Thanks to a few one-off lucky breaks, the budget deficit will come in a lot lower than officially predicted, the financial secretary said. The deficit, which has been steadily mounting because of the government's high fixed costs and shrinking revenue, would be $49 billion when the financial year finished at the end of the month, Henry Tang Ying-yen said. That is 37 per cent less than the $78 billion estimate made by Mr Tang in October, when he added an extra $10 billion to the original estimate. As it turned out, the Exchange Fund contributed $13.7 billion more than expected because of higher-than-anticipated returns on its assets, while better business conditions meant the government earned $5.7 billion extra in profits tax. Land income was also twice the expected figure, while government spending fell $10.7 billion. But the outlook for the years to come is a bit rocky, with the deficit in 2004-05 forecast to hit $62.1 billion, although a proposed government bond issue of $20 billion may knock a corresponding amount off. The deficit will not go away until 2008-09, when Mr Tang expects a consolidated surplus of $7 billion. But there will still be an operating deficit of $5.2 billion. Mr Tang forecast that economic growth over the next five years - the so-called medium term - will average about 3.8 per cent. After growing 6 per cent this year, the economy will expand 3.3 per cent in each of the next four years. But estimates for revenue over that period seem to be pretty much unchanged from the estimates in last year's budget, when medium-term economic growth was forecast at 3 per cent. That has left accountants wondering why the numbers do not add up. 'Over the medium-range forecast, he's predicting a stronger growth rate - 3.3 per cent. But that's not translating into stronger revenue collections,' said Guy Ellis, a PricewaterhouseCoopers partner. Perhaps the government was banking on stronger growth from the Closer Economic Partnership Arrangement, which would boost the economy but not result in any higher tax collections because transactions would be done on the mainland, Mr Ellis said. Owen Chan Shiu-shing, a tax partner at Ernst & Young, said: 'I can't make any sense out of it.' The difference between 2004-05 deficit estimates made this year and last year was $24 billion, which could be explained by a delay in the sales of assets and an increase in spending on education, Mr Chan said. Unlike last year, Mr Tang did not include a medium-range forecast of expected income from land sales in his budget book. But officials said land income brought in $4.8 billion in 2003-04, higher than the $2.5 billion estimated in the last budget. This year, land sales are expected to earn $12 billion, slightly lower than the $13.3 billion forecast in last year's budget. Mr Tang announced no new plans to cut government spending and said he would stick to the original plan to keep operating expenditure this year to about $212 billion. The government aims to get operating expenditure down to $200 billion by 2008-09. The Democratic Party previously suggested that instead of cutting spending across the board by 11 per cent, the government should cut areas such as education, health and welfare by 5 per cent. But Mr Tang rejected that argument yesterday, saying it would delay the balancing of the budget by four years. The government faces the task of cutting the civil service to reduce spending on salaries, its biggest expense. There were 198,000 civil servants in 2000,but that number had fallen to 172,000 and would shrink to 166,500 in a year, Mr Tang said.
