ENG-2017 — Page 90

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The Economy

A government department can incur expenditure only up to the amounts stated in the expenditure estimates and for the purposes approved by LegCo. During the financial year, which runs from 1 April to 31 March, if a department needs to change the expenditure estimates and spend more money, it must obtain LegCo's authorisation.

The government controls its finances through the General Revenue Account (GRA) and various funds established under the ordinance. The GRA is the main account for day-to-day departmental expenditure and revenue collection. Funds established under the ordinance are the Bond Fund, Capital Investment Fund, Capital Works Reserve Fund, Civil Service Pension Reserve Fund, Disaster Relief Fund, Innovation and Technology Fund, Land Fund, Loan Fund and Lotteries Fund. The total revenue and expenditure of the GRA and all these funds except the Bond Fund represent government revenue and government expenditure respectively, and the total balance of the GRA and the funds except the Bond Fund constitutes government fiscal

reserves.

Financial Results

For 2016-17, the government recorded a surplus of $111.1 billion, with revenue of $573.1 billion and expenditure of $462 billion. Fiscal reserves at the end of March 2017 stood at $954 billion, equivalent to 25 months of government expenditure. Highlights of government revenue and expenditure for 2016-17 and 2017-18 (Revised Estimate) are found in table 6 of Appendix 6.

Public expenditure comprises government expenditure and expenditure by the Housing Authority and Trading Funds. In 2016-17, public expenditure increased 5.7 per cent against the previous year to $494.8 billion, of which $362.1 billion, or 73.2 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.

Future Fund

The Future Fund was set up on 1 January 2016 with an initial endowment of $219.7 billion for placement in longer-term investments, to secure higher returns for the fiscal reserves. As from 1 July 2016, it also includes $4.8 billion, being one-third of the 2015-16 surplus as a top-up. This is part of fiscal measures to cope with foreseeable long-term fiscal challenges arising from an ageing population and slower economic growth.

The Future Fund is being placed with the Exchange Fund for an initial period of 10 years from 1 January 2016 to 31 December 2025. Investment returns arising from the Future Fund during the placement shall be retained by the Exchange Fund for reinvestment. Interest on the placement shall be paid to the government upon completion of the placement period or on a date as directed by the Financial Secretary.

Revenue Sources

Hong Kong's tax system is simple. Tax rates and the cost of administration are 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 (24 per cent), land premium (22 per cent), stamp duties (11 per cent) and salaries tax (10 per cent). All major sources of revenue are presented in chart 1 of Appendix 6.

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