ENG-1987 — Page 84

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THE ECONOMY

The Lotteries Fund is used to finance the development of social welfare services through loans and grants. It derives its income mainly from a share of the proceeds of the Mark Six lotteries.

The Mass Transit Fund is used to finance the purchase of government equity in the Mass Transit Railway Corporation. Its income is derived entirely from transfers from the General Revenue Account.

The Student Loan Fund is used to finance loans to students at the two universities, the two polytechnics, the Baptist College and other approved post-secondary institutions, and to Hong Kong students studying in the United Kingdom. Transfers are made as necessary from the General Revenue Account to enable the fund to meet its commitments, the only other source of income being loan repayments.

Medium Range Forecast

The main technique used by the government in managing its own finances is the Medium Range Forecast. This is a rolling five-year forecast of expenditure and revenue which concentrates on the consolidated financial position of the General Revenue Account and of all the funds except the Lotteries Fund. Expenditure projections take account of expected increases in the demand for and supply of government services. Revenue projections reflect expected patterns of collection in the light of fiscal policies, fees and charges for government services, and the general economic outlook.

Several principles underlie the strategy adopted in the Medium Range Forecast. The first is that the rate of growth of public sector expenditure should not exceed that of the Gross Domestic Product. The second is that there should be a broad balance of revenue and expenditure, although erring on the side of surplus to ensure that the government's fiscal reserves remain generally intact. The third is that, to preserve the stability of the government's finances, at least half of the capital expenditure should be financed from the operating surplus - the excess of recurrent revenue over recurrent expenditure. There are also other principles. These concern taxation policy, capital spending, and the size of the Civil Service.

The Budget presented by the Financial Secretary to the Legislative Council each year is set within the context of the Medium Range Forecast to ensure that full regard is given to these principles and to longer-term considerations.

The Public Sector

Consolidated public sector expenditure in 1986-7 was $47.9 billion, of which the govern- ment itself accounted for $42.7 billion. The growth rate of public expenditure over the preceding year was 10.3 per cent in money terms, or 2.6 per cent in real terms after discounting for the effect of inflation.

A comparison of the growth rate of consolidated public sector expenditure with the rate of economic growth is at Appendix 12. The ratio of consolidated public sector expenditure to the Gross Domestic Product rose to 19.1 per cent in 1982–3, but fell back to 16 per cent in 1984-5 following budgetary measures to correct an underlying deficit at that time. Since then, it has remained at around 16 per cent.

Total government revenue and expenditure in 1986-7 were $48.6 billion and $42.7 billion respectively. The consolidated surplus of $5.9 billion comprised $3.9 billion in the balance on the General Revenue Account and $2 billion in the balances of the other funds. The surplus reflected higher profits tax yield than anticipated and higher stamp duty yield resulting from the higher turnover in the stock market. Details of the revenue sources and