ENG-1995 — Page 93

THE ECONOMY

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The government advocates free and fair competition. Business decisions are left to the private sector, except where social considerations are over-riding. It is considered that the allocation of resources in the economy is best left to market forces. Adopting this free-market philosophy, the government has not sought to influence the structure of industry through regulations, tax policies or subsidies. The tax system is kept as simple as possible. The corporate tax rate, at 16.5 per cent, is low by international standards.

Maintaining a small and efficient public sector is a crucial aspect of Hong Kong's fiscal policy. In 1995, public sector expenditure accounted for only around 17.6 per cent of the GDP. The underlying principle is to ensure that the government will not crowd out an excessive amount-of resources from the private sector. In concrete terms, the growth rate of public sector expenditure is to be kept within the trend growth rate of the economy.

The government sees its major role as providing a good environment and a sound legal and institutional framework in which business can flourish. Accordingly, individual sectors in the economy are not burdened by undue government regula- tions. Industries in Hong Kong are able to adapt swiftly to changes in market conditions, and the economy as a whole is able to weather shocks. A simple tax structure with low tax rate, in particular, provides a good incentive for workers to work and for entrepreneurs to invest.

-Structure of Government Accounts

In accounting terms, the public sector is taken to include the Hong Kong Govern- ment itself, the Hong Kong Housing Authority, the Urban Council, the Regional Council and the government trading funds. Government grants and subventions to institutions in the private or quasi-private sectors are included, but expenditure by organisations in which the government has only an equity stake (such as the Mass Transit Railway Corporation and Kowloon-Canton Railway Corporation) is excluded.

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. Six other funds exist mainly to finance capital investments and expenditure, and government loans. They are the Capital Works Reserve Fund, Capital Investment Fund, Civil Service Pension Reserve Fund, Disaster Relief Fund, Loan Fund and Lotteries Fund.

The Capital Works Reserve Fund finances the public works programme, land acquisitions, capital subventions, major systems and equipment items and com- puterisation. On May 27, 1985, when the Sino-British Joint Declaration on the Question of Hong Kong came into effect, the fund was restructured to enable the premium income 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 land premia and appropriations from the General Revenue Account.

The Capital Investment Fund finances the government's capital investments (mainly in statutory public bodies), such as equity injections in the Mass Transit Railway Corporation, capital investments in the Hong Kong Housing Authority and advances to the Provisional Airport Authority. Its income is derived mainly from