ENG-2011 — Page 104

68 | The Economy

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 (GRA) and various funds established under the PFO. The GRA 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 GRA and eight of the above Funds (excluding the Bond Fund) represent government revenue and government expenditure, and the total balance of the GRA and the eight funds constitutes Government's fiscal reserves.

Financial Results

For 2010-11, the Government recorded a surplus of $75.1 billion. Fiscal reserves at the end of March 2011 stood at $595.4 billion. Government revenue in 2010-11 amounted to $376.5 billion and expenditure $301.4 billion. For details of revenue by source and of expenditure by component for 2010-11 and 2011-12 (Revised Estimate) see Appendix 6, Table 6.

Public expenditure includes government expenditure and expenditure by the Trading Funds and the Housing Authority. In 2010-11, public expenditure totaled $320.6 billion, an increase of 4.4 per cent over the previous year, within which some $236.7 billion(or 73.8 per cent) was of a recurrent nature. Table 7 gives an analysis of public expenditure by policy area group and Table 8, the growth rate of public expenditure as compared with the rate of economic growth.

Revenue Sources

Hong Kong's tax system is simple and tax rates are low. The cost of administration is relatively low. To protect tax revenue, the Government takes vigorous measures to combat tax evasion and prevent tax avoidance. The major sources of revenue include profits tax (25 per cent), land premium (17 per cent),