ENG-1973 — Page 66

FINANCIAL STRUCTURE

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particularly since it has taken place after charging annually against current revenue all capital expenditure other than a comparatively small amount financed by borrow- ing. These annual capital spendings have been increasing in recent years and in 1972-3 they totalled some $1,600 million.

The principal reason for these results, which appear so favourable, was that during the earlier years exeptionally rapid increases in population generated economic activity which raised the yield from taxation and other sources of revenue without appreciable increases in the rates of tax. Revenue expanded nearly 16 times from $309 million in 1951-2 to $4,936 million in 1972-3. The rate of increase was affected by variations in such factors as the economic situation and inflows of capital, but the upward trend has been strong and continuous. In expenditure there was inevitably a time-lag before the government could develop community and social services necessary for an increasing population and made possible by economic growth itself. But as these services were developed at a gradually accelerated rate, the margin between recurrent expenditure and recurrent revenue tended to narrow.

For example, in 1952–3 recurrent expenditure absorbed only 57 per cent of the recurrent revenue, but by 1959–60 the figure had risen to 82 per cent. Consequently, in that year the surplus of the recurrent account could no longer finance all the capital expenditure and an overall deficit of $45 million occurred. Subsequent budgets fore- cast further and in some cases substantial deficits, but the actual results suggest that the economic strength and resilience of Hong Kong was underestimated, particularly earlier on-for 1965-6 is the only year in which another deficit has been recorded.

While the export trade remained buoyant, towards the end of 1964-5 the property market turned dull and this, to a degree, affected other sectors. The deficit of 1965–6 reflected this temporary setback.

There was a return to surplus in 1966–7. The change was assisted by a small increase in taxation, but a more important factor was a falling-off in capital works expenditure as certain major works, particularly the Plover Cove Reservoir scheme and certain major land developments, neared completion. There was also a fall in construction costs due largely to reduced private development.

The picture changed again in 1968 when, partly as an aftermath of success in surmounting the political difficulties of 1967, partly under the influence of world inflation on demand for Hong Kong exports, another period of unusually rapid growth began. This caused the growth of revenue at existing tax rates once again to out-distance the substantial rate of growth of expenditure on special services and development. A budget forecast of a deficit of $13 million in 1968-9 became an actual surplus of $208 million.

The pace of economic growth continued to accelerate in the following years with surpluses rising from $448 million in 1969–70 to $637 million in 1972–3. The estimated surplus for 1972-3 was $47 million but the stock market and property market booms in the second half of 1972 and early 1973 resulted in revenue for the year reaching a record figure of $4,936 million-$713 million of which came from stamp duties and $669 million from land sales. Expenditure exceeded the estimate of $3,657 million by