III. Decisive Action to Eliminate the Fiscal Deficit
45. The Financial Secretary will propose specific measures to solve the fiscal deficit when he presents his 2003-2004 Budget Speech to the Legislative Council in March. Today, I will only set out our basic thinking and guiding principles.
Causes and Solutions
46. The major cause of our fiscal deficit lay in the rise in public expenditure during the period of the bubble economy. In the six years between 1991-1992 and 1996-1997, public expenditure grew on average by 14% annually. From 1997-1998 to 2001-2002, we took steps to cut spending. This was done cautiously, taking into account the acceptability of those cost-cutting measures to the community during difficult times of economic restructuring. But public expenditure still continued to grow at an average annual rate of 5%. Having public spending consistently exceeding the rate of economic growth is a departure from the principle of small government we have always promoted. If expenditure continues to grow unchecked, we will have no alternative but to keep on raising taxes and increasing fees, thus channelling more and more resources to the Government. Such a move will only result in less efficient use of community resources and a deteriorating business environment. None of us would like to see this happen.
47. To eliminate the fiscal deficit, we must adopt a three-pronged approach - boost economic growth, cut public expenditure, and raise revenue. Public revenue hinges essentially on economic performance. In the final analysis, the solution to the deficit problem lies in economic growth. The measures I mentioned earlier to promote economic restructuring and restore growth will, in the long run, tackle the problem at source. We accept that we need time to achieve economic restructuring, but solving the fiscal deficit problem is an immediate imperative. We therefore consider it necessary to raise revenue and cut public expenditure at this critical juncture. Coupled with our efforts to promote economic growth, we should be able to solve basically the deficit problem within a few years. Our target is to reduce, through various means, Government's projected spending of $220 billion in the operating accounts in 2006-2007 by $20 billion. We also intend to introduce appropriate tax increases and adjust government fees and charges upwards to help eliminate the fiscal deficit. Detailed arrangements will be announced by the Financial Secretary in his Budget Speech.