bill (laughter). On this occasion it is the Appropriation Bill 1981, which was published in an issue of the Gazette Extraordinary at 2 o’clock today.
ACKNOWLEDGEMENTS
2. To assist Members in their consideration of this motion, laid on the table are the Draft Estimates of Expenditure for 1981-82, and the Revenue Estimates, together with various supporting documents(1). As usual, but no less
(1) For a list of all documents laid, see inside cover of the printed version of this speech.
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 453
sincerely for that, it behoves me to acknowledge the diligence of all concerned in the preparation and production of these documents(2) and the loyal and invaluable help I have so readily received from my closest colleagues during this budget season.
STRUCTURE OF SPEECH
3. As I said on this occasion last year, we entered the present decade on the crest of the most sustained period of fast growth ever recorded by our economy. That growth momentum was sustained, as I forecast, in 1980. But five years of double-digit, or near double-digit, growth coupled with a surge in the resident population in the past two years, with the direct and indirect effects of world-wide inflation, and with a rapidly diversifying economy have left us all somewhat breathless and even apprehensive. This is because of the various sectoral pressures, excitements and discomforts generated by these developments and, inevitably, our socio-economic infrastructure and the machinery of Government have come under strain.
4. Obviously, in these circumstances, stability is difficult of achievement. This is the case despite several factors which, undoubtedly, are in our favour: our financial resources are not inconsiderable; our economy has become much more sophisticated (and this must not be overlooked when worrying about its volatility); various institutional reforms have been successfully implemented recently and others are in hand; our flexible cost/price structure remains the equilibrator meaning, among other things, that we shall always tend to a state of full employment; all our experience confirms the wisdom of our commitment to the market disciplined economy and to the free enterprise system; equally, there is abundant evidence that our basic policy stances are entirely appropriate to the reality of our circumstances, and will remain so, provided we adhere to them consistently, albeit with a degree of realistic pragmatism; and, finally, our stock of fixed capital, on both private and public account, is now substantial and can be expected to become even more so.
5. But in a world of uncertain prospects, given the continuing emphasis on anti inflationary policies by the governments of the main industrialized countries, involving declining growth rates, the pursuit of stability may become even more difficult of achievement. But, at least, it provides the obvious theme for budgetary strategy in 1981-82, that is, to secure stability with growth in the following years.
6. So, in this speech, I shall begin with an analysis of the present state of our economy, which I shall evaluate with reference to the five post-recession years,
(2) To a greater or lesser extent all departments have been involved, but particular mention must be made of staff at all levels in the Finance Branch, Government Secretariat; the Economic Services and Monetary Affairs Branches, Government Secretariat; the Census and Statistics Department; the revenue departments; a special team of translators and calligraphists made available by the Home Affairs and Information Services Departments; the Central Copying Office, Government Secretariat; the Printing Department. and the Economic Review Committee (which includes six Unofficial Members of the Legislative Council and two officials under the chairmanship of the Financial Secretary).
454 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
1976 to 1980 (PART I). I shall then report on the present state of the public finances, which I shall set in the context of the five post-recession years, 1976-77 to 1980-81, for our recent performance has certain implications for the management of the public finances in the future (PART II). I shall then turn to my forecast of expenditure on the main components of the gross domestic product in 1981 (PART III), which forecast has been influenced to an unusual degree by trends in our economy in recent months. Thus the stage will be set for my presentation of the budget for 1981-82 (PART IV) which, again, has been unusually influenced, in several respects, by our experience in the financial year now drawing to a close. I shall conclude with a prognostication of the likely structure of the economy in the 1980s, and then dwell on a number of management questions and how I think they should be resolved, including the management of the General Revenue Account in the new three year forecast period, 1982-83 to 1984-85 (PART V).
7. Depending on what seemed appropriate to prevailing circumstances, I have, over the years, varied the statistical context in which I have set my view of the economy and budgetary policy for the forthcoming year. This year, as I have just said, I propose to set what I have to say in the context of the five post-recession years, with particular reference to developments in 1980-81. Serious students of our affairs will find a comprehensive Statistical Appendix of trends in our economy and of the performance of the public sector over the past ten years in the Blue Pages in the printed version of this speech.
PART I: THE PRESENT STATE OF THE ECONOMY
(1) Preliminary Estimate of Expenditure on the Gross Domestic Product in 1980(3)
8. In paragraphs 9 to 18 of the printed version of this speech (Appendix I), I have reviewed how the economy actually fared in 1980 by using the preliminary estimate of expenditure on the various components of the gross domestic product (G.D.P.), and I have compared the forecast for 1980 made in last year’s budget speech with the growth rate for 1980 and 1979 derived from the latest available G.D.P. estimate(4). I shall confine myself now to a summary only of this review and then analyse the implications of the preliminary estimates for
(3) See Statistical Appendix, Tables (1), (2) and (3).
(4) Various calculations of expenditure on the gross domestic product are published, from the forecast released in the budget speech to the final estimate. The normal sequence for the publication of these forecasts/estimates, taking 1980 as an example, is as follows:
Forecast Budget Speech 1980
Revised forecast Speech by the Financial Secretary at a public function around September 1980
Preliminary estimate Economic Background 1981
Revised preliminary estimate Half-yearly Economic Report 1981
Provisional estimate Estimates of Gross Domestic Product 1966 to 1980 Revised provisional estimate Half-yearly Economic Report 1982
Final estimate Estimates of Gross Domestic Product 1966 to 1981
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 455
the economy in 1980. Unless I state otherwise, the growth rates I shall be quoting will be in real terms, that is to say, they will be in respect of aggregates at constant (1973) prices.
(a) Total expenditure on the G.D.P.
9. Last year, taking the various components of expenditure on the G.D.P. together, I forecast that the growth rate of G.D.P. in 1980 would be 9%(5). For once, the (preliminary) estimate at 9% agrees exactly with my forecast (not that I have always been wildly out (laughter) as serious students of the occult will see from f.n.(6) to the printed version of this speech). This is slightly higher than the (provisional) estimate of the growth rate for 1979 now put at 8.6%(7). In per capita terms, the (preliminary) estimate of the growth rate of G.D.P. in 1980 is 5.4%, compared with the (provisional) estimate in 1979 of 2.1% (which was unusually low because the growth rate of the population was unusually rapid). At constant (1973) prices, the (preliminary) estimate of G.D.P. for 1980 is $60,400 million.
(b) Prices and the G.D.P. at current prices
10. The rate of increase in the G.D.P. deflator in 1980 was 13% compared with my forecast of 11%(8), and was marginally less than that in 1979 of 14%. The rate of increase in consumer prices in 1980 was 15.5%, distinctly faster than my forecast of 10%(9) and faster also than the rate of increase in 1979 of 11.6%. At current prices, the (preliminary) estimate of G.D.P. in 1980 is $106,100 million, or 23.2% higher than in 1979. This exceeds my forecast of 21% because the rate of increase in prices as measured by the G.D.P. deflator was slightly higher than expected.
(2) Implications of the Preliminary Estimate for the Economy
11. So, for the fifth successive year, the growth rate of the economy was rapid. To see to what extent we achieved growth with stability in 1980, I shall now analyse the implications of the growth rates of the various components of
(5) B.S., 1980, paragraph 190.
(6) Growth rate of G.D.P. in real terms (%):
1976 1977 1978 1979 1980
Budget forecast 9 7 9 7 9 Revised forecast 16 8 10 12 10 Preliminary estimate 16.2 11.6 10.0 11.5 9.0 Revised preliminary estimate 17.8 11.4 10.0 11.0 N.Y.A. Provisional estimate 16.9 11.9 10.0 8.6 N.Y.A. Revised provisional estimate ― ― 9.2 N.Y.A. N.Y.A.
Final estimate 16.7 New series (final) 18.8 Note: N.Y.A.=Not yet available.
11.9
10.2 10.2 N.Y.A. N.Y.A.
(7) Mainly the result of figures on stock changes becoming available: as will be seen from f.n. (6) above there was an upward revision to 10.2% in the final estimate of expenditure on the G.D.P. in 1978 and a downward revision to 8.6% for the provisional estimate in 1979.
(8) B.S., 1980, paragraph 192.
(9) B.S., 1980, paragraph 191.
456 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
expenditure on the G.D.P. in terms of the key relationships between the operative aggregates and variables(10) as a prelude to an assessment of the adjustment process since the recession.
(a) Total final demand and the G.D.P.
12. First, the growth rate of total final demand, at 13.6%, was higher than the growth rate of the G.D.P., at 9%, so that the growth rate of imports was as high as 18.6%. But the growth rate of imports reflected the very rapid growth rate of re-exports. If we subtract re exports, the growth rate of total final demand becomes only 10.7% which is more consistent with the growth rate of the G.D.P.(11); and so is the growth rate of retained imports at 13%.
(b) Domestic demand and domestic exports
13. Secondly, within total final demand, the growth rate of domestic demand, at 11.7%, was roughly the same as the growth rate of domestic exports at 10.9%. So both were equally important in contributing to economic growth in 1980, that is to say, the shift of resources away from the manufacturing sector in 1980 was not as substantial as I forecast in last year’s budget speech(12). In other words, the substantial shift of resources in favour of the manufacturing sector in 1979(13) was not eroded.
(c) Public sector demand versus private sector demand
14. thirdly, within domestic demand, the growth rate of public sector demand, at 5.8%, was less than that of private sector demand at 12.4%(14). This reflects lower expenditure on building and construction by the M.T.R.C.(15) and the restraining effect of cash limits on the growth rate of public expenditure in real terms, in a situation in which the rate of increase in prices was higher than envisaged.
(10) See Statistical Appendix, Table (3).
(11) C.f. growth rates derived from the 1980 budget speech forecasts:(%) Total final demand 10 G.D.P. 9 Imports of goods 11 Total final demand (excluding re-exports) 9.5
(12) C.f. growth rates derived from the 1980 budget speech forecasts:
(%)
Domestic demand 11 Domestic exports 7 Total exports 9
(13) C.f. growth rates in 1979 (provisional estimates):
(%)
Domestic demand 7.5 Domestic exports 16.5 Total exports 19.5
(14) C.f. growth rates derived from the 1980 budget speech forecasts:
(%)
Public sector demand 13 Private sector domestic demand 11
(15) Excluding the Mass Transit Railway Corporation from the calculation, the growth rate of public sector demand in 1980 was 8.6%.
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 457
(d) Demand for the output of the building and construction sector
15. However, fourthly, as regards expenditure on building and construction, the growth rate of public sector expenditure, despite the point just made about expenditure by the M.T.R.C., was 3.1%, while the growth rate of private sector expenditure was only 1%. As a result, the proportion of the output of the building and construction sector acquired by the public sector was 50.6%, compared with 50.2% in 1979(16); and the public sector’s share of the output of the building industry alone was 30%, compared with 26.3% in 1979(17).
(e) Private consumption expenditure and real income
16. Fifthly, the growth rate of private consumption expenditure at 8.8% was not particularly rapid and not out of line with the growth rates of real income in 1979 and 1980 of 8.8% and 9.1% respectively(18), but it does indicate that the increase in the average propensity to save which seemed to be emerging in 1979 has not been sustained due, probably, to consumers’ inflationary expectations.
(f) Imports and total exports of goods
17. Sixthly, the growth rate of imports of goods, at 18.6%, and the growth rate of total exports of goods, at 17.7%, were roughly in line with each other(19).
(g) External trade account and the exchange rate(20)
18. However, seventhly, as the rate of increase in export prices was slightly less than that of import prices, the visible trade ‘gap’, at 12.1%, remained the same as in 1979. But, it appears that the growth rate of imports of services was faster than that of exports of services: so the visible and invisible trade ‘gap’ widened to 3.7% from 2.2% in 1979. This, together with a net outflow of funds in 1980 of about $4,400 million, compared with a net inflow in 1979 of $10,500 million, were the main factors causing the exchange value of the Hong Kong dollar to depreciate by 5% between the end of December 1979 and the end of December 1980.
(16) C.f. growth rates derived from the 1980 budget speech forecasts:
(%)
Public sector expenditure on building and construction 15 Private sector expenditure on building and construction 5 Share of public sector 49
(17) See Statistical Appendix, Table (7).
(18) C.f. growth rates derived from the 1980 budget speech forecasts:
(%)
Private consumption expenditure 9 Real income 9 (Real income in previous year) (11.1)
(19) C.f. growth rates derived from the 1980 budget speech forecasts:
(%)
Imports of goods 11 Total exports of goods 9
(20) See Statistical Appendix, Tables (4) and (5).
458 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
(h) Pressure of demand on domestic resources and inflation
19. Turning, finally, to the question of the balance between the demand for, and supply of, domestic resources: as regards labour, during the 12 months ending September 1980, the growth rate of the labour force (which includes the unemployed as well as the employed) was very rapid at 8.3%. The growth rate of demand for labour was not rapid enough to absorb completely this additional supply. Thus, although the growth rate of the employed labour force was high at 7.2% during these same 12 months, the seasonally adjusted unemployment rate increased to 3.8% by September 1980(21). In other words, we had a paradoxical situation, that is to say, the unemployment rate increased at the same time as the size of the employed labour force increased. The main reason for this was, of course, immigration: immigrants add directly to the supply of labour and indirectly also, for a slowing down in the rate of increase in wages leads to a higher labour force participation rate. For workers generally in the manufacturing sector there was hardly any increase in wage rates in real terms in 1980, but the experience of workers in different industries varied: for example, during the 12 months ending September 1980, real wages in the electronics industry increased by 5% and in the printing industry by 6%, but in the clothing industry they decreased by 1% and in the plastic toys industry by 3%. In the building and construction sector, real wages decreased by 2%. At present, we do not have data on wages in the tertiary sectors, but all the subjective evidence suggests that real wages increased and at a faster rate than in other sectors of the labour market.
20. As regards land and property: property prices continued to rise in 1980, particularly for commercial property (in other words, offices and shops), in line with the continuing expansion of activity in the tertiary services sectors. Because the price of land is derived from the price developers expect for the property they build on it, land prices generally continued their upward trend in 1980 suggesting that, increased supply notwithstanding, there was an excess of demand at current prices.
21. The rate of increase in prices generally continued to be fairly rapid in 1980 reflecting in part the rapid rate of increase in prices in the rest of the world(22). Exchange rate movements were also unfavourable in terms of their impact on domestic prices(23). Consumer prices in 1980 were 15.5% higher than they were in 1979 and the G.D.P. deflator was 13% higher(24).
(21) See Statistical Appendix, Table (6).
(22) Consumer prices in O.E.C.D. countries, for example, increased by over 13% in 1980. (23) Allowing for the fact that it takes time for exchange rate effects to work through the economy.
(24) C.f. rates of increase forecast in the 1980 budget speech:
(%)
Consumer prices 10
G.D.P. deflator 11
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 459
(i) Monetary aggregates(25)
22. Finally, the growth rates of the money supply (M3) and of total loans and advances in Hong Kong during 1980 were rapid at 40% and 64% respectively, the difference in these growth rates reflecting principally the net outflow of funds across the exchange during the year(26). These growth rates are significantly higher than the growth rate of the G.D.P. in money terms at 23.2%. A sustained upswing such as we have experienced for the past five years, coupled with periods of very active trading in some markets, is bound to be associated with a strong demand for credit but, unfortunately, our monetary statistics do not yet provide a basis for really meaningful economic analysis. The money supply as presently defined includes deposits in foreign currencies, and loans and advances in Hong Kong are defined to include credit granted in Hong Kong for use outside Hong Kong(27). The monthly returns now being collected from banks and deposit-taking companies under the Monetary Statistics Ordinance will provide us with more suitable statistics for analytical purposes and I shall revert to this subject later on.
(3) Assessment of the Adjustment Process since the Recession(28)
(a) General
23. To sum up, Sir, in 1980 as a whole, despite unfavourable conditions in our main markets, the Hong Kong economy achieved balanced growth, albeit with some acceleration of inflationary pressures and further downward pressure on the exchange value of the Hong Kong dollar. So, for the five post-recession years, 1976 to 1980, the average annual growth rate of the G.D.P. was as high as 11.3%(29).
(b) Growth with stability
24. In paragraphs 34 to 39 of the printed version of this speech (Appendix II), I attempt an assessment of how the economy has fared since the recession,
(25) See Statistical Appendix, Table (5).
(26) Determinants of the money supply (M3):End-1979 End-1980 Increase ($ mn) ($ mn) ($ mn)
Loans and advances in Hong Kong 75,793 124,287 48,494 Banks’ and d.t.cs’ net holdings of foreign currency assets 32,035 27,639 -4,396 Notes and coins in circulation 7,285 8,372 1,087 Banks’ and d.t.cs’ net holdings of other assets -15,348 -20,720 -5,372 Total 99.765 139,578 39,813
(27) Per contra loans and advances in Hong Kong exclude credit granted outside Hong Kong for use in Hong Kong.
(28) See Statistical Appendix, Table (3).
(29) C.f. the average annual growth rates of G.D.P. in earlier periods:
Period No. of years (%) 1971 to 1975 5 6.9 1966 to 1970 5 8.1 1971 to 1980 10 9.1 1966 to 1980 15 8.7
460 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
beginning with the growth path followed year by year. I shall now look at the five post recession years as a whole in terms of the key relationships between the operative aggregates and variables.
(i) Aggregate demand and supply
25. Reflecting the sustained upswing, the growth rate of the demand for the output of the economy was higher than the growth rate of the ability of the economy to produce that output. In other words, aggregate demand outstripped aggregate supply. The average annual growth rate of total final demand for these five years was 14.2% and, even if the effect of the rapid expansion of re-exports during most of the period is excluded, the growth rate of total final demand was still as high as 13.1%. But the average annual growth rate of the G.D.P. was (only) 11.3%. As a result, the growth rate of imports of goods was even higher at 17.6% for the period and so was the growth rate of retained imports at 15.7%.
(ii) Components of demand
26. As regards the several components of aggregate demand, there are four points to be made: first, although we are looking at a relatively short period of five years only, the average annual growth rates of domestic demand and domestic exports were roughly the same at 13.2% and 14.1% respectively. Within domestic demand, investment in plant and machinery recorded, at 22.3%(30), the highest growth rate (and the manufacturing sector’s share of this investment must have been substantial: evidence of this is provided by the fact that the average annual growth rate of imports of industrial plant and machinery was about 20%). The conclusion to be drawn from the closeness of the growth rates of these two aggregates is that, over the period, the economy achieved balanced growth, the adjustment mechanism so operating as to ensure that any tendency for the domestic sector to draw resources away from the external sector was fairly quickly corrected.
27. Secondly, the average annual growth rate of public sector demand was 13.6%, rather higher than the growth rate of private sector domestic demand at 13.1%. So the public sector was commanding an increasing share of available resources, during a period, moreover, of sustained growth of the economy. Thus, whereas in 1975 the relative size of the public sector, as measured by the
(30) C.f. average annual growth rates of the other three components of domestic demand: (%)
Private consumption 12.4 Government consumption 10.4 Investment in building and construction 11.1
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 461
ratio of public sector demand to the G.D.P., both at current prices, was 10.5%, by 1980 this had increased to 13.7%(31)..
28. Focussing now, thirdly, on demand for the output of the building and construction sector, the average annual growth rate of demand by the public sector (including the M.T.R.C.) was 15.8%, very much higher than that by the private sector at 7.2%. So the public sector’s share of the output of the building and construction sector increased sharply over the period: from 41.2% in 1975, its share increased continuously to 50.8% in 1978 and budgetary constraints in 1979-80 did no more than hold it to 50.2% in 1979; in 1980, its share increased again to 50.6%.
29. When expenditure on building and construction is analysed in terms of building works, on the one hand, and all other works (largely civil engineering), on the other, the new significance of the public sector becomes even more apparent: its share of the output of the building industry increased from 14.5% in 1975 to 30% in 1980 (in a period, moreover, when the total output of the building industry increased by 74% in real terms); whilst the public sector’s share of civil engineering output remained at over 98% (in a period when the total output of the civil engineering industry increased by 60% in real terms)(32). So the public sector’s demand for the output of the building and construction sector is now such that the capital works programmes of the Government and such agencies of the Government as the Housing Authority and the M.T.R.C. have a significant effect on the prices charged by both industries making up this sector and these prices influence prices in the rest of the economy.
30. Finally, the average annual growth rate of private consumption expenditure over this period was 12.4%. This was slightly higher than the growth rate of real income at 11.7% but, as the growth rate of private consumption expenditure fluctuates from year to year, the two growth rates were, for all intents and purposes, consistent with each other.
(iii) External trade account and the exchange rate
31. Turning now to the external trade account, there are also four points to be made: first, the average annual growth rate of imports of goods was 17.6%, slightly higher than that of total exports of goods at 16.6%, resulting, secondly, in the visible trade ‘gap’ in 1980, at 12.1%, being wider than that in 1975 of
(31)
Year Public sector demand as a percentage of G.D.P., both at current prices
1975(*) 10.5 1976(**) 9.5 1977 11.1 1978 12.7 1979 13.6 1980 13.7 Notes: (*) Recession year.
(**) Recovery began and so the relative size of the public sector fell.
(32) See Statistical Appendix, Table (7).
462 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
11%. This was to be expected given the sustained momentum of the upswing over the period, with the growth rates of both domestic demand and domestic exports being higher than the growth rate of the G.D.P. However, as the growth rates of imports and exports of goods varied widely in particular years there were, thirdly, frequent and significant shifts in the visible trade ‘gap’ in both directions reflecting the operation of the adjustment mechanism(33). Finally, exchange rate movements during the five years under review were roughly consistent with shifts in the visible and invisible trade balance and inflows and outflows of funds, as will be seen from a study of the fascinating data in f.n.(34) (f.n.(51) to the printed version of this speech).
(iv) Prices and the monetary aggregates
32. As I said earlier, the five years of the post-recession upswing were characterized by a persistent tendency for aggregate demand to outstrip aggregate supply: the average annual growth rate of total final demand was 14.2%, whilst that of the G.D.P. was only 11.3%. Thus, there were certain inevitable consequences for the prices of domestic resources and hence for those prices of goods and services which are largely determined by domestic demand and supply.
33. The pressure of demand for labour over most of the period is reflected in the fact that the unemployment rate fell continuously from a seasonally adjusted rate of 8.6% in September 1975 to 2.3% in March 1979(35). So wage rates increased rapidly: in the manufacturing sector, for example, wage rates increased at an average annual rate of 10.3% and were 41% higher by March 1979. In 1979 and 1980, however, although the growth rate of the employed labour force remained high, the downward trend of the unemployment rate was reversed because of the implications for the growth rate of the labour force of
(33) See Statistical Appendix, Table (4).
(34)
Year
Visible trade balance (*)
Invisible trade balance
Visible and invisible
balance
Inflow/outflow of funds (****)
Exchange value of the Hong Kong dollar (*****)
($ mn) ($ mn) ($ mn) ($ mn) (%) (%) (1) (2) (3) (4) (5) (6)
1976 -1,963 +6,355 +4,392 +2,844 +3.7 +6.5 1977 -3,963 +6,059 +2,096 +2,673 +2.2 -6.8 1978 -9,355 +7,012 -2,343 -1,515 -11.0 -12.6 1979 -10,405 +8,290(**) -2,115(**) +10,524 -8.0 -0.5 1980 -13,547 +8,850(***) -4,697(***) -4,396 -0.4 -4.9
Notes: (*) Adjusted to include imports of gold for industrial and commercial use. (**) Provisional estimate.
(***) Preliminary estimate.
(****) Figures for 1976 to 1978 refer to changes in the net identifiable foreign assets of banks only; for the last two years the figures include those of deposit-taking
companies as well.
(*****) The percentage changes in Column (5) have been calculated by comparing the daily average of the trade weighted exchange rate index for a particular year
with that of the previous year. The percentage changes in Column (6) have been
calculated by comparing the trade weighted exchange rate index at end
December in a particular year with that in the previous year.
(35) See Statistical Appendix, Table (6)
.
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 463
increased immigration(36): the unemployment rate rose from a seasonally adjusted rate of 2.3% in March 1979 to 3.8% in September 1980. That is still a low unemployment rate by current international experience(37) and is not high in terms of our own historical experience. Nevertheless. in the manufacturing sector and the building and construction sector where the impact of immigration tended to be most severe, wage rates in real terms actually decreased in the 18-month period between March 1979 and September 1980(38).
34. While the pressure of demand for labour eased in the last two years of the period under review, the pressure of demand for land, the scarcest domestic resource, intensified, reflecting a rapid growth rate of demand for residential and non-residential accommodation, a consequence of the sustained growth momentum and diversification of the economy. This is why the increased supply of new land which the Government has been able to put on the market in recent years has been accompanied by steadily rising prices. However, the production of land will continue to be accorded a high priority in the Public Works Programme for some years to come and, sooner or later, prices should stabilize even in the absence of an easing off of demand.
35. At the same time, the asking prices and rentals for property increased sharply over the period but, at least in the case of non-residential property― shops, offices, hotels and industrial accommodation―they have begun to stabilize, not least because the supply response, particularly recently, has been considerable. As further new developments come on stream, the present imbalances in the bargaining power between sellers and buyers should be
(36) Growth rates of:
Employed labour
Year
Population (mid-year on mid-year) (%)
Labour force (September on September) (%)
force (September on September) (%)
1976 1.1 -3.1 1.6 1977 1.6 1.9 2.5 1978 2.0 5.7 7.2 1979 6.4 6.8 6.1 1980 3.4 8.3 7.2
(37) Unemployment rate in selected O.E.C.D. countries, standardized, as far as possible, to the definition used in the United States and seasonally adjusted (%):
1979 1980
Q1 Q3 Q1 Q3
United States 5.6 5.7 6.0 7.5 Germanv 3.4 3.2 2.9 3.4 United Kingdom 6.0 5.6 6.2 7.6 Japan 2.0 2.2 1.8 2.1 Canada 7.8 7.1 7.4 7.5 France 5.5 6.1 6.0 6.4 Italy 7.5 7.8 7.7 7.4 O.E.C.D. group 5.1 5.1 5.3 N.A.
Adjusting to the U.S. definition, the unemployment rate in Hong Kong was 1.7% in March 1979 and 3.2% in September 1980 not seasonally adjusted because this is not possible for technical reasons).
(38) See also paragraph 19 above.
464 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
progressively corrected. I would ask that anyone who has doubts about this statement should study the statistics in f.n.(39) (f.n.(56) to the printed version of this speech) and study them carefully.
36. The imbalance between the demand for and supply of domestic resources simply had to affect the internal price level sooner or later(40). And it certainly did from 1979 onwards. At the same time, the rate of increase in world prices accelerated(41), and exchange rate movements had adverse effects also on the internal price level, contrasting with their dampening effects between 1976 to 1978.
37. So the rates of increase in prices have been generally rapid recently: whilst the average annual rate of increase in the G.D.P. deflator was 8.9% for the post-recession period as a whole, the rate accelerated from 5.9% for the three years 1976 to 1978 to 13.5% for the two years 1979 and 1980. The average annual rate of increase in consumer prices for the period as a whole was 8.4%, made up of 5% for the three years 1976 to 1978 and of 13.5% for the two years 1979 and 1980. The strong demand for property, being accompanied by an equally strong demand for the output of the building and construction industry, resulted in a rapid rate of increase in building and construction costs, but the pattern over
(39) Completions of private accommodation:
Miscel
Residential Shops
laneous
commercial Offices
Flatted
factories Storage
(‘000 units) (‘000 sq.ft.) (‘000 sq.ft.) (‘000 sq.ft.) (‘000 sq.ft.) (‘000 sq.ft.) Stock at end
1980 477.1 29,566 19,023 26,196 103,413 14,440 Completions:
(*)
1979 27.8 (6.0%)
1980 25.0 (-10.1%)
1981 33.9 (35.6%)
1982 29.3 (-13.6%)
Completions
as a
proportion of
the end-1980
stock (%):
1,410
(0.0%) 1,944
(37.9%) 2,626
(35.1%) 3,136
(19.4%)
1.036
(19.2%) 987
(-4.7%) 1,207
(22.3%) 1,177
(-2.5%)
1,919
(-3.8%) 3,194
(66.4%) 4,495
(40.7%) 5,963
(32.7%)
13,753 (17.1%) 10,513 (-23.6%) 11,563 (10.0%) 18,790 (62.5%)
2,536
(146.4%) 463
(-81.7%) 1,517
(227.6%) 1,541
(1.6%)
1979 5.8 4.8 5.4 7.3 13.3 17.6 1980 5.2 6.6 5.2 12.2 10.2 3.2 1981 7.1 8.9 6.3 17.2 11.2 10.5 1982 6.1 10.6 6.2 22.8 18.2 10.7
Note: (*) Figures in parentheses are year-on-year growth rates.
(40) See Statistical Appendix, Table (8).
(41) The rate of increase in consumer prices in the O.E.C.D. group of countries:
Year (%)
1976 8.6
1977 8.9
1978 7.9
1979 9.9
1980 13.1
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 465
the period was different: the rate of increase doubled from 4.1% in 1976 to 9.5% in 1977, then accelerated to 14.9% and 36.4% in 1978 and 1979, easing back to about 17% in 1980.
38. Finally, although comparable statistics are not available for the five post-recession years, the growth rate of the money supply (whether we are speaking in term of M2 or M3) at around 27% was significantly higher than the growth rate of the G.D.P. in money terms at 21% and the growth rate of loans and advances (L2/L3) was even higher at around 36%(42). I believe that high growth rates for the monetary aggregates are inevitable during periods of sustained economic growth, particularly when domestic demand is the main determinant of growth as in 1977 and 1978, but, as I have said already, present statistics are inadequate for the purpose of economic analysis because they are designed and collected for prudential purposes by the Commissioner of Banking and the Commissioner of Deposit taking Companies.
39. To remedy this shortcoming, the Monetary Statistics Ordinance 1980 was enacted in July 1980, and was brought into operation in December 1980. The Secretary for Monetary Affairs is now collecting from every bank and deposit-taking company detailed monthly returns of their assets and liabilities, in Hong Kong dollars and other currencies. These new returns permit the calculation for the first time of M1, M2 and M3 in Hong Kong dollar terms (the series for prudential purposes include, in addition, deposits in U.S. dollars and in other foreign currencies); and the new returns identify the total of loans and advances which are for use in Hong Kong, as distinct from credits granted to customers in Hong Kong for use outside Hong Kong (which are included in the present series of loans and advances in Hong Kong). The new returns also cover other important areas of the monetary sector, such as the growing volume of certificates of deposit, on which no figures have hitherto been available(43). In due course, I hope to be in a position to decide that such instruments should be specified as liquid assets. It may be appropriate to limit, at any rate initially, the extent to which banks and deposit-taking companies can claim them as liquid assets for statutory purposes. This approach, which would require minor legislative amendments, would be a means of encouraging the growth of the secondary market.
(42) See Statistical Appendix, Table (5).
(43) From the first returns collected under the Monetary Statistics Ordinance it has been Possible to measure the size of the local certificate of deposit market and estimate its growth:
End-year:
C.Ds outstanding ($ mn)
Of which denominated in HK$ ($ mn)
Held by banks and d.t.cs ($ mn)
1978(*) 320 N.A. N.A. 1979(*) 900 N.A. N.A. 1980 2,600 1,800 1,200 Notes:(*) Estimates.
466 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
(4) Implications of Recent Experience for the Management of the Economy 40. So that, briefly, is an attempt to explain not just the nature and sequence of events since our economy swung out of recession in the Autumn of 1975 and since the full impact of a floating exchange rate regime(44) began to be felt in 1977, but also the operative cause/effect relationships. What lessons are to be drawn for the future management of our economy as it continues to encounter, as it undoubtedly will in the 1980s, disequilibrating forces?
41. The first lesson to be learnt and re-learnt is that we must be pragmatic and innovative within the limits of our circumstances and having regard to the fundamental necessity not to damage the adjustment mechanism. If the internal cost/price structure is not allowed, or not given enough room, to inflate or deflate in response to changing conditions in the world economy, then either the optimum growth rate of real incomes is not achieved or our external competitiveness is eroded for an unnecessarily long period of time.
42. The second lesson to be learnt is that the actual course of the adjustment process is now subject to more complicated leads and lags than under the earlier fixed exchange rate regime and is more difficult to discern and predict.
43. This is particularly so when the third lesson to be learnt is that, with the tertiary services sectors generally and the financial and related business services sector in particular, developing rapidly in recent years(45), shifts in the visible trade balance and its components are contributing less to the maintenance or otherwise of internal and external equilibrium.
44. But the fourth lesson to be learnt is that the decision to allow the Hong Kong dollar to float, introducing thereby an additional variable into the adjustment mechanism, has led to the economy being able to adapt more readily to disequilibrating shocks. Indeed, under the floating exchange rate regime, shifts in the visible trade balance, as illustrated for example by the relative
(44) The Hong Kong dollar was floated on 26 November 1974.
(45) Contributions to the G.D.P. by industrial origin:
1970 (%)
1975 (%)
1980(*) (%)
Primary Sectors: 2.2 1.5 1.2 Agriculture and fishing 2.0 1.4 1.1 Mining and quarrying 0.2 0.1 0.1 Secondary Sectors: 37.1 34.4 35.3 Manufacturing 30.9 26.9 26.7 Electricity, gas and water 2.0 1.8 1.9 Building and construction 4.2 5.7 6.7 Tertiary Services Sectors: 60.7 64.1 63.5 Wholesale and retail trade, and restaurants
and hotels 19.6 20.7 18.8 Transport, storage and communications 7.6 7.2 6.5 Financing, insurance, real estate and
business services 14.9 17.0 22.0 Community, social and personal services 18.0 18.7 16.0 Activities not adequately defined 0.6 0.5 0.2 Note:(*) Very rough estimates.
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 467 growth rates between total exports and imports of goods, occur more rapidly than before(46).
45. However, in consequence, the fifth lesson to be learnt is that such shifts are sharper and inevitably create a higher degree of uncertainty within the domestic economy than before. Rapid changes have become, therefore, an even more notable feature of our economy and, accordingly, it is hardly surprising that some have argued for a greater degree of intervention by the Government than hitherto(47). Our experience in the post-recession years is a vindication of our reliance on the adjustment mechanism to achieve growth with stability and emphasizes the need to be very careful indeed not to damage inadvertently the efficiency of the operation of that mechanism. However, as the economy grows and evolves the way in which the mechanism operates also changes and the framework provided by the Government must also change if it is to remain appropriate. Indeed, the post-recession years have been marked by a number of important changes in the framework―institutional and regulatory―within which markets in Hong Kong operate, but we must continue to eschew any form of control of markets, wherever possible.
PART II: THE PRESENT STATE OF THE PUBLIC FINANCES
(1) Introduction
46. Before reviewing the performance of the public sector(48), and evaluating the management of our public finances in term of the General Revenue Account during the five post-recession years, 1976-77 to 1980-81, I must bring Members up to date on the present state of the Government’s accounts. I shall conclude this part of my speech by suggesting that our recent experience has certain implications for the future management of the public finances. And just in case honourable Members have lost me, I am up to Part II section 2 subsection (a)(laughter).
(46) See Statistical Appendix, Table (3).
(47) For instance, as an economy develops, and particularly during a period when there is pressure on the internal price level, supply bottlenecks develop and relative prices change rapidly, leading to calls for the Government to intervene in such a way as to maintain, or at least to minimize the changes in the status quo. However, it is through changes in relative prices that commercial risk-takers are induced to take the decisions necessary to remove the supply bottlenecks.
(48) Defined for this purpose in terms of the Consolidated Account, that is, expenditure by the Urban Council and the Housing Authority, expenditure financed by certain statutory funds (Development Loan Fund, Home Ownership Fund, Lotteries Fund and Student Loan Fund), expenditure on public works projects financed with loans from the Asian Development Bank and all expenditure charged to the General Revenue Account. So expenditure by institutions in the private or quasi-private sector is included to the extent of their subventions. The activities of Government departments which are partly financed by charges raised on a commercial basis are also included (e.g. Kowloon-Canton Railway, Airport, Waterworks). But not included is expenditure by those organizations, including even statutory organizations, in which the Government has only an equity position, such as the Mass Transit Railway Corporation.
468 HONG KONG LEGISLATIVE COUNCIL―25 February 1981 (2) General Revenue Account for 1980-81
(a) Budgetary policy
47. On General Revenue Account, after allowing for my revenue proposals(49), I budgetted for a surplus in 1980-81 of $2,904 million, being the difference between estimated expenditure of $18,028 million and estimated revenue of $20,932 million. I believed the increase in expenditure budgetted for, which was 27% up on the revised estimate for 1979-80 of $14,232 million, to be 12% in real terms.
48. In terms of budgetary policy(50), I considered this to be acceptable from the point of view of the economy, which had been adjusting satisfactorily in the latter part of 1979, particularly on external trade account, and to be inevitable, given the build up of our on-going contractual commitments on capital account. I argued that, in the fifth year of the post-recession upswing, there was a case for at least holding the relative size of the public sector in terms of the Consolidated Account at its 1979- 80 level of 18.7%(51) instead of allowing it to rise further(52). But I took comfort in the fact that I was budgetting for a large surplus on General Revenue Account of 14% of estimated revenue (and the public sector as a whole was expected to be in surplus too(53). At the same time, I warned that, within our presently buoyant financial situation lay seeds of trouble for the future, inasmuch as we could get ourselves locked into a level of expenditure on capital account which was not sustainable.
(b) Revised estimates(54)
(i) Outturn
49. My revised estimates of revenue and expenditure for 1980-81 are $29,000 million and $19,677 million respectively. On the basis of these figures, the year’s
(49) At a net cost to the revenue of $496 million: see B.S., 1980, paras. 280-296 and paragraph 299.
(50) Five general objectives of budgetary policy were identified in the 1979 budget speech (B.S., 1979, paragraph 63) and these remain valid: 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.
(51) Based on the revised estimates for 1979-80 and the preliminary estimate of expenditure on the G.D.P. for 1979.
(52) B.S., 1980, paragraph 174. As expenditure on the General Revenue Account is usually around 88-90% of expenditure on Consolidated Account and is directly under the Government’s control, the General Revenue Account is the main instrument of budgetary policy.
(53) B.S., 1980, paragraph 307.
(54) See Statistical Appendix, Tables (11), (13) and (14).
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 469
operations will result in a surplus of $9,323 million(55). This figure is very different from the actual surplus which will emerge in the Treasury’s cash book for two reasons: first, because of various adjustments to both revenue and expenditure made for analytical reasons amounting to a net addition to expenditure of $3,815 million, including a transfer of $3,500 million to the Mass Transit Fund(56); and, secondly, because the revised estimates may overstate expenditure and understate revenue by relatively small margins. Thus the Treasury’s cash book will probably show an actual surplus of about $6,000 million only, but that’s twice what I budgetted for (laughter) and this is the figure I shall use when considering our cumulative financial position at 1 April next.
50. The surplus, in the accounts I mean, of $9,323 million will be the highest on record, I am happy to say, in both absolute and relative terms (i.e. as a percentage of total revenue)(57). For the fourth year running, this larger than budgetted for surplus―$9,323 million rather than $2,904 million, although I stress only $6,000 million will actually be taken to our reserves―this larger than budgetted for surplus is due to a flush of revenue rather than a failure of expenditure(58). In addition, for the first time ever, there is a surplus on capital account, and of no less than $2,899 million as opposed to a budgetted for deficit
(55) $ mn $ mn Recurrent Account: O/A.E. R.E. O/A.E. R.E. Revenue 14,307 18,374 ― ― Expenditure 10,702 11,950 +3,605 +6,424 Capital Account:
Revenue 6,625 10,626 ― ― Expenditure 7,326 7,727(*) - 701 +2,899
Overall surplus ― ― +2,904 +9,323 Notes: (*) Includes a transfer of $400 million to the Development Loan Fund, approved by Finance Committee on 11 February 1981 (after the Draft Estimates went to print) for a possible civil servants’ home purchase scheme.
O/A.E.=Original /Approved Estimates.
R.E. =Revised Estimates.
(56) Approved by Finance Committee on 11 February 1981.
(57)
Year Total revenue ($ mn)
(1)
Surplus ($ mn) (2)
(2) as % of (1)
1976-77 7,494 917 12 1977-78 9,383 1,225 13 1978-79 12,442 1,486 12 1979-80 16,796 2,975 18 1980-81 29,000 9,323 32
(58) Revenue ($ mn)
Expenditure ($ mn)
Year O.E. Actual A.E. Actual 1977-78 8,172 9,383 8,119 8,158 1978-79 10,131 12,442 10,131 10,956 1979-80 13,888 16,796 12,433 13,821 1980-81 20,932 29,000 18,028 19,677
470 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
on capital account of $701 million: so much for my disclaimer in last year’s budget debate that my estimate of revenue from land sales was on the heroic side (laughter).
(ii) Revenue
51. At $29,000 million, the revised estimate of revenue exceeds the original estimate of $20,932 million by $8,068 million, or by 39%.
52. Recurrent revenue at $18,374 million is up by a net $4,067 million, or by 28%, on the original estimate: earnings and profits taxes are up by $1,541 million, or by 24%, due to company profits generally being more buoyant than anticipated when the Revenue Estimates were prepared in early January 1980; stamp duties are up by $1,242 million, or by 182%, for obvious reasons (laughter); interest earnings on the General Revenue Balance are up by $666 million(59), or by 65%, again for obvious reasons; and all other heads and subheads are up by a (net) $618 million.
53. Capital revenue at $10,626 million is up by $4,001 million, or by 60%, on the original estimate since premia from land transactions are up by $3,908 million, or by 63%, and the yield from estate duty is up by $80 million, or by 48%. I estimated revenue from land transactions in 1980-81 at $6,169 million, of which $1,001 million was in respect of modifications and regrants and private treaty grants, and $5,168 million was in respect of the sale of 45 acres of industrial land and 152 acres of non-industrial land. In the event, $10,077 million will be realized from land transactions, of which $8,777 million will be in respect of the sale of 40 acres of industrial land and 116 acres of non-industrial land.
54. Now, Sir, before anyone starts arguing that the shortfall of 36 acres in the amount of non-industrial land sold conclusively proves that the Government feeds land on to the market in order to maximize profits, let me point out that total land sales in 1980-81 of 156 acres is 80 acres up on actual sales in 1979-80(60). There are some very interesting data and footnotes at(60) and(61) (laughter).
(iii) Expenditure
55. At $19,677 million, the revised estimate of expenditure exceeds the approved estimate of $18,028 million by $1,649 million, or by just over 9%; and so, for the fourth year running, actual expenditure will have exceeded the
(59) To $1,696 million, sufficient to finance all but $176 million of recurrent expenditure on education subventions.
(60) Sales of Crown land (by auction and tender):
Year Industrial (acres)
Non-industrial (acres)
Total
(acres)
1976-77 10.7 27.3 38.0 1977-78 10.7 23.1 33.8 1978-79 23.5 34.8 58.3 1979-80 21.0 54.9 75.9 1980-81 39.6 116.4 156.0
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 471
approved estimate(61), but by less than I feared, since the cost of the revisions/adjustments to civil service salaries approved during the year(62) came to over $1,300 million, made up of about $800 million for the civil service and $500 million for subvented organizations.
56. On recurrent account, at $11,950 million, there is net over-spending of $1,248 million, or 11.7%. Personal emoluments subheads alone require additional provision of $644 million on account of civil service salary revisions and adjustments. The balance required is being found from savings since the rate of recruitment assumed when calculating the original provision has proved to be too optimistic. The total wage bill of the civil service (including allowances, of course, but not pensions) in 1980-81 is likely to be around $4,710 million for about 112,000 occupied posts(63). The additional provision required for subventions (including the U.P.G.C.) is $513 million, largely for salaries. The cash contribution under the old Defence Costs Agreement is up by $189 million, or by 43%, on the approved estimate of $437 million, largely due to a different basis for calculating charges for stores and air trooping, to increases in military pay scales and to exchange rate variations.
(61)
Year
Shortfall/excess on Approved Estimates ($ mn)
% of Approved Estimates
1976-77 -620 8.6 1977-78 + 39 0.5 1978-79 + 825 8.1 1979-80 +1,388 11.2 1980-81 +1,649 9.1
(62)
Effective date
Standing Commission on Civil Service Salaries and Conditions of
Service
Report on the pay of staff of I.C.A.C. 1 October 1979 Review of the upper end of civil service pay scales 1 October 1979 Second Report on civil service pay (Report No. 5) Various Standing Committee on Directorate Salaries and Conditions of
Service
Seventh Report 1 January 1980 Pay Trend Survey
Adjustment 1980 1 April 1980
(63) That is, the number of posts occupied at end-December 1980―some of which would have been filled w.e.f. various dates since 1 April―chargeable to General Revenue (i.e. total strength of the civil service less staff paid for by the Urban Council and the Housing Authority).
472 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
57. On capital account, at $7,727 million(64), there is net over-spending of $401 million, or 5.5%. This is made up of under-spending of $101 million on the two Public Works Programme components and the Land Acquisition component, and net over-spending of $502 million on the other nine components, including $400 million being a transfer to the Development Loan Fund for loans for down-payments in respect of a possible civil servants’ home purchase scheme.
58. The under-spending on the Public Works Programme occurred despite the injection of 75 new projects into the Public Works Programme involving
(64)
Component
(1) Public Works Programme (other than New Towns
Approved Estimates 1980-81 ($ mn)
Revised Estimates 1980-81 ($ mn)
and Housing) 1,817 1,803 (2) Public Works Programme (New Towns and
Housing) 1,542 1,346 (3) Land Acquisition 441 550 (4) Transfers to D.L.F. for on-lending to the Housing
Authority 1,831 1,831 (5) Transfers to Home Ownership Fund ― ― (6) Subventions:
Education 91 93 Medical 56 36 Miscellaneous 4 5
(7) University and Polytechnic Grants Committee 287 236 (8) Departmental Special Expenditure 317 285 (9) Defence Costs Agreement: Capital Works 33 20 (10) Defence: Miscellaneous Measures 393 (*) 946 (**)
(11) Other Transfers:
Emergency Relief Fund 3 4 Student Loan Fund 36 36 Development Loan Fund ― 400 (***)
(12) Miscellaneous 475 (****) 136 (*****) Total Capital Expenditure 7,326 7,727
Notes: (*) Comprises $180 million for reinforcement of the garrison (treated as nonrecurrent expenditure); $30 million for border defence works and $183 million for the reprovisioning of Victoria Barracks and other capital works for the Armed Forces outside the terms of the D.C.A.
(**) Comprises $161 million for reinforcement of the garrison (treated as nonrecurrent expenditure); $54 million for border defence works; $90 million for other capital works for the Armed Forces outside the terms of the D.C.A.; and $641 million for ‘buying-into’ the garrison’s stocks of consumable stores and fixed assets.
(***) For a possible civil servants’ home purchase scheme.
(****) Includes $450 million for expenditure unforeseen at the time the Draft Estimates were prepared, including cost increases; $12 million for expenses relating to Vietnamese refugees (treated as non-recurrent expenditure); and $11 million for central computer facilities.
(*****) Includes $94 million for grants to the Urban Council for salary revisions/ adjustments; $17 million for arrears of salaries for the civil service (i.e. in respect of 1979-80); $13 million for expenses relating to Vietnamese refugees; and $5 million for central computer facilities.
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 473
expenditure during the year of the order of $128 million(65). But this under-spending must be seen not only in the context of total activity in the building and construction sector, but also in relation to the higher level of expenditure achieved in 1980-81 of $3,699 million, compared with $3,092 million in 1979-80 and only $2,274 million in 1978-79. So, even allowing for inflation, the performance of the Public Works Department and the other departments involved was very commendable.
(c) Financial position at 31 March 1981
59. Assuming that the surplus on General Revenue Account in 1980-81 transferable to the General Revenue Balance at 31 March next is of the order of $6,000 million(66), our fiscal reserves at the beginning of the financial year 1981-82 will be around $15,300 million(67).
60. After allowing, say, $5,000 million (on the basis of a gearing of three) as cover for our formal contingent liabilities (which will be around $15,000 million by 31 March 1985, the last year of the new forecast period 1982-83 to 1984-85(68), we shall have, at 1 April next, ‘free’ fiscal reserves of around $10,300 million.
(65) The outstanding commitment in respect of P.W.P. projects in hand on 1 April 1980 was about $11,500 million. During 1980-81 work was put in hand on new projects of a total value of about $4,000 million, within which projects of a total value of $2,300 million were envisaged when the Draft Estimates for 1980-81 were prepared. Revisions to project estimates during 1980-81 added a further $4,700 million to the outstanding commitment. The revised estimate of expenditure for 1980-81 is about $3,200 million. So, the outstanding commitment in respect of P.W.P. projects in hand on 1 April 1981 will be $17,000 million (a 48% increase on a year ago).
(66) That is, the cash book balance without the adjustments made for analytical purposes: see paragraph 49 above.
(67) That is, the General Revenue Balance at 1 April 1980=$9,339 million plus assumed actual surplus of $6,000 million=$15,339 million, say, $15,300 million.
(68) At 31 March:
1981
($ mn)
1985 ($ mn)
Guarantees of M.T.R.C. debt 4,512 6,536 Export Credit Insurance Corporation: outstanding amounts 2,100 4,400 Home Ownership Scheme: guarantees to banks and d.t.cs 416 2,944 Asian Development Bank: uncalled capital 241 497 Gold coins 194 443 H.K. Building and Loan Agency: guaranteed notes 150 ― Hong Kong Arts Centre: guarantee of bank loan 12 ― Demonetized currency notes 10 10 Owensbord Enterprises Ltd: guarantee of bank loans 260 ― Total 7,895 14,830
474 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
61. The available assets in the Development Loan Fund(69) and the Lotteries Fund(70) are not included in our fiscal reserves for they are committed to approved loan allocations. Nor are the net proceeds from the sale of our gold coins: when the accounts for the Year of the Cockerel coin have been finalized, the surplus in the Special Coin Suspense Account is expected to be about $120 million, that is to say, after allocating $13 million towards the cost of the Queen Elizabeth Stadium and $55 million towards the cost of the Jubilee Sports Centre at Sha Tin. 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, profits of over $600 million should have been realized.
(3) Assessment of Performance, 1976-77 to 1980-81(71)
(a) General principles
62. Hong Kong’s public finances are managed on the basis of the following four principles: first, that the growth rate of public sector expenditure, appropriately defined, should have regard to the growth rate of the economy and, allied to this, the relative size of the public sector should be carefully watched; secondly, that the pattern of public sector expenditure should reflect the Government’s conscious view as to priorities; thirdly, that a certain balance should prevail between direct and indirect taxation and between direct and indirect taxation taken together and all other recurrent revenue, and that our tax system as such should meet certain defined requirements; and, fourthly, that in the preparation of the annual estimates of revenue and expenditure on General Revenue Account certain guidelines should be borne in mind.
63. I shall now consider how successful we have been in applying these four principles during the five post-recession years, 1976-77 to 1980-81.
(69) Available assets in the Development Loan Fund at 1 April 1981 will be $792 million against outstanding allocations of $5,266 million of which $4,829 million is for housing (*), $170 million for flatted factories, $11 million for non-profit making schools, and $248 million for the Industrial Estates Corporation. The available assets also include $400 million for a possible civil servants’ home purchase scheme (see note (*) to f.n. (55) and note (***) to f.n. (64) above). The available assets in the Fund will not be sufficient to meet the anticipated calls to be made on the Fund during 1981-82, estimated at $2,531 million (excluding any call to be made in respect of a civil servants’ home purchase scheme); and so a sum of $2,114 million has been entered as provision under Head 184 Transfers to Funds Subhead 291 Payment to the Development Loan Fund.
Note: (*) Housing Authority ($4,627 million for public housing and $185 million for the commercial elements of the Home Ownership Scheme); Housing Society ($9 million for the Urban Improvement Scheme); Local Government Officers’ Housing Schemes ($1 million); and Hong Kong Building and Loan Agency Ltd. ($7 million for guaranteed notes).
(70) Available assets in the Lotteries Fund at 1 April 1981 will be $101 million, to which must be added estimated receipts during the year of $66 million. Payments in 1981-82 against approved and new allocations are likely to be $95 million, leaving a balance in the Fund of $72 million at 31 March 1982. Outstanding allocations will amount to at least $56 million, but may be higher if all applications already to hand are approved. In this event, it will be necessary to seek Finance Committee’s approval temporarily to over-commit the Fund’s resources.
(71) See Statistical Appendix, Table (12).
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 475 (b) The public sector and the economy
(i) Growth
64. In Government accounting terms, the public sector in Hong Kong may be defined with reference to the Consolidated Account, that is to say, all expenditure financed from public funds, irrespective of who incurred the expenditure(72). It is the growth rate, in real terms, of public sector expenditure so defined that should be, taking one year with another, kept in line with the growth rate of the economy as measured by the growth rate of G.D.P. in real terms; and I have also paid heed, in recent years, to the impact of expenditure on the construction of the Mass Transit Railway(73).
65. The average annual growth rate of expenditure on Consolidated Account in real terms for the five post-recession years, 1976-77 to 1980-81, was 13.8% and of G.D.P. it was 11.3%(74). The growth rate of expenditure on Consolidated Account accelerated from 5.2% in 1976-77 to 21% in 1978-79 and was then held down to 7% in 1979-80. But it accelerated again to 21.4% in 1980-81: now this is a considerably higher growth rate than the 13.4% envisaged in the budget speech last year, which was made up of 11.6% on recurrent account and of 17.1% on capital account. On recurrent account, the growth rate achieved was about the same as that envisaged. But, on capital account, the growth rate achieved was much higher at 42% due, first, to the actual growth rate in 1979-80 being lower than implied in the revised estimates used when the budget speech was being prepared; secondly, to the assumed rate of increase in building and construction costs being too high; and, thirdly, but this is a minor factor, to over-spending of $260 million. Somewhat in contrast, the growth rate of G.D.P. was nearly 19% in 1976-77 and then settled down to an average annual rate of 9.5% for the next four years.
66. In 1977, I set a steady progression guideline for the growth rate of expenditure in real terms on General Revenue Account of 10.4%, the General Revenue Account, remember, being the main instrument of budgetary policy. The guideline rate of 10% was a little above the then trend growth rate of G.D.P., for I believed the relative size of the public sector as a whole (in terms of the Consolidated Account) could be allowed to increase as the economy was enlarged and this rate of 10% on General Revenue Account also seemed to be consistent with what was practicable and with the need to secure value for money.
(72) See f.n. (48) above and f.n. (243) below.
(73) Expenditure on the M.T.R. is included, of course, in the calculation of public sector demand for national accounts purposes.
(74) Growth rates in real terms:
Year
C.A. expenditure (%)
G.D.P. (%)
1976-77/1976 5.2 18.8 1977-78/1977 15.5 10.2 1978-79/1978 21.0 10.2 1979-80/1979 7.0 8.6 1980-81/1980 21.4 9.0
476 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
67. The guideline rate is essentially a target rate to be achieved over time. It might well have to be lower in some years, but it could be higher in others. For the five post-recession years, the average annual growth rate of expenditure on General Revenue Account was, in fact, 12.7%(75). Only in the first post-recession year, 1976-77 (when we had difficulty gearing up again after the recession) and in the year in which domestically generated inflationary pressures beset us, namely, 1979-80, was the growth rate below the target. In 1977-78 and 1978-79, the growth rate was pushed up to 15% and 23% (and remember, I am speaking in real terms) to make up for time lost in 1976-77 and in 1975-76, the recession year in which the growth rate of expenditure was deliberately slowed down so as to ensure that the adjustment process was not hindered. As part and parcel of our anti-inflationary stance in 1979-80, the growth rate was eased back to 4.7%, but for the reasons I have just given(76), the growth rate accelerated to 20.1% in 1980-81.
(ii) Relative size of the public sector
68. As a consequence of the different growth rates of public sector expenditure and G.D.P., the relative size of the public sector, defined here as the ratio of expenditure on Consolidated Account to the G.D.P., both at current prices, drifted upwards from 14% in 1976-77 to 18% by 1979-80 and then jumped to over 21% in 1980-81(77).
69. Whilst I would not wish to argue that, for the relative size of the public sector to be as high as 20-21% is beyond the capacity of our enlarged and more sophisticated economy, what does worry me is the future. It is not really possible to set a precise upper limit to the relative size of the public sector but, clearly, the implications of sharp increases or decreases need to be carefully considered and so do the implications of a persistent tendency for the share to drift upwards. Needless to say, the acceptable relative size of the public sector is larger on the downswing phase of the trade cycle than on the upswing (and it increased from an average of 14.2% in the four pre-recession years to 16.8% in the two recession years). But, as a general rule, when the economy is enjoying strong growth, the relative size of the public sector will tend to fall, at any rate initially, because the growth rate of public sector expenditure tends to lag behind the economy on the upswing(78). But, when the upswing is prolonged,
(75) Growth rate in real terms of G.R.A. expenditure:
Year (%)
1976-77 2.5 (*)
1977-78 15.0
1978-79 23.0
1979-80 4.7
1980-81 20.1
Note: (*) C.f. -0.7% in 1975-76.
(76) When discussing the growth rate of expenditure on Consolidated Account in paragraph 65 above.
(77) See Statistical Appendix, Table (9).
(78) So the relative size of the public sector fell from 16.2% in 1975-76 to 14.2% in 1976-77.
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 477
the growth rate of public sector expenditure tends to catch up with, and then exceed, the growth rate of the economy. This is not desirable because there should be some room for the public sector to expand relative to the economy on the downswing, particularly as it is difficult to trim back the growth rate of public sector expenditure on the downswing in line with the growth rate of the economy(79).
(c) Fiscal policy
(i) Balance of the fiscal system(80)
70. I turn now to the subject of fiscal policy. In our externally-oriented economic circumstances, there is no alternative to a relatively high dependence on direct taxation(81) for the financing of recurrent services within the General Revenue Account and to help finance the deficit on capital account. However, as the yields from earnings and profits taxes are related to the growth rate of the economy in money terms, if that rate is sustained at, say, 20% as it has been recently, then high yields will be enjoyed. The yield from earnings and profits taxes increased by 3½ times over the five post-recession years(82) whereas the G.D.P. (at current prices, of course) increased by 2½ times only. But yields from indirect taxes(81) (excise duties, for example) are more closely related to the growth rate of the economy in real terms.
71. The thesis that there will be a tendency for the relative importance of earnings and profits taxes to increase is borne out by our experience during the five post-recession years as seen in the context of the guideline ratios I bear in mind when assessing the balance of the fiscal system, namely, that the ratio of direct to indirect taxation should be 55:45 and the ratio of direct and indirect taxation taken together to all other recurrent revenue should be 70:30. The average ratio for direct to indirect taxation shifted from 56:44 in the first three years of the period to 60:40 in the last two; and the ratio of direct and indirect taxation taken together to all other recurrent revenue averaged 72:28 over the five years. But the fact that we are not adhering to these ratios does not mean
(79) So the relative size of the public sector jumped from 15% in 1973-74 to 17.3% in 1974-75. (80) See Statistical Appendix, Table (16).
(81) Direct taxes are defined as earnings and profits taxes. (Estate duty is regarded as capital revenue.) Indirect taxes are defined as excise duties, General Rates, bets and sweeps taxes, entertainment tax, hotel accommodation tax, stamp duties, motor vehicle taxes and franchises. (Premia paid for taxi concessions are regarded as capital revenue.)
(82) There were no major tax increases during these years and the system of personal taxation was adjusted on three occasions to allow for fiscal drag. Several reform measures, such as the bringing into charge of profits earned in Hong Kong from offshore borrowing and lending transactions arranged by banks and other financial institutions in Hong Kong, and improved administrative efficiency, have also increased the productivity of the system. But the income sensitivity of our direct tax system is self-evident.
478 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
that they no longer serve a purpose, which is to remind us of the importance of trying to maintain the yield from indirect taxes and fees and charges(83).
(ii) Requirements of the tax system
72. At the same time, our tax system has been designed to meet six requirements all of which I believe to be compatible with our externally-oriented circumstances and our free enterprise economy: the first requirement is to help to generate sufficient recurrent revenue to finance a major proportion of a given level of total expenditure(84) and to maintain our fiscal reserves at a satisfactory level.
73. The second requirement is that the tax system is as neutral as possible as regards the internal cost/price structure, the supply of human effort and private investment decisions (and this means, inter alia, that apart from° a degree of progressivity for personal taxation, the emphasis should be on proportionality).
74. The third requirement is that the laws governing the tax system are adapted from time to time to make them compatible with changing commercial practices.
75. The fourth requirement is that each and every levy―be it direct or indirect―is simple and easy (and, therefore, inexpensive) to administer for both the Government and the taxpayer and does not encourage evasion, for a narrowly based tax system with low rates of charge cannot afford to finance costly overheads (and, in this situation, arguments about equity being sacrificed for simplicity have a very doctrinaire ring to them).
76. The fifth requirement is that the tax system is equitable as between different classes of taxpayers or potential taxpayers and between different income groups (and this means, inter alia, setting relatively high thresholds for personal taxation and generally ensuring that the system rests as lightly as possible on the disposable incomes of those at the lower end of the income spectrum, or leaves them untouched).
77. Exceptionally, and this is the sixth requirement, the tax system must be capable of being used to achieve non-fiscal (that is to say, economic and social policy) objectives when necessary. I stress the work exceptionally, because I believe that such policy objectives should be pursued directly through public expenditure programmes and by appropriate legislative measures, and not indirectly by adjustments to tax rates and amendments to tax laws. Once a
(83) In a low tax environment, and particularly one which is characterized by high thresholds, public services which can be related to individual needs must be charged for in full, provided adequate remission arrangements are available when required, except where, as is frequently the case, a policy decision has decreed that the cost of those services should be borne, in whole or in part, by General Revenue. In some instances, charges may be pitched above the level necessary to recover full costs, for the purpose of raising revenue or for deterring usage; and fees which are set for permission to engage in certain activities are not cost-related at all. See further f.n. (181) below.
(84) That is, Guideline (1): recurrent revenue should finance at least 88% of total expenditure.
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 479
government starts to tread that path the consequences are unpredictable, and probably irreversible, and the economic costs unquantifiable.
78. The tax changes introduced in the past five years have all been consistent with one or more of these requirements. But, as I said last year, I am none too happy with the present distribution of the tax burden as between some classes of taxpayers and there is some evidence that some correction needs to be made again for fiscal drag(85).
(d) Management of the General Revenue Account
(i) Budgetary guidelines
79. So much for the relationship between the public sector and the economy, and fiscal policy in the five post-recession years, I turn now to an assessment of the management of the General Revenue Account, the underlying theory of which is that, taking one year with another, we should achieve at least a balance between revenue and expenditure, having regard to the need to make additions to our fiscal reserves in line with the growth of expenditure and our contingent liabilities.
80. To begin with, an appropriate relationship had to be determined between the recurrent and capital accounts, 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; and we must not delude ourselves into believing that this is not true, simply because it is not the case just now.
81. The guidelines adopted in the 1970s were that recurrent revenue should meet at least 88% of total expenditure, 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 and at least 20% by capital revenue(86). In addition, an upper limit was set to recurrent expenditure of 70% of total expenditure(87).
(85) For a summary of the corrections made since 1976-77, see B.S., 1980, f.n. (264) and paras. 281-288.
(86) In other words, the view was taken that net capital expenditure, after apply the surplus on recurrent account, should be financed in a certain way, that is to say, at least half by capital revenue and no more than half by debt.
(87) In summary:
Guideline Ratio
Recurrent revenue (1) Total expenditure At least 88% (*) Recurrent expenditure (2) Recurrent revenue No more than 80%
Surplus on recurrent account (3) Capital expenditure
At least 60%
Recurrent expenditure (4) Total expenditure No more than 70%
Capital revenue (5)Capital expenditure
At least 20%
Note: (*) This ratio is derived from Guidelines (4) and (2), viz: 70%÷ 80%=88%.
480 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
82. Taking each of the five guidelines in turn(88): the ratio of recurrent revenue to total expenditure (Guideline (1)) fell from 104% in 1976-77 to an average of 95% in the next four post-recession years, because the growth rate of total expenditure exceeded the growth rate of recurrent revenue, except in 1979-80(89); but the ratio nevertheless remained well above the guideline of at least 88%.
83. Throughout the five post-recession years the ratio of recurrent expenditure to recurrent revenue (Guideline (2)) never exceeded the guideline of 80%. Indeed, it has been well below it in the last two years at 66%. The fact is that the prolonged post-recession upswing of our economy has meant that in no year did the growth rate of recurrent expenditure exceed the growth rate of recurrent revenue, which was influenced by the growth rate of G.D.P. in money terms after allowing for leads and lags(89).
84. Again, throughout the period, the ratio of the surplus on recurrent account to capital expenditure (Guideline (3)) exceeded the guideline of at least 60%: it recorded an average of 108% in the first two years of the period and 85% in the last three. The surplus on recurrent account and flushing capital revenues (Guideline (5))(90), combined in 1976-77 with under-spending on capital account(91), resulted in overall surpluses on General Revenue Account.
85. Finally, the success with which the growth rate of recurrent expenditure has been contained in relation to recurrent revenue, combined with a new and, in my view, very appropriate, emphasis on capital expenditure, has meant that the balance between recurrent expenditure and capital expenditure (Guideline (4)) shifted over the period: in the two years 1976-77 and 1977-78, the average ratio of recurrent expenditure to total expenditure at 78% exceeded the guideline of no more than 70% but, in the last three years, the ratio fell steadily from 67% in 1978-79 to 61% in 1980-81.
(ii) Fiscal reserves
86. So much for the management system devised to force us to think through the consequences of particular courses of action by reference to certain guidelines.
(88) See Statistical Appendix, Table (15).
(89) Growth rates of:
Year
Total
expenditure (%)
Recurrent expenditure (%)
Recurrent revenue (%)
G.D.P. in
money terms (%)
1976-77/1976 9 17 17 28 1977-78/1977 24 19 19 15 1978-79/1978 34 18 24 17 1979-80/1979 26 21 33 24 1980-81/1980 42 35 36 23
(90) In 1977-78, 1978-79 and 1979-80 capital revenue financed, on average, 65% of capital expenditure and in 1980-81 was sufficient to finance all of it (being 138% of expenditure).
(91) In relation both to the Approved Estimates and actual expenditure in 1975-76.
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 481
87. In support of this management system are our fiscal reserves. These fiscal reserves, together with the balances in various funds(92) and the Exchange Fund’s surplus, represent the net financial assets of the Hong Kong Government. Apart from the Treasury’s current cash requirements, the bulk of the financial assets are held in the Exchange Fund, and placed by the Fund in bank deposits in Hong Kong dollars and foreign currencies and in various interest bearing instruments in foreign currencies(93). The Fund transacts its business through 87 banking, safe custody and security accounts located in 13 countries(94), reflecting the extensive programme of diversification, in terms of both currencies and management, of our financial assets over the past seven years since the end of 1974.
88. Our fiscal reserves have several roles(95), first, provision must be made for cover for our contingent liabilities, which also secures, of course, our credit rating in international capital markets. Secondly, unexpected and unavoidable commitments and situations involving a short lived tendency for expenditure to exceed revenue, or for revenue yields to fall below expectations, should not affect the implementation of the Government’s on-going policies and programmes or involve adjustment to tax rates and charges(96). Such situations are best dealt with by having available adequate ‘free’ fiscal reserves; and, happily, they are adequate. Thirdly, to the extent that our ‘free’ fiscal reserves exceed the minimum guideline ratio of 15% of budgetted for expenditure in the following year, they are available for such purposes as the purchase of equity in trading enterprises (such as the M.T.R.C.) and the placing of statutory funds, such as the Development Loan Fund, in a position to meet their commitments, for there is no reason, no particular reason, why annual revenues should necessarily have to meet these particular calls. In addition, our ‘free’ fiscal reserves will enable us to blend grants from General Revenue with debt finance for such large, lumpy and expensive works projects as a new airport or fixed harbour crossings which we may eventually decide to embark upon in the 1980s outside the Public Works Programme itself.
(92) For example, the Development Loan Fund, the Special Coin Suspense Account and the Mass Transit Fund.
(93) The Exchange Fund’s liabilities are the sum of the value of non-interest bearing Certificates of Indebtedness issued to the two note issuing banks, coins in circulation and interestbearing debt certificates issued to the Treasury in respect of sums deposited with the Fund on behalf of the General Revenue Account.
(94) The 87 accounts include 5 accounts with central banks and 16 accounts with various financial institutions managed on a discretionary basis within guidelines laid down by the Secretary for Monetary Affairs who is also the Secretary (and a member) of the Exchange Fund Advisory Committee.
(95) Quite apart from providing such cover as is necessary for seasonal deficits. In the past, these have peaked in October after which E.P.T. receipts began to flow in; and, simply because capital revenue has distorted this pattern recently, there is no reason to suppose that this will be the case indefinitely.
(96) 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 deficit 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 persistent situation of demand-pull inflation threatens the ability of the economy to maintain internal and external equilibrium.
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89. Our total―I stress total― our total fiscal reserves at 1 April 1976 represented 39% of budgetted for expenditure in 1976-77(97). A year later, I decided that we had to make specific provision to secure our significantly larger contingent liabilities(98), on the basis of a gearing of three. So our ‘free’ fiscal reserves at 1 April 1977 were reckoned to be $1,213 million(99), or nearly 15% of budgetted for expenditure in 1977-78 of $8,143 million. This was equal to the guideline ratio I then selected. By 1 April 1980, the position had improved to $5,716 million(100), or 31% of budgetted for expenditure in 1980-81 of $18,332 million; and the position will show a further improvement at 1 April 1981 to $10,300 million(101), the equivalent of 42% of the expenditure I am budgetting for in 1981-82 of $24,670 million(102). This is distinctly better than the guideline of 15%(103). In fact, the relative size of our ‘free’ fiscal reserves is now nearly three times what it was in 1977-78.
(e) Implications for management in the 1980s
90. For the proper management of the public finances in the 1980s, I see no reason to depart from, or amend, the four principles which guided us in the past decade(104), but four lessons emerge from this assessment of the application of these principles.
(97)
Year
Fiscal
reserves(*) ($ mn)
(1)
Budgetted
expenditure(**) ($ mn)
(2)
(1) as % of (2)
1 April 1976/1976-77 2,810 7,212 39 1 April 1977/1977-78 3,713 8,143 46 1 April 1978/1978-79 4,949 10,144 49 1 April 1979/1979-80 6,416 12,446 52 1 April 1980/1980-81 8,916 18,332 49 Note: (*) From 1 April 1976 the General Revenue Account’s foreign currency assets were
transferred to the Exchange Fund against interest bearing debt certificates thus insulating the Government’s fiscal reserves from differences in exchange values and in the book values of fixed interest bearing assets: see B.S., 1976, paras. 75-84. As explained in paragraph 93 and f.n.(93) above, the Hong Kong dollar balances of the General Revenue Account over and above the Treasury’s current cash requirements are also now held in the Exchange Fund against the issue of interest bearing debt certificates in accordance with the concept of the Exchange Fund being effectively banker to the Government.
(**) Including, for this purpose, debt repayments.
(98) B.S., 1977, paragraph 106.
(99) Fiscal reserves at 1 April 1977=$3,713 million, minus $2,500 million being one third of , contingent liabilities at 31 March 1981 (i.e. the end of the then forecast period) =‘free’ fiscal reserves of $1,213 million.
(100) Fiscal reserves at 1 April 1980 = $8,916 million, minus $3,200 million being one third of, contingent liabilities at 31 March 1984 (i.e. the end of the then forecast period) = ‘free’ fiscal reserves of $5,716 million.
(101) Fiscal reserves at 1 April 1981 = $15,339 million, minus $5,000 million being one third of, contingent liabilities at 31 March 1985 (i.e. the end of the next forecast period) = ‘free’ fiscal reserves of, say, $10,300 million.
(102) Inclusive, for this purpose, of public debt repayments of $27 million.
(103) In fact, the relative size of our ‘free’ fiscal reserves is now nearly three times what it was in 1977-78. (104) See paragraph 62 above.
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 483
91. First, the trend growth rate of public expenditure must not be allowed to exceed the trend growth rate of G.D.P. to such an extent, and so persistently, that the relative size of the public sector becomes excessive. By 1980-81, the relative size of the public sector was over 21% and, whilst I do not regard this as an absolute limit for all time, for the time being any further increase ought to be avoided. Otherwise, we might have to face a severe trimming back of the growth rate of expenditure in a downswing phase in order to prevent the relative size of the public sector becoming so large as to frustrate temporarily the adjustment process with painful implications.
92. Secondly, the Government’s expenditure priorities must be readily adjusted in response to changing circumstances. It seems clear, however, that the transport infrastructure, technical education, land production and housing stand out as deserving especial priority(105) and so does anything that can be done to ease the differential impact of inflation on the disadvantaged members of our community.
93. Thirdly, the tendency in the last two years for the balance between direct and indirect taxation to slip away from the guideline ratio must eventually be corrected, and so must the present distribution of the burden between different classes of taxpayers.
94. Fourthly, as regards the management of the General Revenue Account, the growth rate of recurrent expenditure has been well contained in the past five years, but the level of capital expenditure has been lifted very substantially indeed in recent years. The absence of an overall deficit in our accounts simply reflects the present availability of capital revenue for the financing of the capital account(106), which means that there is a potential need to correct this by boosting recurrent revenue.
PART III: THE IMMEDIATE OUTLOOK FOR THE ECONOMY
(1) The Economy in the Second Half of 1980
95. I turn now to my forecast of the expenditure on the G.D.P. in 1981. As developments in the second half of 1980 were markedly different from those in the first half of the year and are likely to influence the course of our economy in the near future to an unusual extent, they have had to be taken into account when working up the forecast.
(105) For the pattern of expenditure on Consolidated Account in 1981-82, see paras. 187-194 of the printed version of the Budget Speech 1981.
(106) In the five post-recession years, the ratio of capital revenue to the surplus on recurrent account has doubled every other year: from 40% in 1976-77 to 81% in 1978-79 to 166% in 1980-81. Put another way: in 1976-77 capital revenue was sufficient to finance nearly half of capital expenditure. In the next three years, it was sufficient to finance two-thirds and in 1980-81 the capital account will actually be in surplus (capital revenue being 138% of
capital expenditure).
484 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
96. There were two really significant developments in the second half of 1980: the first was a sharp slow down in the growth rate of domestic exports, from a high 18% (in real terms, of course) in the first half, to only 5% in the second half(107). This slow down reflected developments in the economies of our major markets, particularly in the United States, where there was a sharp decline in retail sales in the second quarter of 1980 with only a limited recovery in the subsequent two quarters.
97. The main impact of this slow down was on the manufacturing sector: while the growth rate of employment in the manufacturing sector during the twelve months ending March 1980 was 8.8%, the growth rate during the twelve months ending September was only 1.4%. At the same time, vacancies as a percentage of employment fell from 7% in March 1980 to the low level of 4.2% in September. So, real wages in the manufacturing sector, the rate of increase of which had already been constrained as a result of the immigration-induced growth in the size of the labour force, were virtually the same in the second half of 1980 as in the first half(108). Further, and this has implications for our export performance in the immediate future, the growth rate of retained imports of raw materials and semi-manufactures declined from 15% in the first half of 1980 to only 1% in the second half(109). However, there seemed to be some recovery in the fourth quarter.
98. The second significant development in the second half of 1980 was an acceleration in the growth rate of private consumption expenditure, as can be deduced from the growth rate of retained imports of consumer goods: from 22% in the first half to 35% in the second half(109).
99. So, despite the slow down in the growth rate of domestic exports, the growth rate of aggregate demand remained high, as can be deduced from the growth rate of the employed labour force: at 7.2% for the twelve months ending
(107) Growth rates of domestic exports(%):
Year-on-year comparison
In money terms
In real terms
1980/1979 22 11 1980/1979: Q1 36 18 Q2 31 18
Q3 16 7
Q4 12 4
1980/1979: H1 33 18 H2 14 5
(108) See Statistical Appendix, Table (6).
(109) Growth rates, in real terms, of retained imports by end-use categories (%): Raw materials
Year-on-year comparison
Food stuffs
Consumer
goods Fuels
and semi
manufactures
Capital goods
1980/1979 10 29 9 8 20 1980/1979: Q1 16 21 25 16 25 Q2 7 24 10 14 32 Q3 11 34 -2 -2 6 Q4 6 36 9 4 21 1980/1979: H1 11 22 17 15 29 H2 9 35 3 1 13
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 485
September 1980, it was not much below the growth rate for the twelve months ending March 1980 of 7.8%. Even so, the growth rate of demand for labour was not high enough to absorb the supply of labour becoming available. In consequence, the seasonally adjusted unemployment rate increased from 3.2% in March 1980 to 3.8% in September.
100. As the impetus to growth shifted from domestic exports to domestic demand in the second half of 1980, there was an inevitable tendency for the visible trade ‘gap’ to widen: in the first half of 1980, at 14.6%, it was narrower than in the first half of 1979 at 15.4%; but in the second half of 1980, at 9.7%, it was wider than in the second half of 1979 at 8.5%. With a surplus on the invisible trade account smaller than the deficit on the visible trade account, and with a fairly large net outflow of funds in the second half of 1980 of $4,753 million, compared with a net inflow in the first half of $357 million, there was downward pressure on the exchange value of the Hong Kong dollar(110), despite the protective effect of higher interest rates.
101. After being reduced from 16% in March to 10% by 28th July, the lead lending rate― the Best Lending Rate of the two note-issuing banks―was steadily increased to 17% by 9 December. Over this period, the three months’ deposit rate, for example, fell from 10½% to 6% and then increased to 13%(111). As a consequence, the growth rate of the money supply (M2) slowed down from 17.6% during the first half of the year to 9.5% during the second half(112). Despite the increases in interest rates, the differential between interest rates in
(110) The trade weighted exchange rate index fell by 3.7% between end-July and end-December 1980, compared with a fall of 2% between end-December 1979 and end-June 1980. (111) Principal banks’ interest rates (% p.a.):
With effect from:
Three months’ deposits
Savings deposits
Best Lending Rate
21 August 1979 9½ 9¼ 14½ 11 March 1980 10½ 10¼ 16 26 May 1980 9 9 14½ 2 June 1980 7½ 7½ 13 23 June 1980 6½ 6½ 12 28 July 1980 6 5 10 9 September 1980 6½ 5½ 10½ 7 October 1980 8 6½ 12 4 November 1980 9 7½ 13 11 November 1980 10 8½ 14 25 November 1980 12 10 16 9 December 1980 13 11 17
(112) And even the growth rate of M3 slowed down from 19% in the first half of 1980 to 17% in the second half
486 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
Hong Kong and in the United States widened(113), contributing to the depreciation of the exchange value of the Hong Kong dollar, with consequences of course for the internal price level.
(2) Forecast of Expenditure on the G.D.P. in 1981
(a) Gross domestic product by component
102. Now, Sir, in my usual state of trepidation, I offer my forecast of expenditure on the gross domestic product in 1981(114), the growth rates I shall be quoting being calculated, as usual, from aggregates at constant (1973) prices.
(i) Private consumption expenditure
103. Although the growth rate of private consumption expenditure showed signs of accelerating during the course of 1980, I expect less buoyant export earnings in the second half of that year, and probably in the first half of 1981, to exert a dampening effect. Thus, my forecast for the growth rate of private consumption expenditure in 1981 is 8%, compared with the achieved growth rate(115) in 1980 of 8.8%.
(ii) Government consumption expenditure
104. By converting into national accounts terms the revised estimate of recurrent expenditure by the public sector on Consolidated Account in 1980-81
(113)
With effect from
Prime rate charged by leading banks in the United States (%)
B.L.R. in Hong Kong (%)
Differential (% points)
21 August 1979 12 14½ -2½ 23 June 1980 12 to 12½ 12 0 to ½ 28 July 1980 10¾ to 11½ 10 ¾ to ½ 25 November 1980 17 16 1 9 December 1980 19 17 2 20 December 1980 21 to 21½ 17 4 to 4½ 31 December 1980 20½ to 21½ 17 3½ to 4½ 31 January 1981 19½ to 20 17 2½ to 3
(114) See Statistical Appendix, Table (10). This 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 entirely satisfactory; and, because the system of equations is not fully articulated, the results thrown up may not agree completely with the original assumptions put in. Secondly, results from two other simple income determination models: one with three equations and the other, which is still in a very preliminary form, with ten equations. Thirdly, results from a survey of economic prospects: this is 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.
(115) The phrase ‘achieved growth rate’, when used throughout this section, means the growth rate implied in the preliminary estimates of expenditure on the G.D.P. in 1980.
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 487
and the corresponding cash input figure for 1981-82(116), putting both on a calendar year basis and then appropriately deflating them, a growth rate of 15% for Government consumption expenditure was obtained. Having then considered the implications for the economy of this growth rate, and the growth rate of public sector expenditure on building and construction implied in the corresponding cash input figures for capital expenditure on Consolidated Account and by the M.T.R.C., I took the view that it was acceptable. So my forecast for the growth rate of Government consumption expenditure in 1981 is 15%, compared with the achieved growth rate in 1980 of 7.9%.
(iii) Gross domestic fixed capital formation
105. My forecast for the growth rate of investment in plant and machinery in 1981 is 16%. This represents a slow down from the achieved growth rate in 1980 of 18.7%. In arriving at this forecast, I have taken into account the likelihood of a slow down in the growth rate of domestic exports in 1981 and hence of investment in industrial machinery(117).
106. As for investment in building and construction: new building intentions of the private sector, as indicated by the floor area of buildings for which consents to commence work were given during 1980, were rather below those for 1979(118). This suggests that the growth rate of private expenditure on building and construction in 1981 will not be significantly higher than in 1980. However, resource constraints on the building and construction sector, at least in respect of unskilled labour, should be less severe in 1981 than in recent
(116) For the purpose of forecasting total expenditure on General Revenue Account for 1981-82 (and for the three years of the new forecast period, 1982-83 to 1984-85) departments were required to submit returns, at mid-1980 prices, which distinguished between, on the one hand, commitments in respect of maintaining present services and expanding them to meet demand at existing standards and, on the other hand, new services. All the figures were 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. These figures were used as the basis for guidance to departments in preparing their estimates submissions. After Finance Branch treatment and the addition of figures of other public sector expenditure on Consolidated Account in 1981-82, cash input figures for use in the G.D.P. forecast exercise were derived.
(117)Except to the extent that manufacturers respond to difficult trading conditions by investing in new machinery to improve their competitiveness.
(118) Floor area of new building plans by the private sector with consents to commence work: Usable floor area
Year
(thousand square feet)
1978 35,338 1979 33,174 1980 30,806
488 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
years(119). At the same time, labour productivity in the building and construction sector should start to improve as the large numbers of unskilled workers absorbed in 1979 and 1980 become more experienced. Having regard to these two factors, and to public sector intentions in 1980, my forecast for the growth rate of expenditure by the private sector on building and construction in 1981 is 5%, compared with the achieved growth rate in 1980 of 1% only(120).
107. My forecast for the growth rate of expenditure by the public sector (including the M.T.R.C.) on building and construction is 8%, compared with the achieved growth rate in 1980 of 3.1% only. This forecast of 8% is made up of a growth rate of 20% for expenditure by the Government and of - 25% for expenditure by the M.T.R.C.
108. So my forecast for the growth rate of total expenditure on building and construction in 1981 is 7%, compared with the achieved growth rate in 1980 of 2%. After taking a view on the growth rate of the other, relatively small, item in gross domestic fixed capital formation relating to net expenditure incurred in connection with transfers of ownership of land and existing buildings, and combining this forecast of 7% with my forecast for the growth rate of investment in plant and machinery, my forecast for the growth rate of gross domestic fixed capital formation in 1981 is 13%, the same as the achieved growth rate in 1980. Although the mix is different.
(iv) Total exports of goods
109. Now, as regards our export prospects, and looking at the world economy as a whole to begin with: sharp increases in oil prices, combined with tight fiscal and monetary policies adopted by the governments of the O.E.C.D. group of countries, resulted in the overall growth rate of these economies slowing down to 1% in 1980, compared with 3% in 1979. The slowing down in the growth rate of their imports was even more drastic, to an estimated zero to - 1% in 1980, compared with about 8% in 1979(121).
(119) Evidence is beginning to emerge from recent movements in the labour and materials cost index (February 1970=100):
1979: Index Year-on-year increase (%)
March 278 31.8
June 304 40.7
September 329 40.0
December 344 38.2
1980:
March 349 25.5
June 357 17.4
September 368 11.9
December (est.) 379 10.2
(120) For statistics of completions of accommodation by the private sector in 1980, see f.n. (39) above.
(121) See f.n. (43) in Appendix II.
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110. Negative growth rates were recorded by several O.E.C.D. countries as their economies moved into the trough of the downturn, but the prospects are for a weak recovery starting in the first half of this year. This view is based on the assumption that, following the increase in posted prices last December(122), there will be no substantial increase in the real price of oil and that governments will persist with fiscal and monetary policies aimed at restraining aggregate demand so as to reduce inflation. So the growth rate of the economies of the O.E.C.D. group of countries as a whole is expected to be about 1% in 1981, roughly the same as that in 1980. But the volume of imports into these countries is expected to be marginally less in 1981 than in 1980. According to a cross section of manufacturers who took part in a survey conducted by the Census and Statistics Department, there will not be any substantial improvement in our trading prospects until at least the second half of this year. Their views, unfortunately, are consistent with our latest statistics on the state of order books and with the lack of growth in the second half of 1980 in retained imports of raw materials and semi-manufactures.
111. In these circumstances―and remember that about 75% of our domestic exports are sold in the markets of the O.E.C.D. group of countries in this circumstances―it is essential that our cost/price structure is allowed to adjust downwards relatively so as to restore our external competitiveness as soon as possible.
112. As regards the United States (which took 33% of our domestic exports by value in 1980): there seems to be a consensus among forecasters that the U.S. economy will progressively recover, albeit slowly, this year. If this is so, then the growth rate of domestic exports to this market should recover shortly, reversing the trend which saw a slow down from 21% in the second quarter of 1980 to 7% in the third quarter and to zero in the fourth quarter (all comparisons being on a year-on-year basis). Indeed, if the recovery in the U.S. economy is accompanied by a rebuilding of inventories―this is possible in view of their depletion in the second half of 1980, particularly if interest rates decline―the recovery could well be as sharp as the slow down we have just experienced. Nevertheless, my forecast for the growth rate of domestic exports to the United States for 1981 as a whole is only 5%, compared with the achieved growth rate in 1980 of 10%.
113. As regards the Federal Republic of Germany (which took 11% of our domestic exports by value in 1980): the growth rate of the German economy was nearly 2% in 1980 (twice the average growth rate for the O.E.C.D. group of countries). But, in the second half of the year, a large deficit on the current account of the balance of payments, a large Government borrowing requirement and accelerating inflation mean that there may be a shift back to more restrictive fiscal and monetary policies. Consequently, the forecasts of the growth rate of the German economy in 1981 range from slightly less than zero to 1%. However, the slowing down in the growth rate of our domestic exports
(122) After having increased by about 150% over the 18-month period from the beginning of 1979 from about U.S.$13 per barrel to about U.S.$32 per barrel, the posted prices of crude oil were increased on average by 10% in December 1980 to about U.S.435 per barrel.
490 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
to Germany from 13% in the second quarter to 4% in the third quarter and - 2% in the fourth quarter was due not only to sluggish demand, but also to the sharp appreciation of the exchange rate of the Hong Kong dollar against the Deutschemark in the early months of 1980(123). The rate has since stabilized. So, in line with the opinion of local exporters and manufacturers, I think performance in this market in the second half of 1981 will improve. Accordingly, my forecast for the growth rate of domestic exports to Germany in 1981 is 6%, roughly the same as the achieved growth rate in 1980.
114. As regards the United Kingdom (which took 10% of our domestic exports by value in 1980): the latest forecast is for a growth rate of the gross national product (G.N.P.) of - 2% in 1981, as in 1980, but I expect the price effects of the depreciation of the Hong Kong dollar against sterling of about 10% during 1980 to facilitate some growth in domestic exports to this market in 1981. Although the growth rate of our domestic exports fell from 4% in the second quarter of 1980 to - 6% in the third quarter, in the fourth quarter there was some improvement to 1%. Opinion in the trade is mixed in relation to this market but, on the whole, some improvement is envisaged. So, my forecast for the growth rate of domestic exports to the United Kingdom in 1981 is 3%, an improvement over 1980 when virtually no growth was recorded.
115. As regards the rest of the world (which took 46% of our domestic exports by value in 1980): I think our prospects are rather more promising, particularly in the countries of the East Asian region, because I expect the region’s growth momentum will be maintained in 1981, albeit at a slower pace as a result of economic conditions in the major industrialized countries. My forecast for the growth rate of domestic exports to the rest of the world in 1981 is thus 9%, compared with the achieved growth rate in 1980 of 15%.
116. To sum up: my forecast for the growth rate of domestic exports to all markets in 1981 is 7%, a slow down compared with the achieved growth rate in 1980 of 10.9%.
117. Turning to the other component of total exports of goods, namely, re-exports, the very high (and accelerating too) growth rates recorded in the last three years have confirmed the re-establishment of Hong Kong as an entrepot. This has been very largely due to the growth of the China trade which is expected to continue to expand rapidly(124). It is possible, however, that
(123) The H.K. dollar appreciated against the Deutschemark by 9% between end-December 1979 and end-March 1980.
(124) Re-exports to
Re-exports of
Year China origin
China
($mn) (%)(*) ($ mn) (%)(*)
1976 1977 1978 1979 1980
123
175
214
1,315 4,642
1
2
2
7
15
2,402 2,492 3,659 5,663 8,394
27 25 28 28 28
Note: (*) of total re-exports through Hong Kong.
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unfavourable economic conditions in the major industrialized countries may affect their demand for goods re-exported through Hong Kong. Nevertheless, I am optimistic about the growth rate of re-exports in 1981 and my forecast is for a growth rate of 25% (remember, I am speaking in real terms), only just below the average annual growth rate in the past three years, although down on the achieved growth rate in 1980 of 37.3%.
118. Thus, my forecast, Sir, for the growth rate of total exports of goods in 1981 is 12%, compared with the achieved growth rate in 1980 of 17.7%.
(v) Imports of goods
119. The growth rate of imports of goods in 1981 that is consistent with the forecasts of the other G.D.P. components is 13%, which is below the achieved growth rate in 1980 of 18.6%.
(vi) Net exports of services
120. As usual, the rather scanty information we have on exports and imports of services in previous years makes forecasting of net exports of services difficult. However, taking due account of the emerging contribution to total export earnings of the tertiary services sectors in their own right, I expect the growth rate of the net exports of services in 1981 to be about 3%, compared with the achieved growth rate in 1980 of - 2.5%. This is a distinct improvement, given that the net balance of tourist expenditure is expected to continue to decline(125).
(vii) Stocks
121. Finally, I expect there will be a small accretion of stocks in 1981 as in 1980.
(b) Total expenditure on the G.D.P.
122. Combining these forecasts for the individual components of expenditure on the G.D.P., my forecast for the growth rate of G.D.P. in 1981 is 8%, compared with the achieved growth rate in 1980 of 9%. This forecast implies that, at constant (1973) prices, total expenditure on the G.D.P. will be about $65,300 million. Assuming that the growth rate of the population will be 2.4%(126), the growth rate of G.D.P. per capita in 1981 will be 5.5%, which is the same, for all intents and purposes, as the achieved growth rate in 1980 of 5.4%.
123. I expect, however, that our terms of trade will deteriorate slightly, reflecting a deflating cost/price structure. So, my forecasts for the growth rates of real income and real income per capita in 1981 are, at 7.5% and 5% respectively, slightly less than those of G.D.P. and G.D.P. per capita.
(125) See paragraph 17 in Appendix I.
(126) Mid-1981 on mid-1980 and made up of: 1.1% for net immigration (after allowing for the departure of some 25,000 Vietnamese refugees) and 1.3% for natural increase.
492 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
(c) Prices and the G.D.P. at current prices
124. Turning now to prices: the latest forecasts available to us suggest that the rate of inflation in the world economy will slow down in 1981. The rate of increase in consumer prices in the O.E.C.D. group of countries, for example, is expected to slow down from 13% in 1980 to about 10% in 1981. Against this background, my forecast for the rate of increase in consumer prices in Hong Kong in 1981 is 12%, representing a slow down from the actual rate of increase recorded in 1980 of 15.5%.
125. But much still depends upon the future course of world oil prices. Retained imports of oil products now represent 9% of total retained imports by value, compared with 7% by value in 1976 and only 2% by value in 1973; and, given that demand is fairly price inelastic in the short term, the impact of increases in the prices of these products on our balance of trade and the internal price level has become much more significant. It could well be that the assumption of no substantial increase in real oil prices implicit in the forecast growth rates for the O.E.C.D. group of countries will turn out to be unrealistic. If that is the case, the mild recovery in demand which I anticipate in our main markets is less likely to occur.
126. The rapid growth rate of public sector expenditure on building and construction is such that the prices of locally produced inputs used by the building and construction sector (including labour) may increase at relatively rapid rates. However, with the pressure of demand on resources in the economy generally easing, I expect the rate of increase in the general price level―in other words, the G.D.P. deflator―to slow down. My forecast is that it will increase in 1981 by 10%, compared with the actual rate of increase recorded in 1980 of 13%.
127. My forecast for the growth rate of G.D.P. in money terms in 1981 is 19%, compared with the achieved growth rate in 1980 of 23.2%. At current prices, total expenditure on the G.D.P. in 1981 will be about $126,400 million. In per capita terms, G.D.P. at current prices will be about $24,400, representing a growth rate of 16%, compared with the achieved growth rate in 1980 of 19.1%.
(3) Implications of the Forecast for the Economy
128. So, Sir, the gloomy predictions of imminent disaster, so fashionable recently in some quarters, are simply not borne out by this forecast of the likely state of our economy in 1981. A growth rate of 8%, as forecast, may be lower than the achieved growth rate in any year since the recession, but it would still be a very respectable growth rate, both in its own right and by international standards (as honourable Members will see from a close
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 493
study of(127) (laughter). It also compares favourably with the trend growth rate achieved by our economy in almost any other period one chooses to select during the past 15 years(128). And I would refer honourable Members to footnote(29). Furthermore, should the forecast be borne out, it will be associated with a fair measure of stability, as I shall now proceed to demonstrate.
(a) Total final demand and the G.D.P.
129. First, the growth rate of total final demand, at 11%, will be higher than the growth rate of G.D.P. at 8%(129). The growth rate of imports will also be higher at 13%. However, excluding the effect of the rapid growth rate of re-exports, the growth rate of total final demand, at 8%, will be the same as the growth rate of G.D.P. which does not suggest any substantial imbalance between aggregate demand and supply. In fact, the growth rate of retained imports will be 9%, only just above the growth rate of G.D.P.
(b) Domestic demand and domestic exports
130. Secondly, within total final demand, the growth rate of domestic demand, at 10%, will be significantly higher than the growth rate of domestic exports at 7%(130) implying a continuation of the shift in the distribution of labour away from the manufacturing sector which started in the second half of 1980(131).
(127) Forecast growth rates of G.N.P./G.D.P. in real terms of selected O.E.C.D. countries in 1981: (%)(*) (%)(**)
United States 0.75 1.0 Germany －0.25 1.0 United Kingdom －2.0 －0.8 Japan 3.75 4.0 Canada 1.25 1.0 France 1.0 1.7 Italy －1.0 Zero O.E.C.D. group 1.0 1.4 Note: (*) By O.E.C.D. Secretariat (G.N.P.).
(**) By National Institute of Economic and Social Research (G.D.P.).
(128) See f.n. (29) above.
(129)
Growth rate of:
Total final demand
G.D.P.
Imports of goods
Total final demand excluding re-exports Retained imports
(130)
Growth rate of:
1980 Preliminary estimate
(%)
13.6
9.0
18.6
10.7
13.0
1980 Preliminary estimate
1981 forecast (%)
11
8
13
8
9
(%) 1981 Forecast (%)
Domestic demand
Domestic exports
Total exports of goods
(131) See paragraph 97 above.
11.7 10.9 17.7
10 7
12
494 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
(c) Public sector demand versus private sector demand
131. Thirdly, within domestic demand, the growth rate of public sector demand at 14% will be higher than the growth rate of private sector demand at 9%(132). So the public sector will command a larger share of available resources in the economy, a reverse sadly of the situation in 1980. But this is probably just about acceptable, notwithstanding the need to allow the internal cost/price structure to adjust downwards relatively(133), because the growth rate of the supply of labour has exceeded the growth rate of demand for it since March 1979(134).
(d) Demand for the output of the building and construction sector
132. However, fourthly, the growth rate of public sector expenditure on building and construction, at 8%, will be higher than the growth rate of private sector expenditure, at 5%, and there will be some crowding out effect as the public sector’s share of the output of the building and construction sector will increase further from 50.6% in 1980 to 51.3% in 1981(135). But, as the overall growth rate of expenditure on building and construction is forecast to be only 7%, which is probably not much greater than the likely growth in capacity, this crowding out effect should not be too serious.
(e) Private consumption expenditure and real income
133. Fifthly, the growth rate of private consumption expenditure, at 8%, will be consistent with the achieved growth rate of real income in 1980 of 9.1%, and the forecast growth rate in 1981 of 7.5%(136).
(132)
Growth rate of:
Public sector demand
Private sector domestic demand
(133) See paragraph 111 above.
(134) See paragraph 19 and 33 above.
(135)
Growth rate of:
Public expenditure on building and construction Private expenditure on building and construction Share of public sector
(136)
Growth rate of:
Private consumption expenditure
Real income
(Real income in previous year)
1980 Preliminary estimate
(%)
5.8
12.4
1980 Preliminary estimate
(%)
3.1
1.0
50.6
1980 Preliminary estimate
(%)
8.8
9.1
(8.8)
1981 Forecast (%)
14
9
1981 Forecast (%)
8
5
51.3
1981 Forecast (%)
8
7.5
(9.1)
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 495
(f) Imports and total exports of goods
134. Sixthly, the growth rate of imports of goods, at 13%, and the growth rate of total exports of goods, at 12%(137), will be roughly in line with each other as they were in 1980.
(g) External trade account
135. So, seventhly, the visible trade ‘gap’ will widen slightly to 13.2% in 1981 from 12.1% in 1980, but still within the range of our historical experience, and the visible and invisible trade ‘gap’ will widen to 5% from 3.7%. But in relation to flows of funds across the exchanges, this should not present a financing problem.
(h) Pressure of demand on domestic resources and inflation
136. Finally, there will be lower rates of increase in prices(138) as world inflation slows down and as the internal cost/price structure deflates (and commercial property prices will be influenced by the supply response which is now so apparent(139). It is possible that, in these circumstances, the unemployment rate may increase further, but it is implicit in the forecast that any such increase would be only temporary.
4.21 p.m.
HIS EXCELLENCY THE PRESIDENT:―Perhaps at this point Members might like a short break before the Financial Secretary speaks on his budget. Council will resume in ten minutes.
4.37 p.m.
HIS EXCELLENCY THE PRESIDENT:―Council will resume.
(137)
Growth rate of:
1980 Preliminary estimate
(%)
1981 Forecast (%)
(138)
Imports of goods 18.6 13 Total exports of goods 17.7 12
1980 Preliminary
Rate of increase in:
estimate (%)
1981 Forecast (%)
G.D.P. deflator 13.0 10 Consumer prices 15.5 12 (139) See f.n. (39) above.
496 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
THE FINANCIAL SECRETARY:―
PART IV: THE BUDGET FOR 1981-82
(1) Introduction
137. After the timely interruption (laughter), Sir, I should now begin to present the Draft Estimates of Expenditure, the Revenue Estimates and my revenue proposals for 1981-82. At the same time, I hope to be able to reassure Members that the levels of expenditure proposed, on both recurrent and capital account, are compatible with economic and monetary stability.
(2) Draft Estimates of Expenditure(140)
(a) Total expenditure
138. Total expenditure on General Revenue Account in 1976-77 was $6,577 million. The revised estimate of expenditure in 1980-81 is $19,677 million.
139. The Draft Estimates of Expenditure for 1981-82 as printed provide for total expenditure of $25,062 million but, on an adjusted basis, this figure becomes $24,063 million(141), which is an increase of $4,966 million, or 25%, on the revised estimate for 1980-81.
140. An explanation of the provision sought in each subhead under each head of expenditure is to be found in the Memorandum Notes in the Draft Estimates. But, as the Estimates are designed to record the limits of financial authority conferred on Controlling Officers, it is not easy to extract from them a clear idea of expenditure on particular programmes. So the statistical summaries in the Green Pages to the Estimates have been designed to assist in the interpretation of the Estimates themselves. In addition, in Annex (2) to the printed version of this speech, Members will find a descriptive analysis of the Government’s main programme areas, namely, public housing, the new towns, infrastructural facilities (particularly transport), social services and law and order and defence. The annex deals with the Government’s objectives, implementation to date and intentions provided for in 1981-82. All I need to do now, therefore, is to concentrate on the budgetary aspects, as it were, by describing the Draft Estimates by components of expenditure, on both recurrent and capital account, assessing each component by reference to our historical experience over the five post-recession years, 1976-77 to 1980-81.
(140) See Statistical Appendix, Table (14).
(141) On an unadjusted basis, the provision sought (i.e. the provision shown in the Draft Estimates and, therefore, reflected in the Appropriation Bill) is $25,062 million, comprising $15,188 million on recurrent account and $9,874 on capital account. All the adjustments are on capital account. Thus the unadjusted estimate of capital expenditure of $9,874 million may be reconciled with the adjusted estimate referred to in paragraph 150 below as follows: $9,874 million minus $332 million, being transfers to the Home Ownership Fund for land premia minus $28 million, being transfers to the Mass Transit Fund for the purchase of equity minus $32 million for the Jubilee Sports Centre (to be reimbursed from the Special Coin Suspense Account) minus $27 million for debt repayments=$9,455 million.
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 497
(b) Recurrent(142)
141. The provision sought for expenditure on recurrent services in 1981-82 is $15,188 million. This represents an increase of $3,238 million, or 27%, on the revised estimate for 1980-81 of $11,950 million.
142. Personal emoluments (including allowances, but not pensions) at $5,271 million account for 36% of recurrent expenditure, compared with an historical ratio based on actual experience in the five post-recession years of 40%. Of this total provision, $493 million is for some 17,600 posts which might be created during the financial year by Controlling Officers(143), or by Finance Committee in the case of directorate posts. The approved establishment of the civil service shown in the Draft Estimates is 125,831 posts(144) of which about 90% or, say, 113,500 are likely to be filled on 1 April 1981, that is to say, the vacancy ratio is likely to be about 10%, compared with an average of 8-9% over the past five years. This establishment represents an increase of 9,031 posts, or 7.7%, on the approved establishment of 116,800 posts(145) at 1 April 1980; and may be compared with the average annual growth rate of 4.5% for the previous four post-recession years.
143. As usual, the provision sought for personal emoluments does not allow for the cost of any revision of civil service salaries in 1981-82. At the same time, we await the advice of the Standing Commission on Civil Service Salaries as to the principles on which pay policy should, in future, be based.
(142)
Component 1981-82 Draft Estimates
Historical ratio, 1976-77 to
1980-81
($ mn) (%) (%)
(1) Personal Emoluments 5,271 36.1 39.8 (2) Departmental Other Charges 2,290 15.7 14.5 (3) Public Works Recurrent 891 6.1 6.1 (4) Recurrent Subventions 2,869 19.7 21.8 (5) U.P.G.C. 656 4.5 4.8 (6) Defence 1,375 9.4 4.8 (7) Pensions 449 3.1 3.6 (8) Public Debt 23 0.2 0.4 (9) Miscellaneous (excluding
Additional commitments(*)) 764 5.2 4.2 14,588 100.0 100.0
Add back: Additional commitments 600 ― ― Total Recurrent Expenditure 15,188 ― ― Note: (*) Their inclusion would distort the comparative analysis.
(143)But, of course, the new posts will have to be justified to the satisfaction of Controlling Officers, having obtained the advice of Departmental Establishment Committees and, in the event, the number of posts created during the year will be less than 17,600 (which would represent an increase of no less than 14%).
(144) Exclusive of 25,978 posts in the Urban Services and Housing Departments the personal emoluments (and on-costs) of which are met by the Urban Council and the Housing Authority, as the expenditure involved is only reflected in the Consolidated Account.
(145) Exclusive of 24,333 posts in the Urban Services and Housing Departments.
498 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
144. Provision for all other recurrent expenditure amounts to $9,917 million: Departmental Other Charges(146) at $2,290 million account for 15.7% of recurrent expenditure, slightly up on the historical ratio of 14.5%.
145. Public Works Recurrent expenditure(147) at $891 million accounts for 6.1%, the same as the historical ratio but, I must say, I am still not satisfied that we pay sufficient attention to maintaining our assets intact.
146. Recurrent Subventions and the U.P.G.C. at $3,525 million account for 24.2% of recurrent expenditure, down on the historical ratio of 26.6%. Overall, taking recurrent and capital subventions together, no less than $3,958 million, or 17% of total expenditure on General Revenue Account(148), will be disbursed by subvented organizations, that is below the historical ratio of 19.2%. But this is due to the surge in total expenditure envisaged in 1981-82 and not because the role of subvented organizations in the disbursement of public funds is on the decline. Expenditure by these organizations financed from General Revenue will be no less than 10% up on the revised estimate for 1980-81 of $3,590 million which, in turn, is up by 39% on actual expenditure in 1979-80. As a matter of interest, subventions from General Revenue in 1980-81 as a proportion of total expenditure by the various subvented organizations concerned are as follows:
%
Medical 77.5
Education 96.1
Social Welfare 67.0 (including grants from Lotteries Fund)
147. Defence at $1,375 million accounts for 9.4% of recurrent expenditure. This compares with an historical ratio of 4.8% for the five years 1976-77 to 1980-81 which happen to coincide with the term of the Defence Costs Agreement, to be replaced by a new agreement, which honourable Members are well aware, with effect from 1 April 1981(149).
(146) That is, all recurrent expenditure other than personal emoluments, Public Works Recurrent, subventions, defence, pensions, interest and service charges on public debt and miscellaneous services.
(147) That is, all expenditure connected with the maintenance of Government assets and the operation of various services such as water supply (including the purchase of water from China), sewage works, quarries, street lighting, etc.
(148) Excluding additional commitments, on both recurrent and capital account. (149) A new Defence Costs Agreement (D.C.A.) for a seven-year term commencing 1 April 1981 was signed on 10 October 1980 to replace the previous D.C.A. which remains in force until 31 March 1981. The new D.C.A. provides for an enlarged garrison (principally by the addition of a further infantry battalion) and for a more accurate calculation of its costs. The Hong Kong Government will continue to pay to the United Kingdom Government 75% of the assessed costs of the garrison, but will under take and initially pay for all capital works and maintenance under the Agreement. The United Kingdom Government’s 25% share of the works programme plus 25% of the revenue foregone by the Hong Kong Government (which might otherwise be collected in respect of services provided for the garrison or charges levied on it) are recovered by an appropriate reduction in the quarterly cash contribution made by the Hong Kong Government towards the cost of the garrison. The capital costs of the five replacement patrol craft for the Royal Navy’s Hong Kong Squadron are outside the new D.C.A., although subject to the same apportionment formula.
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 499
148. Within the miscellaneous component(150) of $1,364 million, $600 million is being sought for unquantifiable, but likely, commitments and for commitments unforeseen when the Estimates went to print. Some of these have been made known to Finance Branch recently, including a revision of the schemes for grants and loans to post-secondary students(151), a revision of the scheme for subsidizing students travelling on public transport(152), a possible scheme of assistance for students from Hong Kong undertaking courses of study leading to a first degree/diploma in the United Kingdom, the cost of back payments into approved provident funds for staff employed by subvented organizations(153), the cost of the 1981-82 Keep Hong Kong Clean Campaign, any increased expenditure which may be approved by Finance Committee under various votes as the District Advisory Boards are formed and start operating, and the cost of improvements to certain facilities for the care of handicapped children.
(149) See Head 106 Miscellaneous Services Subhead 100 Additional commitments.
(151) Provisions for the existing schemes are made under Head 190 Universities and Polytechnic Subhead 101 Student finance and also the Student Loan Fund (page 741 of the Estimates).
(152) Provision for the existing scheme is made under Head 40 Education Department Subhead 103 Subsidy for students travelling on public transport.
(149) In accordance with approved increased contributions, but payments. have not yet been made because of difficulties in ascertaining the length of service of employees.
500 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
(c) Capital
149 A comparative analysis of the capital account by component is provided in f.n.(154) (f.n.(191) to the printed version of this speech).
150. The provision sought for capital expenditure in 1981-82 in $9,455 million, an increase of 1,728 million, or 22%, on the revised estimate for 1980-81 of $7,727 million. The provision sought for 1981-82 includes $4,538 million for the two Public Works Programme components, $800 million for the Land Acquisition component and $2,114 million for the Housing Authority. Taking these four components together for comparative purposes, the provision sought in 1981-82 is $7,452 million, an increase of $1,922 million, or 35%, on the revised estimate for 1980-81 of $5,530 million which, incidentally, is only $101 million below the approved estimate.
(154)
Component
(1) Public Works Programme (other than New Towns
Revised Estimates 1980-81 ($ mn)
Draft
Estimates 1981-82 ($ mn)
and Housing) 1,803 2,650 (2) Public Works Programme (New Towns and
Housing) 1,346 1,888 (3) Land Acquisition 550 800 (4) Transfers to D.L.F. for on-lending to the Housing
Authority 1,831 2,114(*) (5) Transfers to Home Ownership Fund ― ― (6) Subventions:
Education 93 162 Medical 36 78 Miscellaneous 5 11
(7) University and Polytechnic Grants Committee 236 182 (8) Departmental Special Expenditure 285 471 (9) Defence Costs Agreement: Capital Works 20 119
(10) Defence; Miscellaneous Measures 946 245(**) (11) Other Transfers:
Emergency Relief Fund 4 3 Student Loan Fund 36 21 Development Loan Fund 400(***) ― (12) Miscellaneous 136 711(****)
Total Capital Expenditure 7,727 9,455
Notes: (*) It is estimated that the Housing Authority will draw $2,338 million from the Development Loan Fund: $2,020 million for the construction of public housing for renting (interest free, repayable over 40 years), $199 million for the construction of flatted factories and $119 million for the construction of commercial facilities for estates built under the Home Ownership Scheme (both at 8%, repayable over 20 years).
(**) Includes $131 million for the reprovisioning of Lyemun and Sham Shui Po barracks, $65 million for replacement patrol craft for the Royal Navy and $26 million for border defence works.
(***) A transfer approved by Finance Commitee on 11 February 1981 for a possible civil servants’ home purchase scheme.
(****) Includes $700 million for Head 106 Miscellaneous Services Subhead 275 Additional commitments.
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 501
151. The provision sought for Subventions and the U.P.G.C. is $433 million. For Departmental Special Expenditure the provision sought is $471 million, well up on the revised estimate for 1980-81 of $285 million as we seek to update and upgrade our stock of plant and equipment; and, incidentally, I believe we should be careful not to extend the physical life of our plant and equipment beyond its economic life. For the two Defence components the provision sought is $364 million.
152. The Miscellaneous component includes $700 million for additional commitments unforeseen when the Estimates went to print: $330 million has already been earmarked for an ex gratia one-off unconditional grant of $280 million to the Urban Council to meet an anticipated deficit in its accounts in 1981-82, and $50 million for the early repayment of the loan from the Asian Development Bank for the desalting plant(155), for I believe this particular loan should be paid off in full now that the plant is on a care and maintenance basis (against a future emergency) and not generating a cash flow. This leaves $370 million for extra costs in respect of on-going and new contracts(156), and for new projects assigned a high priority during the year.
(3) Revenue Estimates(157)
(a) Total revenue
153 Total revenue in 1976-77 was only $7,494 million. The revised estimate of revenue in 1980-81 is $29,000 million.
154. The Revenue Estimates as printed anticipate that total revenue collections will be $34,138 million but, on an adjusted basis, this figure becomes $33,774 million(158), which is an increase of $4,774 million, or 16.5%, on the revised estimate for 1980-81.
(b) Recurrent
155. My estimate of recurrent revenue in 1981-82 is $21,842 million, an increase of $3,468 million, or 19%, on the revised estimate for 1980-81 of $18,374 million. Within this estimate, direct taxes are estimated to contribute $10,005 million, or 46%, of total recurrent revenue, indirect taxes $4,977 million, or 23%, and all other recurrent revenue $6,860 million, or 31%.
(155) See head 134 Public Debt Subhead 104 Loans (Asian Development Bank) Ordinance: Single purpose desalting plant: Repayment.
(156) Estimates for works expenditure in 1981-82 are based on September 1980 prices. (157) See Statistical Appendix, Table (13).
(158) That is, comprising $21,842 million on recurrent account and $12,296 million on capital account. All the adjustments are on capital account. Thus the unadjusted estimate of capital revenue of $12,296 million may be reconciled with the adjusted estimate referred to in paragraph 166 below as follows: $12,296 million minus $332 million, being payments for land premia from the Home Ownership Fund minus $32 million, being a reimbursement from the Special Coin Suspense Account for the Jubilee Sports Centre=$11,932 million.
502 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
156. As regards direct taxes: at $10,005 million, the estimate is an increase of $1,970 million, or 24.5%, on the revised estimate for 1980-81 of $8,035 million, which was $2,311 million, or 40%, up on actual collections in 1979-80 of $5,724 million(159), such has been the growth rate of money incomes in recent years, particularly in the financial and related business services and property sectors(160) which now contribute, incidentally, 45% of total collections of profits tax.
157. The assumptions made in calculating the estimate of $6,675 million for profits tax in 1981-82 (up by 20% on the revised estimate for 1980-81) is that total profits assessable to tax in 1981-82(161) will be around 25% higher than profits assessed to tax in 1980-81; and that there will be an increase in hold-over orders from 12.5% in 1980-81 to 15% in 1981-82. However, if there were to be a sharp downturn in the economy, the effect on profitability of businesses could lead to the hold-over provisions of the provisional tax system being invoked on a larger scale than this and actual collections in 1981-82 being down on the estimate. Furthermore, in a situation in which the growth rate of profits eases back, the difference between final tax and provisional tax diminishes and so does the balance collectible in the following year.
158. The estimate of $1,950 million for salaries tax (up by 32% on the revised estimate for 1980-81) allows for the fact that provisional tax in 1980-81, being based on 1979-80 assessable incomes, will be less (probably much less) than 1980-81 final tax collectible in 1981-82. This is because money incomes in 1980-81 were on a fast rising trend and, therefore, there will be substantial balances to be collected in 1981-82. The estimate envisages that the number of salaries taxpayers in the net will be around 395,000 in 1981- 82, as opposed to 340,000 in 1980-81.
159. The estimate of $600 million for interest tax (up by 9% on the revised estimate for 1980-81) assumes double-digit in terest rates for some time to come
(159)
1979-80
Actual
($ mn)
1980-81
Revised
Estimates ($ mn)
1981-82 Estimates ($ mn)
Profits tax 3,832 5,565 6,675 Salaries tax 1,275 1,480 1,950 Personal assessment 103 120 140 Interest tax 216 550 600 Property tax 298 320 640
Total 5,724 8,035 10,005
[Profits tax:
Corporations 3,364 4,935 5,900 Other Businesses 468 630 775]
(160) These now contribute around 45% to total collections of profits tax (c.f. 15% for the manufacturing sector).
(161) Tax payable in 1981-82 equals final tax for 1980-81 in respect of profits in 1980-81 minus provisional tax already paid plus provisional tax for 1981-82 based on profits in 1980-81 plus second instalment of 1980-81 provisional tax payable in 1981-82 minus second instalments of provisional tax for 1981-82 payable in 1982-83.
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 503
and some diversion of funds out of equity investments into deposits with banks and deposit-taking companies.
160. The estimate of $640 million for property tax (up by 100% on the revised estimate for 1980-81) reflects the higher assessable values likely to be established by the reassessment exercise now in hand(162), and the application of these higher assessable values will go some way towards correcting the present inequity of treatment between non corporate and corporate property owners (including, in effect, non-corporate business proprietors), the latters’ actual income from property being brought into profits tax charge.
161. As regards indirect taxes: I have assumed that the yield from stamp duties will be $1,300 million, which is $625 million less than the revised estimate for 1980-81 of $1,925 million. This latter figure is, in turn, almost three times the original estimate, thanks to the fact that turnover recorded on the stock exchanges averaged nearly $8,000 million per month in 1980 (and there was substantial out of hours trading as well) and to the fact that the consideration on assignments of property, at some $2,800 million per month, has exceeded original expectations.
162. The estimate of $1,061 million for rates (up by 8% on the revised estimate for 1980-81) assumes that interim valuations of new premises will be about the same as this year, and takes into account the completion in 1980-81 of the rating of all rateable premises in the developed and developing areas of the New Territories and allows for the phased increases in the percentage rates charged(163).
(162) As explained in B.S., 1980, paras. 268-276. Property tax at the standard rate of 15% is levied on all non-corporate property owners, other than owner-occupiers and other special categories such as charitable institutions and clubs, on assessable values, less 20% for repairs and outgoings. Assessable values are, essentially, hypothetical figures estimated in the same way as rateable values, except where the rent is controlled when assessable values are equal to the permitted rent or authorized rent under the Landlord and Tenant (Consolidated) Ordinance.
(163) Year in which area became rateable
Rates charge for 1981-82 (%)
Tsing Yi 1974-75 11 Yuen Long 1976-77 11 Tai Po 1976-77 11 Sha Tin 1976-77 11 Tuen Mun 1976-77 11 Clearwater Bay Road 1976-77 11 Luen Wo Market 1976-77 11 Shek Wu Hui 1977-78 10 Sai Kung 1977-78 10 Cheung Chau 1980-81 7 Peng Chau 1980-81 7 Lantau 1980-81 7 Lamma 1980-81 7 Note: The total rateable value of rated premises in the New Territories will have
increased from $390 million at 1 April 1975, to an estimated $1,911 million at 1 April 1981, while the number of rated premises will have increased from 20,748 to about 86,000 over the same period.
504 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
163. I have assumed that the yield from bets and sweeps taxes will be $1,020 million, or 21% up on the revised estimate for 1980-81, which is 17% up on the original estimate.
164. The estimate of $943 million for dutiable commodities is nearly 4% up on the revised estimate for 1980-81 which is, however, down by 3.6% on the original estimate.
165. As regards all other recurrent revenue at $6,860 million: of this, no less than 45%, or nearly $3,100 million, is estimated to be interest earnings on the General Revenue Balance and on the balance in the Mass Transit Fund which, remember, also accrues to General Revenue until equity in the Mass Transit Railway Corporation is actually bought and paid for.
(c) Capital
166. My estimate of capital revenue in 1981-82 is $11,932 million, which is an increase of $1,306 million, or 12.3%, on the revised estimate for 1980-81 of $10,626 million.
167. Within this estimate of $11,932 million, land transactions are expected to bring in $11,498 million(164) (as opposed to the revised estimate for 1980-81 of a mere $10,077 million), taxi concessions are estimated to bring in a modest $86 million(165) and estate duty will bring in a not unhelpful $250 million.
168. Within the estimate of $11,498 million for land transactions, land sales by public auction and tender(166) are expected to yield $9,855 million from the sale of 196 acres, compared with the revised estimate for 1980-81 of $8,777 million from the sale of 156 acres(167); private treaty grants are expected to yield $1,087
(164) The estimate of $11,498 million is based on an assessment of the prices likely to be realized for the individual lots making up the land sales programme for 1981-82. That is to say, a view has been taken of the premia likely to be realized―and this view is, of necessity, subjective―and takes account of the change in the terms of sale for industrial purposes which requires payment of the full premium in a single lump sum. The estimate also includes instalments of premia payable to the Treasury in respect of commercial/residential and industrial lots sold in previous years. For sales in the New Territories, a provisional assessment has been made of the number of lots to be sold by auction and by Letters A/B tender, the revenue from the latter being particularly difficult to assess as it depends on the age of the Letters A/B offered by successful tenderers.
(165) For 331 licences only which will bring the total number of taxi licences in the Urban Areas up to the limit imposed under present policy of 10,000.
(166) Land sales being defined so as to include land disposed of by tender in exchange for Letters A/B, the lots themselves being either drawn from newly formed and serviced land or from areas released from other uses (e.g. open storage let on short term tenancies).
(167)
Industrial Non-industrial Total
1980-81 1981-82 1980-81 1981-82 1980-81 1981-82
(Acres) (Acres) (Acres)
Urban Areas 25.3 34.9 47.2 46.4(*) 72.5 81.3 New Territories 14.3 40.3 69.2 74.8 83.5 115.1 Total 39.6 75.2 116.4 121.2 156.0 196.4
Note:(*) This estimate could be on the low side for there are several large sites in the Victoria Barracks area which may be sold in 1981-82 depending on when planning processes can be brought to finality.
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 505
million(168), compared with the revised estimate for 1980-81 of $876 million; and modifications and regrants are expected to yield $556 million, compared with the revised estimate for 1980-81 of $424 million.
169. In the five post-recession years, land sales by public auction and tender have been 38 acres, 34 acres, 58 acres, 76 acres and 156 acres respectively. The fact that, in 1981-82, a further substantial area will be sold, namely, 196 acres, is a reflection of the build up of expenditure on development works recently(169).
170. The outlook for land sales should also be mentioned here: the forecast is for about 300 acres to be sold in each of these three years of the new forecast period 1982-83 to 1984-85(170). Together with private treaty grants and modifications and regrants, the revenue yields implied in these figures are such as to suggest that the financing of the capital account in the forecast period will continue to be much less dependent on the surplus on recurrent account than hitherto.
(4) Fiscal Policy
(a) Equity of the tax system
171. I said earlier that our tax system is no longer as equitable between different classes of taxpayers as it should be and I implied, accordingly, that it needed to be improved on(171). I am afraid that, according to the Revenue Estimates as printed, the equity of the system will further deteriorate with one exception: revenue from property tax in 1981-82 is estimated to double compared with 1980-81, partly as a result of the addition of new buildings, but mainly as a result of the reassessment of assessable values now in train(172). Thus the contribution of property tax to total collections of earnings and profits taxes will increase to 6.4% in 1981-82 from 4% in 1980-81 and may be compared with 9.4% in 1976- 77, the year of assessment in which the list of assessable values was established as a by product of the 1976 revaluation of rateable values(173).
(168) It has been assumed that only one site of 12 possible sites will be ready to be granted in 1981-82 to the M.T.R.C. for joint development with property developers.
(169) The gross figures for land production in f.n. (109) and paragraph 190 of the printed version of B.S. 1981 are, of course, inclusive of large areas appropriated for public housing, Government, institutional and community use, open space and roads.
(170) A Land Disposal Sub-Committee of the Special Committee on Land Production was set up during 1980 to monitor the six-monthly land sales programmes and to forecast likely sales eighteen months ahead. This arrangement is designed to provide early warning of any difficulties which may prejudice the fulfilment of the land sales programmes.
(171) See paragraph 78 above.
(172) See paragraph 160 above.
(173) Contribution of property tax to total recurrent revenue:
(%)
1976-77 3.7
1980-81 1.7
1981-82 2.9(*)
Note:(*) On the basis of the Revenue Estimates as printed.
506 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
172. As regards indirect taxes: rates are estimated to contribute only 4.9% to total recurrent revenue in 1981-82, compared with 5.4% in 1980-81 and 8.9% in 1977-78, when the new lists of rateable values came into effect for rating purposes. The only way I regret to say, that this trend can be reversed is by an increase in the General Rate percentage, because a revaluation of rateable values is not possible so long as rent controls extend to all residential premises(174). Apart from 1980-81, when they will contribute a remarkable 10.5% to total recurrent revenue, stamp duties contributed between 6% and 7.5% (an average of 6.8%) in the first four post-recession years and are estimated to contribute 6% in 1981-82. Dutiable commodities are estimated to contribute only 4.3% to total recurrent revenue in 1981-82, compared with 4.9% in 1980-81. The contribution of dutiable commodities has, in fact, I regret to say, been declining steadily since 1976-77, when it was 10%, partly because earnings and profits taxes are so income sensitive and partly because our excise duties are specific and not ad valorem and rates have not been updated to maintain incidence. The contribution of bets and sweeps taxes to total recurrent revenue, after peaking at 5% in 1977-78, has steadily declined since then to 4.6% in 1980-81 and to an estimated 4.1% in 1981-82.
173. Finally, of the other indirect taxes, the only one that is worth worrying about in terms of equity between classes of taxpayers is First Registration Tax on motor vehicles(175) which is estimated to contribute 2% to total recurrent revenue in 1981-82, compared with 2.2% in 1980-81, having peaked, if that is the right word, at 2.6% in each of the two previous years 1978-79 and 1979-80. Whether this represents a reasonable contribution to the revenue is debatable. I do not wish to be drawn into arguments about which of the three imposts borne by private motorists(176), namely, First Registration Tax, annual licence fees for vehicles and drivers and excise duty on hydrocarbon oils, would be the weapon most likely to be effective in any attempt to ensure that available road space is used as effectively as possible as our public transport services are diversified and improved or, indeed, I do not wish to be drawn into an argument as to whether any of these weapons should be used(177). But it is also debatable whether the total contribution of road users to total recurrent revenue is as high as it should be, having fallen from an average of 6.8% in the first four post-recession years
(174) B.S., 1980, paras, 262-266.
(175) Levied on all motor vehicles other than enfranchised public omnibuses.
(176) Just for the record, the number of private cars increased by 68% to 175,000 between 1976- 77 and 1980-81, whereas goods vehicles and all other vehicles increased by only 37% and 26% respectively (to 51,000 and 40,000).
(177) Particularly when account is taken of the recent increases in the before-tax prices of petrol and automotive diesel oil.
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 507
to 5.3% in 1980-81 and being estimated at only 4.8% in 1981-82. And Mr. Lo will find some very interesting data at footnote(178) (laughter).
(b) Sources of additional revenue
174. Now, because I have five tax concessions to propose at a very substantial cost to the revenue, I had to consider not only tapping the reserves of taxable capacity indicated in the present inequitable distribution of the burden of taxation between different classes of taxpayers, but also restoring the loadings on royalty-loaded fees(179) and tax-loaded fees and charges(180) to the extent that they have been eroded by inflation and I had to consider also updating cost-related charges including those raised by our various public utility-type undertakings(181).
175. As regards our reserves of taxable capacity: I warned honourable Members last year that, in the absence of a revaluation of rateable values the General Rate percentage could be ―and in terms of equity between different classes of taxpayers should be―raised to increase revenue from rates. Stamp duties on contract notes and assignments of property could easily be raised, I think, without discouraging commercial transactions and, therefore, breaching the neutrality principle which I described as the second requirement of the tax system at paragraph 73 above. Without necessarily arguing that declining incidence means that the point of diminishing returns has not yet been reached, some adjustments to some rates of duty on dutiable commodities ought to be productive of more revenue, albeit carrying a possible risk of adding to
(178)
Year
Hydrocarbon oils
($ mn)
Vehicles and drivers’
licences
($ mn)
F.R.T. ($ mn)
Total ($ mn)
Total as % of recurrent
revenue
1976-77 188 168 102 458 6.7 1977-78 212 183 148 543 6.7 1978-79 242 218 259 719 7.1 1979-80 261 265 360 886 6.6 1980-81 288 298 395 981 5.3 1981-82 311 300 435 1,046 4.8
(179) Royalty-loaded fees are payments for permission to engage in certain activities and trades, viz: licences required for various regulated activities and trades (e.g. bank licences). The level of fees imposed is not directly related to any costs which may be incurred in their regulation.
(180) Tax-loaded fees and charges are levied for services rendered or permissions given. They are set above the level necessary to recover full costs specifically for the purpose of raising revenue.
(181) Cost-related charges fall into three groups:
(a) those which do not cover the full cost (including the cost of capital) of the services provided, because there is a case on policy grounds for part of the cost of the services concerned being borne by General Revenue;
(b) those which are designed to cover the full cost (including the cost of capital) of the services provided. These charges may, from time to time, be set at a level above that necessary to recover full cost to deter usage for policy reasons;
(c) those which are set for the public atility-type undertakings operated by the Government and which are designed to recover the full costs of operation and to earn a required return on capital employed.
508 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
inflationary pressures (but wholesalers’ and retailers’ absolute profit margins must have widened in recent year)(182). Certainly, there is scope for raising extra revenue from bets and sweeps taxes, there is no doubt about that, because I cannot believe that punters as a class of taxpayer should be contributing less than, say 5%, to total recurrent revenue(183) particularly when totalizator turnover has increased from $2,580 million in the (financial year) 1976-77, to well in excess of $8,200 million in 1980-81 and is predicted to be about $10,500 million in 1981-82. Finally, there is scope for some innovations in the taxation of motorists―first registration tax(184), annual licence fees and fees and fees for vehicles and drivers(185) and duty on hydrocarbon oils―again on the grounds of equity between classes of taxpayers and likely price elasticities.
176. As regards royalty-loaded fees and tax-loaded fees and charges: many of these fees and charges should be increased by up to 100% and more to restore the original loadings; and, as regards cost-related charges, many of these are, for one reason or another, up to five years or more out of date. Phase III of the Financial Information System means that we shall have available, in due course,
(182) Incidence of duties (examples only):
Present
incidence
(January 1981)
(%)
Liquor:
Effective
date of last duty change
Incidence immediately thereafter (%)
Brandy (V.S.O.P.) 3 December 1975 40 26 Whisky (Ordinary) ditto 58 41 Gin ditto 59 45 Beer: imported 24 July 1980 14 14
local ditto 14 14 Chinese type spirit:
imported 3 December 1975 28 25 local ditto 26 20 Tobacco:
Cigarettes:
imported (U.K.) 1 March 1978 34 24 imported (U.S.) ditto 30 21 local 3 December 1975 37 25 Hydrocarbon oils:
Motor spirit(*) 25 February 1976 35 20 Diesel oil for road vehicles(*) ditto 34 16 Note: (*) Metrication was introduced on 1 January 1981, but this was not considered a duty
change. The calculations here are inclusive of the increase in prices announced by the oil companies in January 1981.
(183) A new rate of tax of 11% for exotic bets was introduced in 1975 (see C.S., 1975, paras. 41-42), but the rate for traditional bets has remained unchanged at 7½% since 1931. The average on-course bet per punter per daytime race meeting has increased from $570 million in the (financial year) 1976-77 to an estimated $1,174 million in 1980-81 and is predicted to be well over $1,400 million in 1981-82. Even having regard to the importance of discouraging illegal off-course bookmakers, there is obviously scope for increasing the yield from betting taxes by reducing the Jockey Club’s commission (at present 9¼%) and, perhaps, even the proportion available for prize money (83¼%).
(184) Rates of F.R.T. were last raised on 1 March 1979 (see B.S., 1979, paras. 193-197).
(185) Licence fees for vehicles were last raised on 1 march 1979 (see B.S., 1979, paras. 202-210). Fees for drivers’ licences have remained unchanged since 1 March 1974 (see B.S., 1974, paras. 168-169).
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 509
up-to-date information on costs, thereby enabling us to make adjustments to all fees and charges on a routine basis any time during a year as a purely routine management exercise. I emphasize on a routine basis, because not to keep them up to date means that users are cross-subsidized from General Revenue or cross-subsidized to a greater extent than intended (and this is particularly objectionable in principle in the case of fees and charges payable by business enterprises(186).
177. So, even ignoring the possibility of increasing some tax rates (as opposed, for example, to simply restoring the incidence in the case of excise duties) or widening the ambit of some of our revenue laws (as opposed, for example, to reform measures designed to reinstate an original intention or to respond to changing commercial practices), it is apparent that we have various options at our disposal to finance any necessary and desirable tax concessions and to correct the falling trend of recurrent revenue to total expenditure. However, I do not intend to invoke any of these options at this time in view of the present state of our public finances generally, even though it could be argued that, to do so, would be entirely justified on macro-economic policy grounds.
(c) Management of public utility-type undertakings
178. But, in the case of our six public utility-type undertakings the importance of observing the no-subsidy principle cannot be overlooked, that is to say, the charges set must cover the full costs of operation and earn a required return on capital employed. It is clear from the latest operating accounts of our several undertakings(187) that only in the case of the airport and the Post Office(188) is the return on average net fixed assets satisfactory.
179. I should just mention here that the Postmaster General intends to make certain adjustments to postal charges during the coming year. Essentially these adjustments will be designed to meet international obligations and to rationalize part of the system of postal rates and fees. A few services will become more expensive and a few slightly cheaper. I expect the consequences will be neutral in
(186) For example, the present fee payable for textile export licences now covers only 50% of the cost of issuing quotas.
(187) See Annex (3).
(188) The return on average net fixed assets was 31.2% in 1979-80. It will be around 16.5% in 1980-81, but will fall to 1% at today’s prices in 1981-82. In other words, if there are no changes to postal rates further to those mentioned here, the rate of return could well become negative during 1981-82. The profitability of the Post Office in terms of individual services is variable. Losses are particularly marked for the local inland services and the rates for these services cannot remain at their present low levels for much longer.
510 HONG KONG LEGISLATIVE COUNCIL―25 February 1981 terms of the revenue and thus will result in no change in the profitability of the Post Office(189).
180. But it is equally clear that the Kowloon-Canton Railway and waterworks undertakings are making losses and over the next four years, 1981-82 to 1984-85, the position of each will worsen, and worsen seriously, particularly as further substantial capital investment is being made in both undertakings. I fear, therefore, that their fare/tariff structures will have to be looked at again closely before very long (but this will be coupled with a re-examination of the assumptions underlying their operating accounts).
(d) Tax concessions proposed for 1981-82
(i) Personal taxation (i.e. salaries tax and personal assessment)
181. So I come, Sir, to my five tax concessions for 1981-82: my first concession, and it is really a package of concessions, stems from my oft-repeated, but generally ignored, undertaking to review the system of personal taxation periodically, having regard to our current budgetary situation, and the need to maintain equity as between different income groups(190) at a time when the growth of money incomes is leading to fiscal drag(191).
182. As regards our current budgetary situation: it is no part of this Government’s policy to contemplate, let alone plan for, a growth rate of total expenditure in excess of budgetary requirements unless considerations of macro-economic policy apply(192) as they do this year(193). But I accept that the level of our ‘free’ fiscal reserves, at $10,300 million or 42% of budgetted for
(189) As regards the main privately owned public utility-type undertakings the Government exercises a degree of control over their charges to ensure that they do not make excessive profits as a result of their monopolistic or quasi-monopolistic position in the market. At the same time, they are allowed to make profits sufficient to encourage their shareholders to remain in that business and to expand sufficiently to keep up with demand. Within this constraint, and provided the Government is satisfied the undertaking is run efficiently, charges sufficient to recover costs and to earn an acceptable rate of return are―for they must be―permitted. Incidentally, increases in charges raised by all public utility undertakings (public as well as private) account for a very much smaller proportion of the increase in the cost of living as measured by the C.P.I. than generally imagined:
Rate of increase due
Year
Rate of increase in C.P.I. (A)
(%)
to increase in price of public utilities (%)
1976 3.4 ― 1977 5.8 0.1 1978 5.9 0.1 1979 11.6 0.5 1980 15.5 1.4
(190) In accordance with the fifth requirement of the tax system: see paragraph 76 above. (191) See paras. 182-184 below.
(192) As envisaged in the sixth requirement of the tax system: see paragraph 77 above. (193) See paras. 212-214 below.
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 511
expenditure in 1981-82 of $24,670 million(194), is well in excess of the guideline of 15%, and estimated revenue in 1981-82 is no less than 137% of estimated expenditure. Yet the difference between the Draft Estimates of Expenditure and the Revenue Estimates of $9,131 million is largely due to the absence of a deficit on capital account―indeed a surplus has emerged―and it would be clearly imprudent, despite the healthy state of our ‘free’ fiscal reserves, to dissipate this overall surplus on tax concessions which are, moreover, by their very nature, recurring.
183. As regards the implications of fiscal drag for equity: money incomes per capita increased by 19% in 1980. Taxpayers are thus being pushed up the scale of effective rates of tax(195) and this means that their tax liability in relative terms is tending to increase; although, let me hasten to add, this does not mean they cannot afford any additional burden at all, if necessary, for real incomes per capita have increased also, albeit at a slower rate (at 5.5% and this is an average measure only). But, in present circumstances, there is no need for the tax burden to be increased.
184. Further, the growth of money incomes per capita over time means that the tax net tends to embrace an ever growing number of economically active persons. Given the Government’s revenue requirements, this is not necessarily unreasonable to the extent that the growth of money incomes per capita is associated with improvements in real terms. But it has always been our policy to pitch the levels of the entry points into the tax net, the so called thresholds, high and to keep out of the tax net those who might otherwise be brought to charge solely because of the effects of inflation on money incomes.
185. So, notwithstanding the complete failure of most commentators to look at the actual tax liability of persons in various circumstances, I at least need no persuading, first, that the thresholds are now too low; secondly, that the impact of effective rates of tax needs to be stretched out over a broader spectrum of incomes; and, thirdly, that the levels of gross income at which the standard rate of 15% is applicable need to be lifted.
186. Any adjustments to our system of personal taxation involve technical difficulties, to a greater or lesser extent, and have financial implications for taxpayers and the revenue, which are acceptable to a greater or lesser extent. But, after examining various options with the Commissioner of Inland Revenue over the past four months (laughter), my package of proposals is as follows: first, I propose an increase in the level of personal allowances from $12,500 to $15,000 for single persons and from $25,000 to $30,000 for married persons. At the same time, I propose an increase in the present supplementary personal allowances from $2,500 to $7,500 for single persons and from $5,000 to $15,000
(194) See paragraph 89 above.
(195) Tax payable as a percentage of gross chargeable income minus expenses, but before the deduction of any eligible allowances.
512 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
for married persons; and I further propose that the claw-back(196) continue to be zero rated meaning that taxpayers at all levels of income will enjoy the full benefit of the supplementary personal allowances, save those on high incomes to whom the standard rate applies. Thus, if my proposals are agreed, the personal allowance and supplementary allowance for single persons will together become $22,500, compared with $15,000 at present, a very substantial increase of no less than 50%; and for married persons they will become $45,000, compared with $30,000 at present, again an increase of 50%
187. Secondly, I propose an increase in child allowances from $5,000 to $7,000 for the first child (or 40%) and from $4,000 to $5,000 for the second child (or 25%). A two-child family is fairly typical nowadays(197) and, as I regard the present allowances of $3,000 for the third child, $2,000 for the fourth to the sixth child and $1,000 for the seventh to the ninth child as adequate, for various reasons, I do not propose they be changed.
188. Thirdly, I propose an increase in the dependent parent allowance from $5,000 to $7,000 (or 40%). The criteria for the granting of this allowance, now claimed by some 65,000 taxpayers in respect of some 80,000 dependent parents, will continue to apply(198); although this will mean that, in certain circumstances, a taxpayer contributing only the minimum qualifying annual contribution of $1,200 to a dependent parent will enjoy tax relief in excess of this figure.
189. This package of proposals will be effective for final salaries tax assessments for 1980-81 (and for personal assessments also) and provisional salaries tax for 1981-82. The cost to the revenue in 1981-82, after allowing for the two-instalment system for the payment of provisional salaries tax(199), will be $673 million(200) or no less than 32% of estimated revenue from personal
(196) The device whereby the supplementary allowance is, by the application of a percentage reduction, progressively withdrawn and eventually eliminated when assessable incomes exceed a specified limit (see section 42B(1) (aa) and (bb) of the Inland Revenue Ordinance and B.S., 1977, paras. 211-212).
(197) In 1978-79 there were 291,000 salaries taxpayers of whom 170,000 were single, 26,000 were married with no children, 55,000 were married with one or two children and 20,000 were married with three or more children (and there were 20,000 persons on the standard rate).
(198) B.S., 1979, Annex (10).
(199) Provisional tax and, therefore, the two-instalment system, does not apply to personal assessment.
(200) 1981-82 ($ mn)
Under salaries tax:
‘Full’ year ($ mn)
Personal allowances and supplementary allowances 536 298 Child allowances 44 25 Dependent parent allowances 18 10
Under personal assessment:
Allowances 75 75 Total 673 408
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 513
taxation as reflected in the printed Revenue Estimates for 1981-82 of $2,090 million(201). The cost in a ‘full’ (i.e. an ordinary) year will be around $408 million at present levels of chargeable incomes.
190. The effect of this package of proposals will be to exempt 85,000 persons previously liable to salaries tax, and a further 55,000 persons, who would have become liable in 1981-82, will remain out of the tax net. Thus the number of salaries taxpayers for the year of assessment 1981-82 will be 255,000, as opposed to the 395,000 presently envisaged in the net without this package of concessions. Additionally, 237,000 of these 255,000 taxpayers will benefit by way of reduced liability. The remaining 18,000 or 7% of the total number of taxpayers left in the net will not benefit for they will remain on the standard rate of 15% and this group will continue to contribute well over half of the total yield from salaries tax. So much for the idiotic claim that the less well paid subsidize the better off.
191. For the record, a further 45,000 persons who elect for the advantages available under personal assessment will benefit from this package of concessions.
192. Examples of the effects of the new allowances on persons at various income levels and in various personal circumstances appear at Annex (4) to the printed version of this speech. A table showing the present and future effective rates of tax at different income levels for persons in various personal circumstance is at Annex (5). And I have set out at Annex (6) the income levels at which persons in various personal circumstances will become liable at the standard rate in future.
193. I would plead that these annexes be examined with care. For example, just consider the very considerable relief which persons in various personal circumstances at different income levels will enjoy if my package of proposals is implemented: a single person on an annual income of $23,500 will pay $50 in tax, a reduction of $375 on his present liability of (only) $425. A married person on an annual income of $46,000 will pay $50 in tax, a reduction of $1,050 on his present liability of (only) $1,100; a married person with two children on an annual income of $58,000 will pay $50 in tax, a reduction of $1,350 on his present liability of (only) $1,400; while a married person with two children and two dependent parents on an annual income of $72,000 will pay $50 in tax, a reduction of $1,900 on his present liability of (only) $1,950.
194. At the same time, a single person will now pay at the standard rate of 15% on an annual income of $106,250, compared with $87,500 at present. A married person will now pay at the standard rate of 15% on an annual income of $162,500, compared with $125,000 at present; a married person with two children will now pay at the standard rate of 15% on an annual income of $192,500, compared with $147,500 at present; and a married person with two
(201) See also f.n. (159) above.
514 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
children and two dependent parents will now pay at the standard rate of 15% on an annual income of $227,500, compared with $172,500 at present.
195. I would earnestly suggest, Sir, that this package of proposals will meet the claims of those who argue that the low income earner is in dire need of relief from his tax ‘burden’, that greatly over used word, although I would deny that the low income earner is significantly affected by our salaries tax system at all. The package will also afford considerable relief for those who claim to belong to the ‘sandwiched’ society; and to middle income earners as well for, even their tax liability is, in percentage terms, very modest compared with their other personal liabilities.
196. At the same time, to those Members and taxpayers and potential taxpayers who keep arguing that allowances under our system of personal taxation have not kept pace with inflation and who fail to remember that elsewhere in the world the real burden of taxation has steadily increased(202), and who choose to ignore that in Hong Kong we have a fiscal system designed to do no more than produce sufficient revenue for our even growing needs, without recourse to debt, I would say this: between the years of assessment 1973-74 and 1979-80, the personal allowance for a single person increased from $10,000 to $15,000 and the personal allowance for a married man from $20,000 to $30,000, that is to say, an increase of 50% in each case. Without conceding, for one moment, that there is a need to fine tune allowances in accordance with changes in the purchasing power of money incomes generally, this 50% increase in personal allowances almost exactly offset the effects of the increase in prices over the period as measured by the C.P.I. Yet this year’s proposals alone lift personal allowances by yet another 50%, or by more than three times the rate of inflation, in 1980. So, obviously, I do not believe in fine tuning!
197. Before leaving personal taxation I feel bound to comment on the somewhat vociferous claims heard recently to the effect that our direct tax system is one wherein the ‘rich’ are subsidized by the ‘poor’, the so-called ‘rich’ by the so-called ‘poor’. The respective contributions to the revenue of salaries tax and profits tax just do not support such claims. On the contrary, over the years, the contribution from profits tax has consistently, and significantly, outstripped that from salaries tax. Thus, in 1979-80, for example, the contribution from profits tax amounted to 67% of total collections of earnings and profits taxes compared with only 22% from salaries tax; in 1980-81, the contribution from profits tax is no less than 69%, while that from salaries tax, despite fiscal drag, has declined to 18%. If this package of concessions I have just proposed is approved by this Council, the contribution from profits tax will increase to 70% of the estimated total collections from earnings and profits taxes in 1981-82, whilst that from salaries tax will further decline to no more than 15%.
(202) For a variety of budgetary and non-budgetary reasons: for a comparative analysis of personal taxation in Hong Kong, Singapore, Malaysia and the United Kingdom, see Annex (7).
HONG KONG LEGISLATIVE COUNCIL―25 February 1981 515
(ii) Business taxation
198. Against this background, I come to my second and third concessions, which relate to business taxation: my second concession will benefit all corporate businesses. When I was seeking out ways and means of raising extra revenue in 1976 (unnecessarily as it turned out(203)) (laughter), I proposed(204), and it was subsequently agreed, that a temporary loading of an extra half percentage point should be added on to the 1½ percentage points (or 10%) surcharge on the standard rate of corporation profits tax of 15%. The surcharge concept itself was introduced in 1975 as a device pending the introduction of a dividend withholding tax(205): that idea came to a somewhat untimely end and so the surcharge concept has remained with us (laughter).
199. But I think this is an opportune time to remove the half percentage point loading levied with effect from the year of assessment 1976-77, thus returning the effective rate of corporation profits tax to 16½%. The cost to the revenue in 1981-82 will be $206 million, or 3.5% of estimated revenue from corporation profits tax as reflected in the printed Revenue Estimates for 1981-82 of $5,900 million(206). In 1981-82, both final profits tax assessments for 1980-81 and provisional profits tax for 1981-82 will be affected and the calculation of the cost to the revenue allows for the two-instalment system for the payment of provisional profits tax. The cost in a ‘full’ (i.e. an ordinary) year will be $139 million. Lest it be thought that this proposal will only benefit a few large corporations, may I remind honourable Members that the number of limited liability companies paying corporation profits tax is presently of the order of 18,000, many of which are small family-owned businesses.
(iii) Depreciation allowances
200. My third concession is designed to offer encouragement to manufacturers and others to re-equip and upgrade their plant and equipment as our economy faces up to the challenges of a changing world trading environment. The average annual growth rate of private sector expenditure on the plant, machinery and equipment component of gross domestic fixed capital formation was 30% in money terms and 22% in real terms for the five post-recession years. As a proportion of G.D.P., private sector expenditure on plant, machinery and equipment increased steadily from 10% in 1975 to 14% in 1980. I would like to see both the growth rate of such expenditure and its relative importance even higher.
201. As a result of a new Table made by the Board of Inland Revenue under the Inland Revenue Rules on 9 April 1979, the existing 20% annual rate of depreciation allowance was absorbed into the 25% rate and this now applies to
(203) For the budgetted for deficit of $491 million (or $355 million after taking out various revenue proposals) turned into a surplus of $917 million.
(204) B.S., 1976, paragraph 177.
(205) B.S., 1975, paras. 90-94.
(206) See also f.n. (159) above.
516 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
15 out of 33 heads, the other 18 heads attracting rates of 5%, 10%, 15% and 30%.More recently, a ‘pooling’ system for capital expenditure on two or more assets ranking for the same rate of annual allowance was introduced. I now propose that the 33 heads be re-grouped under three rates of annual allowance of 10%, 20% and 30%(207). Additionally, by way of offering further encouragement, I also propose that the initial allowance should be increased from 25% to 35%(208). Thus, for example, for an item of equipment ranking for the annual rate of allowance of 30%, the write-off allowed for profits tax purposes in the year of purchase will be 54.5%. The cost to the revenue of these more generous allowances will be $203 million in 1981-82, after allowing for the two instalment system for the payment of provisional profits tax. Again, both final profits tax assessments for 1980-81 and provisional profits tax for 1981-82 will be affected. The cost will be $119 million in a ‘full’ (i.e. ordinary) year(209).
(iv) Estate duty
202. My fourth concession concerns estate duty: in response to rising asset values I have, on three occasions, increased the limit below which duty on the estates of deceased persons is not payable, from $200,000, the limit prevailing between 1970 and 1974, to $600,000 for the estates of persons dying after 11 July 1980. On reflection, and with the benefit of hindsight, I do not think I went far enough last year. So, I now propose the limit should be raised to $1 million for persons dying after the enactment of the necessary legislation. The cost to the revenue will be approximately $13 million in 1981-82 and perhaps in the order of $17 million in 1982-83.
(v) Stamp duty on conveyances of low value properties 203. Last year, a new platform was introduced for the concessionary rate of ad valorem duty on conveyances of low value properties provided for under Head 19(1) of the Schedule to the Stamp Ordinance. While the limit for the fixed concessionary rate of $20 remained at $100,000, the limit for the concessionary ad valorem rate of duty of 1% was raised by $75,000 to $250,000. Thus, the full ad valorem rate of duty of 2¾% became payable on properties above $250,000, compared with $175,000 previously.
204. In recognition of the even higher level of prices of domestic flats now prevailing, fifthly I propose that the limit for the fixed concessionary rate of $20 be raised to $250,000 and the limit for the concessionary ad valorem rate of duty of 1% be raised to $500,000. The cost to the revenue of raising these limits will be no less than $155 million in 1981-82, or about 22% of estimated revenue from stamp duty on assignments reflected in the printed Revenue Estimates for
(207) The Board of Inland Revenue will, accordingly, be invited to make a new Table under Rule 2 of the Inland Revenue Rules, but Annex (8) is indicative of what the new Table will look like.
(208) This proposal will require an amendment to the Inland Revenue Ordinance itself. (209) In the long term, the cost will be nil for the effect of increased depreciation allowances is simply to accelerate the rate at which allowances are granted, although the beneficial cash flow effect is important to the business community.
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1981-82. The usual marginal relief arrangements will, of course, continue to apply to these new limits. About 48,000 purchasers of flats will benefit from these higher limits (and, remember, it is the purchaser who, in practice, pays the duty on the assignment).
205. The new platforms of $250,000 and $500,000 will have to be extended also to Head 53(1) voluntary dispositions inter vivos.
(vi) Implementation
206. As Your Excellency this morning signed the necessary Order under the Public Revenue Protection Ordinance, the new limits for the concessionary rates of stamp duty on conveyances of low value properties will be effective from the opening of business tomorrow morning. Bills to amend the Inland Revenue Ordinance to provide for my proposals in respect of personal taxation, corporation profits tax, the initial depreciation allowance for plant and machinery and estate duty will be introduced into this Council as soon as possible.
(5) Outturn and Assessment
(a) Outturn and state of fiscal reserves
207. The cost to the revenue of my five tax concessions is $1,250 million(210) and thus my estimate of total revenue for 1981-82 becomes $32,524 million. The difference between this figure and the estimate of total expenditure of $24,643 million, namely, $7,881 million, is the surplus I am budgetting for on General Revenue Account in 1981-82(211). This represents 24% of revenue as now estimated and, whilst it is about twice the relative size of the surplus in the first three years of the post-recession period, it is below the relative size of the expected surplus for 1980-81 of 32%(212). The reason is, of course, that the increase in expenditure in 1981-82 on 1980-81 is 25%, but the increase in
(210) Classifying the five tax concessions in terms of our tax requirements (see paras. 72-77 above): Proposal Requirement
Personal taxation Fifth (& converse of First)
C.P.T. Fifth (& converse of First)
Depreciation Sixth
Estate duty Fifth
Stamp duty on conveyances of low
value properties Fifth & Sixth
(211) $ mn $ mn Revenue:
Recurrent 20,605 ― Capital 11,919 32,524 Expenditure:
Recurrent 15,188 ― Capital 9,455 24,643
Surplus on recurrent account ― 5,417 Surplus on capital account ― 2,464 Overall surplus ― 7,881
(212) See f.n. (57) above.
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revenue is only 12%, compared with the increase in expenditure in 1980-81 on 1979-80 of 42% and the increase in revenue of 73%(213).
208. Should this budgetted for surplus materialize our ‘free’ fiscal reserves at 1 April 1982 will be of the order of $18,100 million(214). Obviously, therefore, at that date we shall be well in excess of the guideline of 15% of budgetted for expenditure, whatever that may be, in 1982-83; and probably even more so than at 1 April 1981 when our ‘free’ reserves will stand at about 42% of estimated expenditure budgetted for in 1981-82(215).
(b) Budgetary guidelines
209. An analysis of the Draft Estimates of Expenditure and the Revenue Estimates (amended to allow for the cost of the five tax concessions) in terms of our budgetary guidelines(216) dramatically illustrates the effect of the enormous increase in capital expenditure on Guideline (3), which requires that the surplus on recurrent account should be sufficient to meet 60% of capital expenditure; and on Guideline (1), which requires that at least 88% of total expenditure should be financed by recurrent revenue. Both guidelines will be breached but, fortunately, this does not matter because capital revenue is no less than 126% of capital expenditure. In other words, the financing of the capital account in 1981-82 is in no way dependent on the surplus on recurrent account (a repeat of our experience in 1980-81); and, therefore, the fact that recurrent revenue is meeting too small a proportion of total expenditure is acceptable. The obvious conclusion to be drawn is that the original purpose of the guidelines, namely, to secure the financing of the capital account has been, at least for the time being, somewhat overtaken by events but I shall return to this subject shortly.
(c) Balance of the fiscal system
210. As regards the balance of the fiscal system(217), although the cost of my five tax concessions largely affects the yield from direct taxes, the ratio of direct
(213) See Statistical Appendix, Table (11).
(214) That is, $10,300 million being our ‘free’ fiscal reserves at 1 April 1981 (see paragraph 89 above) plus $7,826 million (i.e. the expected cash book balance at 31 March 1982 without the adjustments made for analytical purposes) = say, $18,100 million.
(215) See Statistical Appendix, Table (15).
(216) ($ mn) (%) Ratio Recurrent revenue 20,605 (1) Total expenditure = 24,643 = 84 At least 88% Recurrent expenditure 15,188 (2) Recurrent revenue = 20,605= 74 No more than 80% Surplus on recurrent account 5,417 (3) Capital expenditure = 9,455= 57 At least 60% Recurrent expenditure 15,188 (4) Total expenditure = 24,643= 62 No more than 70% Capital revenue 11,919 (5) Capital expenditure = 9,455 = 126 At least 20%
(217) See Statistical Appendix, Table (16)
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to indirect taxation will further deteriorate to 65:35 in 1981-82 from 61:39 in 1980-81, which is some distance away from the guideline ratio of 55:45. The ratio of direct and indirect taxation taken together to all other recurrent revenue will be 67:33 in 1981-82, compared with 72:28 in 1980-81, the guideline ratio being 70:30, but this improvement is much more apparent than real inasmuch as the contribution of interest earnings on the General Revenue Balance to all other (non-tax) recurrent revenue will be as high as 45% in 1981-82, compared with 33% in 1980-81.
(d) Steady progression guideline
211. As regards the steady progression guideline of 10%, the (adjusted) provision in the Draft Estimates of Expenditure implies a growth rate in real terms of 12.5%, compared with 20.1% in 1980-81 and an average annual growth rate for the five post-recession years of 12.7%.
(6) The Public Sector and the Economy
212. Finally, I must assess the likely impact of the public sector, defined in terms of the Consolidated Account, on the economy, which I argued earlier would enjoy growth with a fair measure of stability in 1981(218).
(a) Growth and the relative size of the public sector(219)
213. The average annual growth rate of expenditure on Consolidated Account in real terms for the five post-recession years was 13.8%, which exceeded the growth rate of G.D.P. at 11.3% over the same period. After accelerating from 5.2% in 1976-77 to 15.5% in 1977-78 and to 21% in 1978- 79, the growth rate of expenditure was slowed down to 7% in 1979-80. It then accelerated again to 21.4% in 1980-81 (not entirely by design) and, although it will slow down to 12.8% in 1981-82, it will be well in excess of the forecast growth rate of G.D.P. in 1981 of 8%. Thus the relative size of the public sector will further increase from its historical high of 21.2% in 1980-81 to 22.4% in 1981-82(220), reflecting the fact that the growth rate of expenditure on Consolidated Account is higher than the growth rate of the economy, rather than a serious slow down in the latter. An increase in the relative size of the public sector of this order is, I think, just about acceptable on macro-economic grounds. Although the public sector surplus will be smaller than in 1980-81, it will still be very substantial, representing a further net draining off of spending power. Furthermore, my forecast of the state of the economy, which incorporates this increase in public expenditure, is for a growth rate of total final demand which does not exceed that of the G.D.P. (excluding the effect of re-exports) and a rate of unemployment at least as high as in 1980, suggesting that there is room for the
(218) See paras. 128-136 above.
(219) See Statistical Appendix, Table (9).
(220
Consolidated Account Expenditure = ⋅ =
28,268 at Current price Gross Domestic Product 126,430
100 22.4%
520 HONG KONG LEGISLATIVE COUNCIL―25 February 1981
growth rate of public sector expenditure proposed. However, the scope for further enlargement of the relative size of the public sector is very limited indeed.
(b) Net balance of the public sector
214. On General Revenue Account the budgetted for surplus is $7,881 million and on Consolidated Account it is $7,381 million(221). As in the last two years, to ensure that the surplus on General Revenue Account has a constraining effect on domestic demand by the private sector, and hence on total domestic demand, the increase in the Government’s Hong Kong dollar balances will be invested so as to prevent it feeding back into the financial sector’s credit base, with unwanted consequences for inflation. That is to say, the increased balances(222) will be either placed by the Exchange Fund short term (on demand, at call or at short notice) thus attracting the 100% liquid assets requirement, or switched by the Exchange Fund into foreign currencies when suitable opportunities occur.
PART V: MANAGEMENT OF THE ECONOMY IN A CHANGING ENVIRONMENT
(1) Introduction
215. Members of this Council, Sir, will have to decide whether they can support the budget I have just presented and vote, accordingly, in favour of the second reading of the Appropriation Bill. I have been at some pains to put my view of the economy in 1981 and the estimates of revenue and expenditure for 1981-82 in a dynamic historical context. Before Members take their leave of this sitting, therefore, I must endeavour to sketch out a view of the rather longer term future, given that the essential theme of budgetary policy at any time is to secure growth with stability; and I shall then deal with a number of economic, monetary and budgetary management questions that must be resolved sooner or later (and preferably sooner).
(221) ($ mn)
Revenue 35,649
Expenditure 28,268
Surplus 7,381 (*)
Note: (*) The difference of $500 million between this surplus and the surplus on General Revenue Account of $7,901 million is made up as follows:
($ mn)
Urban Council -39
Housing Authority -169
Development Loan Fund -135
Lotteries Fund -30
Home Ownership Fund -112
Student Loan Fund -15
-500
(222) But the present ceiling of $20,000 million on borrowings by the Exchange Fund will have to be increased shortly.
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(2) Likely Structure of the Economy in the 1980s
216. I envisage that the manufacturing sector of our economy, largely in response to market forces, will move progressively into higher quality products and more sophisticated product areas. This will only happen, of course, if the growth rate of investment in plant and equipment is sustained at a rate higher than the growth rate of G.D.P.(223) as has been the case in the past 20 years and here the confidence factor enters the picture. Further, although the latest projection of the population growth rate for the 10 years ending 1991 is 1.8% per annum, it is vital that a low growth rate of this order is recorded for, otherwise, the growth rate of the labour force may be such as to require a renewed emphasis on labour-intensive manufacturing industries if full employment is to be maintained.
217. But leaving investment and population questions aside, self-evidently the scope for the diversification of the manufacturing sector is limited by the relative shortage of land, despite the Government’s best endeavours(224). The main effect of this constraint has been, and will continue to be, to keep the range of products manufactured fairly narrow and to require a concentration on light industries. This has not been entirely disadvantageous as a high degree of specialization has made for a cost-efficient economy.
218. Where the production of components or supporting services for these industries involves land-intensive processes, they have generally had to be imported from a distance. The opportunities that now exist for Hong Kong firms to establish joint ventures in China, and particularly in Guangdong Province, may help to alleviate supply constraints of this sort. Supplies of components and services from sources which are both nearby and partly under the control of Hong Kong firms may improve both the competitiveness of Hong Kong’s exports and the flexibility with which our manufacturers can respond to changing market conditions. But we shall need to watch with care the consequences for the integrity of our certification of origin system.
219. Whatever the course of development of the manufacturing sector in the 1980s, it will need to be supported by an even greater stress on technical education, one area in which I would hope to see a greater involvement of public funds(225). But an adverse consequence of Hong Kong’s manufacturing sector
(223) Hence, see paragraph 200 above.
(224) See paras. 190-191 of the printed version of Budget Speech 1981.
(225) See paragraph 92 above. Most of the recommendations of the Advisory Committee on Diversification (A.C.D.) on education and training (Report, 1979, paras, 355-420) are being considered by the Committee to Review Post-Secondary and Technical Education. Its recommendations will help to determine the output of the post-secondary and technical education systems for many years to come. The quality and quantity of this output will have a significant bearing on the capability of the economy to adapt in the future.
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acquiring a greater technical capability and a greater degree of sophistication(226) may well be a reduction in the much-valued mobility of our labour force as workers become more skill-specific.
220. Not that a prognostication of the course of development of the manufacturing sector, let alone its future prosperity, can be made with any confidence, even leaving aside the state of the world economy. The struggle against protectionism since the late 1960s has been really quite successful in that derogations from Hong Kong’s most-favoured-nation rights of access to overseas markets have been virtually limited to exports of textiles and clothing. But Hong Kong’s recent experience when negotiating bilateral agreements under the Multi-fibre Arrangement (M.F.A.) indicates that the major industrialized countries are moving towards discriminatory treatment of different suppliers, thereby breaching the spirit and even the letter of the Arrangement.
221. Partly as a consequence of protectionism, I envisage that the relative size of the contribution of the manufacturing sector to the gross domestic product will tend to decline further in the 1980s, although the manufacturing sector will continue to be the largest single sector of the economy, particularly in terms of employment(227). At the same time, I envisage that the relative size of the contribution of the tertiary services sectors will continue to increase due, in no small measure, to demands likely to arise from the expansion of China’s international trade, a condition and a consequence of China’s four modernizations programme. The provision of such additional facilities as may be necessary to enable Hong Kong to cope with these demands(228) will constitute a further diversification of our economy and should make it less vulnerable to downturns in specific trades. So I envisage that infrastructural and institutional developments
(226) Implementation of the A.C.D.’s recommendations on industrial development (Report, 1979, paras. 285-315 and 421-467) is in hand: the Productivity Centre is proceeding with its work towards improving the provision of industrial support facilities. The development of quality certification services has been complicated as a result of the Advisory Committee having under-estimated the extent to which such services were available in the private sector; but the Director of Trade, Industry and Customs has completed a survey of the private sector and will shortly be putting forward comprehensive proposals. Accommodation is available and staff is being recruited for the electronics calibration laboratory, as the first of what may well turn out to be a series of facilities dealing with primary standards. All these aspects of industrial support facilities and technical back up services are now under the aegis of the Industrial Development Board. As a matter of particular interest, mention should be made of the A.C.D.’s recommendations on the layout and design of industrial buildings: the Productivity Council has agreed to conduct a consultancy on the scope for designing specialized forms of multi-storey buildings for industrial use and on the way complex industrial processes might be adapted to suit multi-storey buildings.
(227) See f.n. (45) above and Statistical Appendix, Table (6).
(228) The modernization of the Kowloon-Canton Railway will substantially improve rail links with China by the end of 1982, while the progress made with the Cheung Sha Wan and Western reclamations will enable improvements to be made in the facilities available for sea links. Inevitably in Hong Kong’s circumstances, the improvements to the road links currently being under taken will be much more difficult to achieve and will take longer. Meanwhile, studies are in progress on oil related facilities; and there have been various exchanges of missions with China as part of a mutual effort to strengthen our economic links generally.
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