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Ambrose Leung

Jimmy Cheung

Finance chief outlines strategy, puts back deficit target by 2 years

The target of balancing the budget by 2006-07 will be delayed for two years until 2008-09, the finance chief announced yesterday.

In an upbeat forecast on economic growth, Henry Tang Ying-yen also raised the growth forecast for this year's gross domestic product to 3 per cent and medium-term GDP growth to 3.5 per cent.

He also hinted at the prospect of a goods and services tax to raise revenue but shelved the controversial border tax proposal.

The measures were announced in Mr Tang's first formal outline to the Legislative Council of his fiscal management philosophy since taking over from Antony Leung Kam-chung in August.

Since the Sars outbreak in spring, the government has been under growing political pressure to revise Mr Leung's target of restoring fiscal balance by 2006-07.

Pledging to provide more details in later budgets, Mr Tang reiterated that the schedule was unrealistic.

While keeping overall spending cuts and revenue targets largely unchanged, he opted for a two-year delay in balancing the books.

'The discussions I have had with various groups and sectors over the past 21/2 months have led me to believe that the community also favours giving the economy some more room to breathe in the next year or two,' he said.

Recurrent government expenditure would be cut to $200 billion by 2008-09, Mr Tang said. He expected revenue would gradually rise from the $155 billion in 2003-04 to $200 billion in 2008-09 to match spending.

The target of keeping public spending below 20 per cent of GDP remained unchanged, Mr Tang said. The government would not waver on principles such as a low tax regime and small government.

But he would not be drawn on whether the delay in balancing the budget meant the pressure for taxpayers to shoulder more had been eased. The government will review the situation each year to see if it is on track to removing the deficit.

'If I am below that straight line, that means I am not going to meet that theoretical target of $200 billion and I will have to consider whether additional revenue measures will have to be introduced,' Mr Tang said. 'If I am above that guideline, there would be a very happy choice of whether I will accumulate a little more in reserves or whether there is a room for tax reduction.''

With various indicators showing a rapid post-Sars rebound, Mr Tang revised the economic growth forecast for this year from 2 per cent to 3 per cent. The estimate trend GDP growth rate, which the government uses to draft its budgets, was raised to 3.5 per cent.

But the deficit for 2003-04 will blow out from the original estimate of $68 billion to $78 billion due to the $12.6 billion Sars-rescue package.

Stressing that a sales tax was a reasonable step forward, the finance chief said an internal committee was studying the details and that he would make a report in his March budget.

But the controversial so-called land departure tax, which was expected to raise an annual $1 billion, would not proceed at this stage, Mr Tang said, although the government believed there was a valid principle for having one.

He gave the clearest signal yet that bonds would be issued,  saying he could see the long-term benefit of using them to help finance capital works. The government was also on track to realise $21 billion from the sale of loans and securitisation of revenue from toll tunnels and bridges, he said.

Unlike his predecessor who handed down across-the-board spending cuts, Mr Tang has opted for more flexibility for individual bureaus and departments. The cuts are to increase on average by less than 2.5 per cent each year to a total of 11 per cent over five years. But he sidestepped the question of whether civil servants would have their pay cut more than the 6 per cent previously agreed.



Balanced budget deadline is delayed