ENG-2010 — Page 106

• HKSAR shall practice an independent taxation system, taking the low tax policy previously pursued in Hong Kong as reference.

• HKSAR shall follow the principle of keeping expenditure within the limits of revenues in drawing up the budget, and strive to achieve a fiscal balance, avoid deficits and keep the budget commensurate with the growth rate of the Gross Domestic Product.

• The Legislative Council of HKSAR shall exercise the power to approve taxation and public expenditure.

The Government implements these constitutional provisions by striving to maintain a low and simple tax regime, and exercising fiscal prudence.

Consistent with these constitutional provisions, Hong Kong's local legislation, the Public Finance Ordinance (PFO), stipulates a system for the control and management of Hong Kong's public finances and defines the respective powers and functions of the legislature and the executive. Pursuant to the PFO, the Financial Secretary submits to the Legislative Council an annual set of estimates of revenue and expenditure. The estimates are developed against the background of a medium- range forecast to ensure that full regard is given to the longer-term trends in the economy. The financial year starts from April 1 and ends on March 31.

A government department can only incur expenditure up to the amounts stated in the expenditure estimates and for the purposes approved by the Legislative Council. If during the financial year a department needs to change the expenditure estimates and spend more money, it must obtain authorisation from the Legislative Council.

The Government controls its finances through the General Revenue Account and various funds established under the PFO. The General Revenue Account is the main account for day-to-day departmental expenditure and revenue collection. Funds are established by resolutions of the Legislative Council for specific purposes. They include the Capital Works Reserve Fund, Capital Investment Fund, Civil Service Pension Reserve Fund, Disaster Relief Fund, Innovation and Technology Fund, Land Fund, Loan Fund, Lotteries Fund and Bond Fund. The total revenue and expenditure of the General Revenue Account and eight of the above Funds (excluding the Bond Fund) represent government revenue and government expenditure, and the total balance constitutes Government's fiscal reserves.

Financial Results

For 2009-10, Government recorded a surplus of $25.9 billion after repayment of bonds and notes issued in 2004. Fiscal reserves at the end of March 2010 stood at $520.3 billion. Government revenue in 2009-10 amounted to $318.4 billion, expenditure $289 billion and repayment of bonds and notes $3.5 billion. For details. of revenue by source and of expenditure by component for 2009-10 and 2010-11 (Revised Estimate) see Appendix 6, Table 6.

Public expenditure includes government expenditure and expenditure by the Trading Funds and the Housing Authority. In 2009-10, public expenditure totalled