Financial Secretary Henry Tang, cautiously optimistic that the economy has bottomed out, has revised upward the forecast of GDP growth for 2003 to 3% from around 2%, he told the Legislative Council today.

Hong Kong's export trade performance remained strong during the SARS outbreak, he said, and exports of goods and services continue to grow. A strong rebound in visitor arrivals, retail sales and local consumption sentiments is also encouraging, as are signs of easing off in unemployment and deflation.

Balancing act: A visible upswing in economic activity and sentiment over the past month or two has given Financial Secretary Henry Tang room for cautious optimism that the economy has bottomed out. The latest forecast is for the economy to grow by around 3% for 2003, while the administration is determined to bring government spending down to $200 billion by 2008-09 and to boost revenues to $200 billion by then, too.

The Financial Secretary told lawmakers the GDP trend growth rate has also been raised  by half a percentage point, to 3.5% for the medium term, on the back of further reform and opening up in the Mainland market.

New target for balanced budget: 2008-09

The Financial Secretary has set a new target to achieve a balanced budget: 2008-09.  He said the Administration is determined to control government operating expenditure and to bring it down to $200 billion by 2008-09.  He also aims to attain $200 billion recurrent revenue by the same year.

The Government committed in the 2003 Budget to balance the budget by 2006-07. However, since the SARS outbreak wreaked havoc with the economy after the 2003 budget was passed, Mr Tang said the day he was appointed Financial Secretary that the deadline was no longer realistic.

"In response to views expressed both within and outside this chamber, I believe that we should allow ourselves two more years to achieve that objective, by 2008-09," he said.

"The discussions I have had with various groups and sectors over the past two and a half 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."

Containing public expenditure key

Mr Tang says he expects the fiscal deficit for 2003-04 will rise to $78 billion - plus or minus $5 billion - compared with a deficit of $68 billion forecast in the 2003 budget. The revision takes into account not only the negative impact of SARS, but also "the more positive signs emerging over the past couple of months".

The Government remains committed to bringing public expenditure to 20% of GDP or below and Mr Tang agrees with the community's view that the Government should look at ways to cut spending before it looks for ways to increase revenue.

Mr Tang told lawmakers that starting from 2004-05, the government's operating expenditure would be cut by an average of less than 2.5% a year, culminating in an 11% cut over five years.

Moderate cuts will balance different policy requirements

He stressed that the cuts were moderate and were not uniform across all policy bureaux. He preferred a pragmatic and measured approach, balancing the requirements of different policy areas. Principal Officials have the full discretion to set spending priorities within their envelopes, and to conduct functional reviews across their programme areas.

The Government will continue to invest in infrastructure projects, Mr Tang noted. "Hong Kong has an enviable reputation for world-class infrastructure and we will need to upgrade this continually if we are to live up to our positioning as Asia's world city," he said.

He indicated that the Government would explore alternative sources of funds, such as disposal of government assets and issuance of bonds, to fund capital projects that would bring long-term economic benefits to Hong Kong. 

Boundary Facilities Improvement Tax scrapped - for now

The Government has already secured nearly $13 billion of the $14 billion it proposed in the 2003 budget, he said. The outstanding $1 billion was meant to come from the proposed Boundary Facilities Improvement Tax. However, its introduction is to be postponed, he announced, because "the public is not yet ready to accept this tax".

While a broad-based consumption tax is a reasonable and equitable way to smooth out the bumps in Government's revenue stream, the Financial Secretary said he would not contemplate introducing such a tax during a deflationary environment.

Revitalising economy No 1 task

Mr Tang sees revitalising Hong Kong's economy as his principal and immediate task. He believes an improved business environment will encourage more investment and help create more and better job opportunities for workers in all sectors.

"The free market has been the bedrock of Hong Kong's success," he said, noting that the Government's role should be to facilitate the market and its development - as it has done through signing the Closer Economic Partnership Arrangement with the Mainland.

"'Big market, small government' is certainly the right way to go," he said.

"We should capitalise on the quality of our market and services and position ourselves as a centre of excellence, not just for Asia but for the whole world."

Hong Kong's success is buttressed by a sound institutional framework - the rule of law upheld by an independent judiciary, a level playing field for business, the free flow of information, and a clean, efficient Administration, he said.

Consultation for 2004-05 budget to begin soon

He places high emphasis on transparency in the policy formulation process. "We must also provide business with policy consistency and predictability so that informed, long-term business decisions can be made without fear of arbitrary change next week, or next month, or next year."

The Government will soon begin a formal consultation for the 2004-05 budget. Mr Tang said he would consult the community widely to ascertain people's aspirations and priorities to devise effective measures to tackle the economic challenges.