ENG-1993 — Page 82

THE ECONOMY

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Inflation

Consumer price inflation, as measured by the Consumer Price Index (A), or CPI(A), moderated to 8.5 per cent in 1993, from 9.4 per cent in 1992. The CPI(B), Hang Seng CPI and Composite CPI showed broadly similar trends. They rose by an average of 8.7 per cent, 9.5 per cent and 8.8 per cent, respectively, in 1993, compared with increases of 9.6 per cent, 9.8 per cent and 9.6 per cent, respectively, in 1992.

The year-on-year rate of increase in the CPI(A) decelerated from 9.4 per cent in the fourth quarter of 1992 to 8.8 per cent in the first quarter of 1993 and further to 8.2 per cent in the second and third quarters. In the fourth quarter, it edged higher to 8.7 per cent, largely reflecting the volatility in the prices of certain fresh food items amidst changing weather conditions. In December, the year-on-year rate of increase in the CPI(A), CPI(B), Hang Seng CPI and Composite CPI stood at 8.6 per cent, 8.5 per cent, 10.2 per cent and nine per cent, respectively.

Among the various components of the Consumer Price Index (A), the cost of housing continued to show the fastest increase, up by an average of 12.6 per cent in 1993 over 1992. This was followed by price increases for alcoholic drinks and tobacco (10.5 per cent), and miscellaneous services (9.5 per cent). These three components together accounted for 48 per cent of the overall increase in the index. Comparing the first half of the year with the second half, however, the rates of increase in their prices were generally on a moderating trend.

The prices for durable goods, fuel and light, miscellaneous goods and food increased at a much slower rate, by an average of two per cent, four per cent, seven per cent and seven per cent, respectively. As faster price increases were generally recorded for items with a larger local input, inflationary pressures were mostly generated domestically rather than imported.

Economic Policy and Public Finances Economic Policy

Economic policy in Hong Kong is to a large extent dictated, and constrained, by the special circumstances of the economy. Owing to its small size and open nature, the economy is vulnerable to external factors, and government actions designed to offset unfavourable external influences are of limited effectiveness. Moreover, the government considers that, except where social considerations are over-riding, the allocation of re- sources in the economy is best left to market forces, with minimal government interven- tion in the private sector.

This basically free-enterprise, market-disciplined system has continued to contribute to Hong Kong's economic success. A relatively simple tax structure, with low tax rates, provides a good incentive for workers to work and for entrepreneurs to invest. Both workers and entrepreneurs are highly motivated. The primary role of the government is to provide the necessary infrastructure and a sound legal and administrative framework conducive to economic growth and prosperity.

Structure of Government Accounts

In accounting terms, the public sector is taken to include the Hong Kong Government itself, the Hong Kong Housing Authority, the Urban Council and the Regional Council.