On the rebound: Expressing optimism for Hong Kong's economic future, Financial Secretary Henry Tang said: "I have every confidence that by grasping our opportunities, constantly renewing our strengths and making full use of our advantages, we can work another economic miracle."

The Financial Secretary has proposed no tax increases in his first Budget, a move to allow the Hong Kong community a respite and give enterprises time to consolidate while creating conditions favourable for a sustained economic recovery.

In his address to the Legislative Council today, Henry Tang said a free market economy is the bedrock of Hong Kong's success so the guiding principle in fostering economic development should be "market leads and government facilitates". He added that the economic future was bright.

"In little more than half a year, Hong Kong has witnessed a dramatic change in the economic climate. Our economy has bottomed out with a V-shaped rebound, and businesses have revived. I am very optimistic about our economic prospects."

Despite difficulties the SARS outbreak caused, the economy staged a rapid rebound, registering real GDP growth of 3.3% in 2003, up from 2.3% in 2002. This, he said, demonstrated the "tenacity, ingenuity and enterprising spirit of our people", and "the great advantage we have in leveraging on our special relationship with the Mainland while engaging the world at large."

He added: "I have every confidence that by grasping our opportunities, constantly renewing our strengths and making full use of our advantages, we can work another economic miracle."

6% GDP growth forecast for 2004

He expects recovery in 2004 to be more deeply seated and broadly based, forecasting real GDP growth of 6%. Deflation should ease, he said, forecasting a 1% fall in the Composite Consumer Price Index for the year.

Over the medium term, he sees GDP growing at 3.8% in real terms, while nominal GDP is forecast at 4.5%.

Three factors will aid Hong Kong's economic growth in the coming year:

* the ongoing implementation of the Mainland/Hong Kong Closer Economic Partnership Arrangement;

* increased tourist arrivals from the Mainland; and

* solid growth in external trade, including robust performance of offshore trade and professional services exports.

Deficit shrinks to $49b from nearly $62b

The Government's forecast deficit for 2003-04 is $49 billion, compared with $61.7 billion in 2002-03.

Government operating expenditure for 2004-05 will be $212.2 billion, 2.4% less than the $217.4 billion originally estimated - incorporating the SARS measures - for 2003-04. Total government spending for 2004-05 will be $258.7 billion: 26.4% for social welfare and health, 23% for education, and 10.5% for security.

"As I strive to foster economic growth, I remain very concerned about our society's development," Mr Tang said.

To encourage community sectors to work together to create a cohesive, harmonious and caring society, Mr Tang has earmarked an additional $200 million to promote a social partnership among the Government, the business community and the welfare sector, and to encourage corporations to help the disadvantaged.

Mr Tang said he was pleased to see a strong consensus in the community that we should strive to balance our Budget and pledged to continue with the Government's drive to tackle the deficit by stringently reeling in spending. He forecast the Government would balance its books and reduce public spending to 16.9% of GDP by 2008-09.

Tax concessions extended

Mr Tang proposed extending two tax concessions - the salaries tax deduction for home loan interest and the duty concession for ultra low sulphur diesel.

Household mortgage holders will now be entitled to home-loan interest deductions for seven years, up from five, with the maximum deduction in any year maintained at $100,000.

If the Legislative Council approves the measure, the concession would take effect from 2003-04. It would cost the Government $4.6 billion in forgone revenues over five years and several hundred thousand taxpayers would benefit.

He also proposed that the concessionary rate of $1.11 per litre for ultra low sulphur diesel that was due to expire at the end the month be extended until the end of the year. This would cost the Government about $900 million in forgone revenues for 2004-05.

Mr Tang said that more than 90% of ratepayers would see an average reduction of 11% in their rates bills next year because of a drop in rateable values, though the rates percentage charged would remain at 5%.

Bonds to fund infrastructure, investment projects

Mr Tang plans to issue government bonds to fund infrastructure or other investment projects that will bring long-term economic benefits to Hong Kong. But he stressed that the Government will not issue bonds to meet its operating expenditure. "We will definitely not live on credit," he said.

Issuing government bonds will provide greater flexibility in managing Government liquidity and also help promote the development of Hong Kong's bond market, he said.

"Quality bonds are an investment option that can provide a steady and higher return. The issuance of government bonds could offer retail and institutional investors such an option," he said.

He proposed that the Government issue a maximum of $20 billion in bonds in 2004-05. The decision to issue additional bonds in future will be based on market conditions, the amount of funds required for investment projects and the implementation of the asset sale and securitisation programme.

DesignSmart to make HK centre of design excellence

To foster creativity and innovation, he has earmarked $250 million to launch a DesignSmart initiative to nurture start-up design ventures, train manpower in design and branding, and promote and honour design excellence.

The initiative also includes setting up a Design & Innovation Centre to attract design talent from different places.

"Our younger generation is very good at picking up new ideas and knowledge and is not afraid to experiment or innovate. This provides a fresh impetus to our economic restructuring," he said.

An extra $95 million has been earmarked for tourism promotion and training activities. The Tourism Orientation Programme will be extended for two years while the Government conducts studies to formulate a tourism development strategy.

'Personalised plates' to raise $70m a year

To raise revenue, the Financial Secretary proposed the introduction of a Personalised Vehicle Registration Marks Scheme that is expected to raise an additional $70 million a year.

Vehicle owners will be able to select a personalised registration mark, any combination of up to eight letters and numbers, subject to bidding and other conditions.

Mr Tang said the Government was duty-bound to reduce the amount of subsidies given for fees and charges, especially those items not related to livelihood, in line with the "user pays" principle. Most of these fees and charges have been frozen since 1998 to alleviate the financial burden on the public in difficult economic times.

As Government departments pare costs, there may be room to reduce some fees and charges, and he hoped LegCo members would give the proposals for fee revisions "a fair and objective" hearing.

GST to be considered

Economies in all parts of the world have successively introduced a goods and services tax, or GST, to broaden their tax base and increase tax revenue. Hong Kong is the only mature economy that does not have one.

An internal committee was conducting a detailed and comprehensive study on the implementation of a GST in Hong Kong and would submit its report by the end of the year.

Looking forward - with optimism

"With the objectives of promoting people-based governance, prudent management of public finances and leaving wealth with the people, I will do my best to strike a balance between reducing the fiscal deficit and safeguarding people's livelihood, so as to give ourselves a breathing space to restore our vigour," Mr Tang said.

"It is now springtime when flowers are coming into bloom, and we can see clearly the early dawn of our economic recovery. Let us work hand in hand, shoulder to shoulder, to realise a bright future for Hong Kong."

Key indicators

* Real GDP growth in 2003: 3.3% (2002: 2.3%)

* Unemployment: 7.3% (down from a peak of 8.7% in mid-2003)

* 2003 Composite Consumer Price Index: -2.6%

* Total exports: + 14.2%

* Offshore trade: Up 16.5%

* Forecast GDP growth for 2004: 6%

* Forecast 2004 Composite Consumer Price Index: -1%