ENG-1989 — Page 84

62

THE ECONOMY

Structure of Government Accounts

In accounting terms, the public sector is taken to include the Hong Kong Government itself, the Housing Authority and Urban and Regional Councils. Government grants and subventions to institutions in the private or quasi-public sectors are included but expenditure by organisations in which the government has only equity, such as the Mass Transit Railway and Kowloon-Canton Railway Corporations, is not included.

The government controls its finances through a series of fund accounts. The General Revenue Account is the main account for day-to-day departmental expenditure and revenue collection. Five other funds exist mainly to finance capital expenditure and to make loans. They are Capital Works Reserve, Development Loan, Lotteries, Mass Transit, and Student Loan Funds.

The Capital Works Reserve Fund finances the Public Works Programme, land acqui- sitions, capital subventions, and major systems and equipment. On May 27, 1985, when the Sino-British Joint Declaration came into effect, the fund was restructured to enable the premium income obtained from land transactions to be accounted for in accordance with the arrangements in Annex III to the Joint Declaration. The income of the fund is derived mainly from premiums and transfers from the General Revenue Account.

The Development Loan Fund is used mainly to finance social and economic develop- ments. Its income is derived from interest payments, capital repayments and transfers from the General Revenue Account.

The Lotteries Fund is used to finance 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.

Management of the Budget

The government manages its finances against the background of a rolling five-year Medium Range Forecast of expenditure and revenue. This models the consolidated financial position of the General Revenue Account and of all the funds except the Lotteries Fund. Expenditure projections are regularly updated to take account of expected increases in the demand for and supply of government services. Revenue projections are updated to reflect the government's fiscal policies, changes in fees and charges for government services, and the general economic outlook.

A number of key principles underlie the government's management of public ex- penditure. The first is that the rate of growth of public sector expenditure should over a period be close to that of gross domestic product. The second is that there should be a broad balance of revenue and expenditure, erring on the side of surplus, to ensure that the government maintains adequate reserves. The third is that at least half the government's capital expenditure should be financed from operating surpluses - the excess of recurrent revenue over recurrent expenditure. Other guiding principles concern taxation policy, capital spending, and the rate of growth of the Civil Service.