ENG-2005 — Page 95

The Economy 1 65

Management of Public Finances

The principles underlying the Government's management of public finance are set out in the Basic Law: to keep expenditure within the limits of revenues in drawing up the budget, to strive to achieve a fiscal balance, to avoid deficits and to keep the budget commensurate with the growth rate of its gross domestic product. The Budget presented by the Financial Secretary to the legislature each year is developed against the background of a medium-range forecast to ensure that full regard is given to the longer-term trends in the economy.

Public Expenditure

Public expenditure is taken to include government expenditure from the General Revenue Account and the other funds except advances and equity investments from the Capital Investment Fund, plus expenditure by the Housing Authority and government trading funds. Government grants and subventions to institutions in the private or quasi-private sectors are included, but not spending by organisations in which the Government has only an equity stake (such as the MTR Corporation Limited, the Kowloon-Canton Railway Corporation and the Airport Authority). Similarly, advances and equity investment by the Capital Investment Fund are excluded as they do not reflect the actual consumption of resources by the Government.

The Housing Authority, operating through the Housing Department, is financially autonomous. The Government provides the Housing Authority with capital and land on concessionary terms to finance the provision of public housing rental flats to those in need.

A trading fund is an accounting entity enabling a department to provide services on a commercial or quasi-commercial basis. Unlike a vote-funded department, a department operating on a trading fund is allowed to retain revenue generated to meet its expenditure and finance future expansion.

Financial Results

Taking into account the proceeds from the issuance of government bonds and notes, the Government's consolidated account recorded a surplus of $21.4 billion in 2004-05. The accumulated balance at the end of 2004-05 stood at $296 billion. This forms the Government's fiscal reserves and is available to meet any calls on its contingent liabilities. It also enables Government to cope with any short-term fluctuations in expenditure relative to revenue.

Total government revenue including the proceeds of government bonds and notes in 2004-05 amounted to $263.6 billion and spending $242.2 billion. For details of revenue by source and of expenditure by component for 2004-05 and 2005-06 (Revised Estimate) see Appendix 6, Table 6.

Public expenditure in 2004-05 totalled $257.1 billion. There was a drop of 5.1 per cent in nominal terms or 3.5 per cent in real terms over the previous year. Some $51.7 billion, or 20.1 per cent of the public expenditure in 2004-05, was of a non-recurrent nature. Table 7 gives an analysis of expenditure by policy area group