While the numbers paint a gloomy picture of Hong Kong's economy, Financial Secretary John Tsang says the Government should show its commitment to the community during exceptional times and maintain spending at a high level.
As a result of the financial crisis and a slowdown in the global economy, Hong Kong's economy suffered a heavy blow in the latter half of 2008, he told lawmakers as he delivered his Budget today.
Gross Domestic Product growth fell - from 7.3% in the first quarter, to 4.3% in the second quarter, 1.7% in the third quarter, and -2.5% in the fourth quarter. For 2008 as a whole, GDP grew by 2.5%, lower than the trend growth rate over the past decade.
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In the works: To counter the financial crisis, the Government will invest heavily in infrastructure. GDP growth slowed to just 2.5% for the whole of last year, lower than the trend rate over the past decade, while the average inflation rate as measured by the Composite Consumer Price Index for 2008 was 4.3%. | |
"Growth in Hong Kong's goods exports slowed last year, recording an increase of only 2%. Consumer sentiment has worsened visibly. The drop in asset prices and bleaker economic prospects saw private consumption spending grow by only 1.8% in 2008, a marked slowdown from the rapid growth in 2007," Mr Tsang said.
Towards the end of last year, enterprises took a more cautious approach to investment and hiring. Gross domestic fixed capital formation dipped 0.3% for the whole year. After falling to a 10-year low of 3.2% in the middle of last year, unemployment has risen to 4.6%.
The financial crisis also triggered a rapid decline in the property market towards the end of last year, he said. Negative equity cases increased to more than 10,000 in the fourth quarter, and represent 2% of all residential mortgages.
As world food prices rose, local inflation went up for most of last year. The rise in private housing rental earlier on, due to an increase in demand, also brought inflationary pressure. As global food and energy prices fell and consumer demand declined in the second half of last year, the inflationary pressure on Hong Kong eased.
Measures dampened inflation
Last year's Budget and a package of relief measures the Chief Executive unveiled in July helped lower headline inflation, Mr Tsang said. The International Monetary Fund agreed these measures had provided a timely economic stimulus and protected vulnerable groups from the consequences of high food prices and the effects of economic downturn.
The average inflation rate as measured by the Composite Consumer Price Index for 2008 was 4.3%. Had there been no relief measures, the inflation rate would have been 5.6%.
The Financial Secretary stressed 2009 will be a difficult year. He forecasts a 2%-3% drop in GDP for 2009 - the first negative growth for a whole year since the Asian financial crisis in 1998.
"With the economy sinking into recession, the employment situation is expected to deteriorate further. As regards inflation, given weaker demand and a significant drop in global commodity prices starting from the second half of last year, I forecast that the headline inflation rate in 2009 will ease to 1.6%.
"In the midst of a worldwide economic downturn, we all hope for a full recovery as soon as possible. Given the fluid economic situation and the varying effects of stimulus measures being taken around the world, it is likely that the global economy will take some time to return to normal."
2008-09 outturn
Operating expenditure for 2008-09, which covers the costs of one-off relief measure, is estimated to be $260 billion - 27% higher than that for 2007-08.
The lagging effect of the rapid economic growth in 2007-08 led to higher-than-expected revenues from profits tax and salaries tax this year, Mr Tsang said, noting the financial crisis' impact on tax revenue has yet to be fully reflected in 2008-09. He expects operating revenue for 2008-09 will be $278 billion - $28.6 billion higher than the original estimate.
Land premium is estimated at $16.9 billion - $26.2 billion lower than the original estimate of $43.1 billion, and down 73% over 2007-08.
Excluding the $21.6 billion endowment to the West Kowloon Cultural District Authority, the revised estimate for government works projects spending for 2008-09 is $23 billion. That is $1.2 billion higher than the original estimate of $21.8 billion and an increase of 12% over the $20.5 billion spent in 2007-08.
Mr Tsang expects an even larger increase in capital works spending in 2009-10.
He forecasts an $18 billion surplus in the Operating Account and a $4.9 billion deficit in the Consolidated Account for 2008-09.
"This deficit, equivalent to 0.3% of our GDP, is close to the deficit of $7.5 billion in the original estimate. This can be regarded as achieving fiscal balance," he said.
Fiscal reserves are forecast to stand at $488 billion by the end of March.
Medium-range forecast
For 2009-10, the Budget sets total government spending at $301.6 billion - slightly lower than that for 2008-09 which included the costs of one-off measures, and 19.2% higher than actual 2007-08 spending. The GDP for 2009 is forecast to increase just 1.8% over 2007.
Mr Tsang forecasts a $9.89 billion deficit in the Operating Account and a $30.1 billion deficit in the Capital Financing Statement in this Budget, resulting in a $39.9 billion deficit in the Consolidated Account, equivalent to 2.4% of our GDP.
Fiscal reserves are estimated to stand at $448.1 billion by the end of March 2010, equivalent to 18 months of government spending.
"For the medium term, I estimate that the annual average growth rate will be 3.5% in real terms for the period 2010-13, while the inflation rate forecast will average 2%. I forecast a deficit in the Operating Account for the next three years, and followed by a return to surplus in our Operating Account in 2012-13, with a further increase in surplus in the subsequent year," Mr Tsang said.
Heavy infrastructure investment to continue
"I will continue to invest heavily in infrastructure so as to counter the financial crisis, create employment and enhance the long-term competitiveness of Hong Kong."
He forecasts a capital financing deficit for some time, especially as annual capital works spending will remain high over the next few years, and may reach $50 billion.
"In light of the current economic environment and needs of the community, I hold to the view that next year's spending should be maintained at a high level despite a fall in revenue. Although this will lead to a deficit in 2009-10, requiring us to draw on the fiscal reserves, I consider it appropriate," he said.
"The Government should show its commitments to the community during exceptional times. In the medium term, with the recovery of the economy and our control of operating expenditure, I forecast that the consolidated deficit will gradually decline and we will largely achieve fiscal balance by 2013-14."
He estimates the fiscal reserves will be about $390 billion by the end of March 2014, equivalent to 14 months of government spending.
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