Appropriation Bill 2017
President,
the Budget delivered by the Financial Secretary this year is overcautious and lacks any pleasant surprise; nevertheless, it is forward-looking. First of all, the Financial Secretary will offer a one-off “sweetener” amounting to $35.1 billion, which is similar in scale to that of last year, to facilitate a stable debut and maintain growth for Hong Kong this year. Secondly, he proposes to make long-term social investment in multiple respects to respond to issues of great social concern, such as the ageing population, education, youth development, etc. Last but not least, he is willing to look into the structure of the fiscal revenue to maintain Hong Kong’s competitiveness that it should have.
I have four comments on this Budget.
First, measures on the sustained development of Hong Kong’s financial services industry should be maintained. To me, I will support this Budget because the concerns that I reflected to the Government earlier through different channels have been positively responded to in the Budget, including the need to increase resources for planning a sustainable future for Hong Kong; to capitalize on the opportunities lying before Hong Kong now to enhance our financial infrastructure; to assist the growth of small and medium enterprises (“SMEs”) and to review the structure of government revenue to counter future expenditure hikes.
The financial development of Hong Kong has actually been quite good in recent years. The National 13th Five-Year Plan pledges support for Hong Kong in reinforcing and enhancing our position as an international financial centre, and in strengthening our status as the global offshore Renminbi business hub and our function as an international asset management centre. In response, the Government has put forth many measures in the Budget to support the sustainable development of Hong Kong’s financial services industry, such as developing an infrastructure investment and financing centre, and an asset management and corporate treasury centre; promoting Fintech, launching a public annuity scheme; providing tax concession for developing aircraft financing business; expanding profits tax exemption to fund industries; and expediting the development of
cross-border financing. It is worthwhile to invest in these measures which are conducive to the
long-term and healthy development of Hong Kong and its financial services industry. I hope that these measures will not be left unfinished due to the change of government, and that the Government will persevere with these measures and implement them as soon as feasible.
Secondly, greater and faster effort should be made to promote diversified economic development as well as innovation and market development, and provide support for SMEs, so that a solid foundation can be laid down for the long-term development of Hong Kong. The Government indicates in the Budget that while it will vigorously assist the sustainable development of the pillar industries, it will also support a diversified development of our economy, including innovation and technology (“I&T”) and creative industry. This is commendable but not vigorous enough. In particular, government investment in research and development (“R&D”) has been minimal. According to statistics on R&D expenditure in 2015 by performing sector, the Government sector only spent $726 million on R&D, accounting for less than 4% of the total R&D expenditure of $18.27 billion. The R&D expenditure of Hong Kong in the same year only accounted for 0.76% of its GDP, which was far lower than the corresponding expenditures of the Mainland, Germany, the United States and Japan, and still lagged behind the R&D expenditure of Singapore in 2013. In a newspaper article published in early April, the Secretary for Innovation and Technology Nicholas YANG says that the situation of Hong Kong is similar to that of London, which is also dominated by services industry, and their R&D expenditure in 2014 accounted for 1.06% of its GDP. If his comment is tenable, we urgently need to push up our R&D expenditure to more than 1% first. The incumbent Government has put forth quite a number of measures to promote I&T. The growth rate and employment rate of the I&T industry have consistently outperformed the overall economy in recent years, showing that Hong Kong has considerable edges in developing I&T: its good location in the Asia-Pacific region, proximity to the enormous Mainland market, world-class intellectual property protection regime, sound legal and judiciary system and comprehensive I&T infrastructure and financial system. I believe these edges
can open new doors for our future economic growth. But the Government needs to preserve with these measures before it can turn I&T development into a major pillar for economic growth.
The Government also put forth many support measures for SMEs, including extending the application period for the Dedicated Fund on Branding; extending the application period for the special concessionary measures under the SME Financing Guarantee Scheme; launching the Technology Voucher Programme, together with the proposed reduction of profits tax and business registration fee. All these measures should be able to relieve the operation pressure of SMEs.
The measures above seek to maintain and develop the local economy in the long run and I hope that the Government will not have a fine start but a poor finish. It should sustainably and persistently implement these sound policies in a pragmatic manner, so that Hong Kong can truly progress toward a diversified development of different industries.
Thirdly, given its long-term financial burdens, the Government needs to consider early how to diversify its revenue sources. The ageing population and the need to construct public housing and discharge its civil service pension obligations will weigh heavily on the Government’s fiscal reserves, and thus its future recurrent expenditures will substantially increase. However, the present structure of public revenue changes dramatically with economic performance. The Government must lay down as soon as possible a contingency plan.
The Financial Secretary proposes to set up a tax policy unit in the Financial Services and the Treasury Bureau to comprehensively examine how to align our tax practices with international standards from a macro perspective, so that Hong Kong can remain competitive in this new international arena; on the other hand, the tax policy unit will enhance our tax regime and explore broadening the tax base and increase revenue, so that the Government can develop in a sustainable
manner. This proposal is worth our support. That said, the Government conducted a public consultation on tax reform and the introduction of a goods and services tax between 2006 and 2007, but the consultation showed that the subjects failed to secure an extensive consensus in society at that time. Ten years have passed. It is thus sensible and justified that another consultation be conducted to comprehensively review the tax policy.
But judging from the Budget, only four new posts will be created for the tax policy unit, which is tasked with an important subject. I am concerned that the tax policy unit may not have sufficient resources to tackle complicated researches and consultation exercises. I hope that the Government will not once again provide an idea with taking real action or just pay lip service.
Fourthly, there is a desperate need to inject new ideas into our public finance objectives, so that we can adapt to the needs generated under the competitive global economy. The fiscal reserves of last year is adjusted to $92.8 billion, again far exceeded the Government’s expectation with over $80 billion of inaccuracy. In the few years under this Government, there has been a cumulative inaccuracy of $140 billion in the calculation of its fiscal reserves. In the past 20 years, the Government has recorded a surplus in 15 financial years and a total inaccuracy of $806 billion. Inaccuracy has obviously become a norm. According to some think tank experts, the Government has been using traditional economic indicators in accessing its surplus and failed to keep abreast of the time, which is the cause to its inaccurate assessment. I hope the Financial Secretary can learn a lesson from this and will not repeat this error every year and make inaccurate surplus assessment. But the new ideas I wish to bring out are not only about this.
In the face of a volatile global outlook, the Government says in the Budget that while it recognizes the effect of market forces, it should play an active role as a facilitator by making optimal use of public resources and develop Hong Kong into an even more liveable, sustainable and vibrant city. I believe this public financial management objective can win the support of many people. In the past few months, many people have provided valuable advice and views on the fiscal philosophy of the Government. Here, I wish to briefly express my view on it. I will begin with a story.
There is a fisherman family with young siblings and elderly. The fisherman makes a living by fishing with his fishing vessel and manages to save up some money every year and accumulate $10,000. He thinks that by the time when he can no longer work as a fisherman, he can use this sum of money to maintain a living. He thus tries every means to preserve the capital and look for long-term value appreciation. He invests the money in some fishing funds with a stable yearly return that roughly outperforms the inflation rate. But their quality of life has been mediocre. The fishery catch is their main source of income. They spend a minimal amount every year on maintaining their fishing vessel. The family can only afford to let their children receive standard education and the elderly members are meagrely provided for. In the years of good fishery returns, the fisherman invests part of the return into the fishing funds and the family will enjoy a relatively sumptuous meal with the rest of the money.
There is little improvement on the quality of life of this family over the years. And the so-called savings can only last for two to three years if the fisherman becomes frail or the fishery drops.
The other fisherman is quite another story. The family background of this fisherman is the same as that of the first one, and his ability to make a living is poor in the beginning. But this fisherman knows how to manage his wealth.
He spends his yearly income generated from his catch on strengthening his competitiveness, such as on upgrading his fishing vessel and gears and on his children by letting them receive higher education. He also allocates part of his assets on the elderly members so that they can enjoy life. Hence, the quality of life of this family has improved over the years. And years of investment in his
fishing vessel also enables the fisherman to enhance his fishing capacity and diversify his fishery business. Also, the quality education that his children received and the elevation of knowledge level also help increase his yearly financial return. It is hard to know how much wealth this fisherman has, but it is obvious that this fisherman family thrives.
At this point I believe Members should be able to guess that the first fisherman in my story alludes to Hong Kong. The only difference is that Hong Kong has hundred million times more wealth than the fisherman has. As of March this year, Hong Kong has a total of $935.7 billion in surplus. Besides, a
total of $72.6 billion has been reserved in the Exchange Fund from the year 2014 and 2015 as provision for the Housing Reserve and not paid to the Government.
The actual fiscal reserves total at $1,008.3 billion. Members may have guessed that the second fisherman in my story is Singapore. The Singaporean Government has been investing in different industries with potential and making infrastructural improvement with its fiscal surplus to strengthen its long-term competitiveness and development capacity.
At present, after deducting the amount for “sweeteners”, a substantial part of our annual fiscal surplus has been allocated to different funds for their use according to their different purposes. A number of funds have been established over the years, which include the Capital Works Reserve Fund, Capital Investment Fund, Civil Service Pension Reserve Fund, Disaster Relief Fund, Innovation and Technology Fund, Land Fund (that is, the Future Fund), Loan Fund, Lotteries Fund, Bond Fund and the Housing Reserve. The provision for these funds in the previous financial year almost reached $600 billion, which did not cover the provision for other government funds and statutory organizations with specific purposes, such as the Research Endowment Fund, Community Care Fund, Elite Athletes Development Fund and Samaritan Fund, etc.
These funds retain a substantial amount of their capital in the Exchange Fund every year to preserve their capital through investment. As of end of 2016, the fiscal reserves and the balance and accumulated surplus of government or public funds totalled at almost $1,760 billion, together with its monetary base of $1,640 billion, the total assets of the Exchange Fund reached $3,630 billion. As
far as we know, the Exchange Fund never rejects placements by public funds for capital management because the Government is of the view that the more financial assets the Exchange Fund holds, the stronger it will be in defending the linked exchange rate system and in maintaining the financial stability of Hong Kong. Undeniably, some international credit rating agencies or organizations look at the size of Hong Kong’s Exchange Fund in assessing our capacity in withstanding external shocks. But the question is how large the size of the Exchange Fund is adequate? In the Budget for 2002-2003, it stated that the Government set the fiscal reserves target at 12 months of government expenditure; but in the Budget for 2007-2008, the Government revised its position by saying that it would maintain the reserves “at an appropriate level” and did not even bother to lay down a specific target. Do we need to indefinitely place our reserves and surplus into the Exchange Fund for capital management? No one dare to provide a specific amount or answer.
At present, there lacks a central body to coordinate these funds and there is not a specific target on investing in Hong Kong and enhancing our overall competitiveness. I believe the main concern of the Government is only to be able to draw capital from the Exchange Fund to settle the expenditures of these funds when necessary. An apparent outcome of this mentality is that the quality of life of the people cannot be substantially benefited from this huge surplus.
The situation is like the first fisherman in my story. On the other hand, if our competitiveness continues to drop and the expenditures exceed the revenues, the surplus will only be able to support the Government’s expenditures for a very short period of time.
Hence, the Government must adopt a new public financial management philosophy to effectively invest its surplus in Hong Kong, such as on housing, infrastructure, health care, elderly care, education, etc., with a view to maintaining and enhancing the overall competitiveness of Hong Kong. By so doing, the quality of life and health of Hong Kong people can be improved and we can have a happy and contented life filled with hope and a better future. The Government should not focus only on surplus management or maintaining the basic purchasing power of the surplus. I hope that the Government can conduct an in-depth and comprehensive study on this subject to clear its mind and lay down a specific target, and capitalize on the opportunities and make good use of the surplus to invest in the future of Hong Kong.
President, I so submit.