This year's Budget has generated considerable debate in the community. Our strong economic recovery and the improvement in the Government's financial position had heightened the expectations of some.

I can therefore understand their wishes for concessions in taxes and increases in welfare. Although views are divergent, I am happy to note the findings of various independent surveys: the majority of respondents have endorsed my principle of fiscal prudence.

In announcing the outline of the Eleventh Five-Year Plan at the National People's Congress in early March this year, Premier Wen Jiabao referred to Hong Kong's position in the overall framework for national development.

From the perspective of long-term national economic and social development planning, he stressed the importance of maintaining the prosperity and stability of Hong Kong, upholding the principles of 'One Country, Two Systems' and 'Hong Kong People Ruling Hong Kong', supporting the development of our financial, logistics, tourism and information services, and maintaining Hong Kong's position as an international financial, trading and shipping centre.

After speaking at the Congress, he further pointed out that Hong Kong's role in the development of the Mainland was irreplaceable. We are most grateful for the support of the Central Government. I firmly believe that Hong Kong will seize opportunities, enhance its competitiveness and complement our nation's development.

Hong Kong is an integral part of China, and, at the same time, an international city. My long-term vision is this: Hong Kong should, by our working together, contribute to our nation, capitalise on our strengths and develop into a just, caring and vibrant cosmopolitan city.

Fundamental economic sustainability relies on sound strategies that will bring long-term benefits and short-term gains. I have laid down several policies that will have a long-term effect on our future economic viability. These policies are:

* prudent management of public finances;

* expanding Renminbi business; and

* pooling of talent.

These three areas are not exhaustive, but they represent important policies which will have a large bearing on our economic future. We must look to our own viability, but the policies adopted in our overall plans should be mutually beneficial to the Mainland. We must adhere to the 'three Cs' principle, namely, Complementarity, Co-operation and friendly Competition with the Mainland.

The financial services sector is a major strength for Hong Kong. It is enjoying robust growth, but we must constantly improve ourselves. Hong Kong, with its sound regulatory system, advanced financial infrastructure and world-class professionals, is well-positioned to contribute to financial intermediation in the Mainland and play a significant role in developing our nation.

We must provide the Mainland with an international standard of efficient, diversified and multi-currency instruments and financial services. This will help open up more fund- raising and investment channels for the Mainland and further consolidate our position as an international financial centre, thereby achieving a win-win situation.

One of the important strategies for financial development in future, therefore, is to strengthen our role as the launchpad for Mainland enterprises to invest and raise capital in international markets, complementing the Mainland's financial reform and economic development.

Expanding our Renminbi business is critical for the further development of our financial services. If we fail to progress this, our competitive edge will in future be seriously undermined. In expanding our Renminbi business, we will of course have to work in tandem with the direction and pace of our nation's development.

While the Mainland is making an all-out effort to build a moderately prosperous society in all respects and developing a socialist market economy, we will continue to adhere to the principles of a market economy and remain a capitalist society.

I have fundamental faith in the market economy. If this is in order and working well, the Government should keep its distance. Only when the market cannot, or fails to function should we intervene. We should facilitate the growth of markets and ensure that they operate fairly and openly. Providing the best business environment, cutting red tape, streamlining procedures, and reducing compliance costs are all our priorities.

Let me elaborate: We want to create the most open and fair business environment in which enterprises may flourish. There is much for the Government to do, such as promoting economic development, improving people's livelihood, creating more employment opportunities, opening up new markets, and reducing trade barriers.

The implementation of the Closer Economic Partnership Arrangement and expansion of the scope of our Renminbi business are examples of government promotion of market development. There are also times when the market may not be ready to make a start.

In those circumstances, the Government should take the lead. Examples include the construction of railways, airports, industrial estates, science parks, theme parks, and ecoparks. We will continue to uphold the principle of "Market Leads, Government Facilitates", and play the role of a market facilitator.

Hong Kong's only natural resources are our people. As I said in my Budget speech, economies which can attract the best talent will be the most successful in this globalised era. The significant improvement in the skills profile of our labour force has enabled our economy to transform itself over time.

To build on the success of the Admission Scheme for Mainland Talents & Professionals, under which more than 9,000 applications have been approved, we will introduce the Quality Migrant Admission Scheme in the first half of this year to attract talent from outside Hong Kong. The main feature of the new scheme is that applicants will not be required to secure a job beforehand.

Separately, we will further enhance our tertiary education by providing an additional 1,800 hostel places to benefit both local and exchange students. These new measures have been very well-received by the business sector and the tertiary institutions.

Investing in infrastructure not only promotes economic development and brings more job opportunities, but also makes for a more pleasant living environment and enhances our competitiveness. We now have a number of major projects under planning, for example the Kai Tak development. I sincerely hope that an early consensus can be reached on these projects so that they can commence more quickly.

As I said in my Budget speech, I am prepared, if necessary, to increase our estimates of expenditure on such infrastructure. At the same time, the Government will study the feasibility of manufacturing prefabricated structures in Hong Kong to help ease the serious and persistent unemployment problem in the construction sector.

Maintaining a small government. Spending within our means. Sharing wealth where we can. Investing in the future. These are all aspects of fiscal prudence and also the pledges that I am striving to fulfil. Prudent fiscal management serves a number of purposes by keeping our taxes low and simple, providing a basic safety net and saving up for a rainy day. This is the approach that best satisfies the community's public-finance aspirations.

Since the day that I became Financial Secretary, I have faced perpetually conflicting demands. During the Budget debate last week, different political parties made various demands: on the one hand, revision of the Comprehensive Social Security Assistance rates, increases in subsidies for early childhood education, and in expenditure to prevent domestic violence, on medical care and environmental protection, the introduction of a community-wide elderly retirement scheme, and provision of additional resources to help disadvantaged groups; and restoring the salaries tax rates to their 2002-03 levels, expressing reservations over the introduction of a Goods & Services Tax, and a reduction in rates on the other. And the list goes on and on.

Each demand, on the face of it and on its own, may have merit. However, considering all of them together leads to a completely different conclusion. Such demands are easy to make; impossible to deliver together. We need to prioritise and make our choice.

As I mentioned in my Budget speech, the biggest challenge in managing public finances is to keep taxes low while, at the same time, satisfying the needs of the community. My fiscal targets are to maintain our accounts in balance and the share of public expenditure in GDP at 20% or below over the next few years. For 2006-07, this share will be around 18%. That is much lower than for many developed economies. For example, the corresponding ratio for members of the Organisation for Economic Co-operation and Development is, on average, nearly 40%.

That the Government can provide first-class services in medical care, education, public order, housing, and so forth for the public, even with our low tax regime, fully reflects our commitment to ensure the efficient use of resources and achieve the best value for money. Nor have we ever tried to wriggle out of these major commitments under political pressure.

The Honourable Leung Yiu-chung took Finland as an example in his speech. He said,:"Even in times of economic downturn, the Finnish Government has continued to invest in manpower development. In education, it has also implemented the small-class teaching that we have often called for, and greatly expanded its tertiary education. It has implemented all these without cutting its expenditure."

I wonder if the Honourable Leung Yiu-chung is aware that the share of public expenditure in Finland is 50% of GDP. How can such countries manage? Because of their high tax rates. Will our community accept a high tax regime? In fact, we continued to invest in education and training during the deficit years.

The newly established Civic Party have set out some very logical commitments, that our tax system should have a broad social basis and progressive rates to ensure the fair distribution of resources in the community. Let me remind Members that the resources of the Government come from the taxpayers. We have no oil, minerals or gold nor have we any other natural resources that grow on trees. Indeed, when there are calls for substantial increases in welfare, we cannot ignore the possibility of increasing taxes.

Will those political parties which have proposed increases in public expenditure support a tax increase? Surely not, as you are requesting a tax cut at the same time. Is this not self-contradictory? May I quote the question asked by the Honourable Lau Chin-shek: "How much are we willing to contribute?"

All we should and can do is to provide a basic safety net. Numerous Members have accused us of not "caring" enough, that we only use $100 million to help the disadvantaged groups. This is intentionally misleading. Our total welfare expenditure accounts for around $36.2 billion, more or less the same as the revenue from salaries tax. In the coming year, recurrent expenditure on welfare will increase by $2.3 billion. These figures do not include government spending on education, housing or medical services for the needy.

Some people have requested the Government to assist the unemployed living in districts further afield to take up employment by providing them with short-term travel support. I have announced in my Budget that, in the coming year, we will provide, on a trial basis, such support for Yuen Long, Islands and North Districts residents. We will keep an open mind in reviewing the trial scheme, and also study the possibility of introducing other measures to promote self-reliance through work.

On top of this, I have already agreed in principle with the proposal of the Commission on Poverty to launch a transport subsidy trial scheme for low-income residents of remote districts to encourage them to work. We will further consider the implementation details of the scheme and our target is to roll it out in 2006-07.

Children and young people are the hopes for our future. To prevent intergenerational poverty, we should start to help at that early stage. The Task Force on Children and Youth under the Commission on Poverty will examine this to prevent intergenerational poverty. I support this area of work and will adopt a positive attitude to any relevant proposals.

The task force will actively consider some Members' proposals to set up a child development fund, and in the coming months will re-examine existing measures to promote the sound and balanced development of the physical and psychological well-being of children and young people, particularly those from disadvantaged backgrounds.

Some have alleged the Government is "deliberately" underestimating the surplus for 2005-06 and hence the scope for more tax concessions. In fact, taking expenditure and revenue estimates together, the government accounts involve a total of some $480 billion in 2005-06.

Deviations from the expenditure or revenue estimates must be assessed in that context. There is absolutely no question of Government trying to cook the books. The fact is that we will continuously update the figures and announce them at the end of each month.

The latest update shows the consolidated surplus by the end of February to be $12 billion, $7.6 billion lower than the January figure. Our latest estimate does show that the outturn for 2005-06 will be better than the $4.1 billion originally forecast in the Budget. However, we will not be able to tell how much the improvement will be until the closing of the 2005-06 accounts, and we will release the provisional results on April 29.

While I am happy to note the improving situation, I should remind Members that the accumulated deficits over the past seven years have reduced the fiscal reserves by some $190 billion in total. Some Members are of the view that with a surplus of many billions, the Government should cut taxes or increase expenditure very substantially. This is either ignorant or purposely misleading. Can we so quickly forget the difficult times that we have been through and the strenuous efforts that we have made over the past seven years, without drawing on the experience we have gained?

As an externally-oriented economy, we should not be oblivious to the challenges around us. Naturally, I have no wish to see an outbreak of bird flu. Neither do I want to see any possible economic fluctuations in the US which may have an impact on the global economy. The risks are, however, real and we cannot pretend that they do not exist. Any government with a firm commitment to the community should be alert to all such challenges, and address them with the best long-term interests of the people at heart.

Three years ahead of schedule, we have achieved all three fiscal targets by successfully reining in expenditure and restoring fiscal balance, which have entailed great effort. Those who are familiar with public finances will know how difficult such a task can be.

We should recognise this as no small achievement, although there is no room for complacency. Without the effort of the whole Government as a team and the support of our community, this would not have been possible. As our financial position has improved after years of tremendous effort, it is perhaps understandable why the demands from Members have increased.

Now I come to my proposed tax concessions. Some think that these are not enough. I realize everyone has a different understanding of what is "enough". It would perhaps be more objective to let the figures and facts speak for themselves.

Fact: There are over 1.2 million salaries taxpayers in Hong Kong. For nearly two-thirds of them, the effective tax rate is 5% per cent or less. That is low by any developed economy's standards. Under my proposed tax concessions, a typical middle-class family earning $480,000 a year with one child and one dependent parent aged 60 or above, currently paying interest of around $40,000 annually on a mortgage, will enjoy a tax saving of $9,400 or 30%. The effective tax rate of this family is also less than 5%.

Fact: As in my two previous Budgets, I have proposed to implement no new taxes. With the salaries tax concessions proposed this year, tax rates will be reduced for the first time since 1998. And they are not one-off.

I hope that all of you understand that our public finances are just recovering. The operating account has only now crept back into balance after many long years of deficit. This is a hard-won achievement. It would be reckless of me to introduce major tax concessions. Indeed, had I done so, I would be accused of trying to buy some popularity.

Nevertheless, I would like to thank Members for their various tax-concession proposals. While I cannot accept these for this year, I will, having regard to prevailing circumstances, continue to examine them carefully in preparing for my future Budgets. If the financial climate continues to improve, we will consider future tax concessions.

We will look into the proposal to introduce tax relief for tuition fees of associate degree courses. The Democratic Alliance for the Betterment & Progress of Hong Kong has also proposed a one-off allowance for parents of newborn babies, to encourage childbirth. This is interesting and also worth considering.

We should not shy from admitting that the current structure of public finances is less than healthy. In addressing this issue, I will adopt a pragmatic approach. The need to consider a broad-based tax is clear. Existing revenue sources are limited and unstable.

Like it or not, land revenue is an important source of revenue for us. It is very volatile, swinging between 3% and 28% of our revenue over the past 10 years. Most other sources are also subject to economic fluctuations. It is a common belief in every civil society that to contribute an affordable amount of taxes is the responsibility of every citizen. An equitable society is also based on civic duty, not personal interests. The Government cannot simply by itself restore public finances to good health. Our community as a whole must achieve this collectively.

To address people's concerns over a Goods & Services Tax, I am suggesting a nine-month public consultation period setting out our detailed proposals, including tax relief and other compensatory measures. Sixteen Members, many belonging to different political parties, expressed their reservations over GST to different extents in their speeches last week.

However, I am glad the Liberal Party agrees with us that the Government should conduct a consultation on GST, despite the fact that most of their Members' constituents have reservations about the tax. This is a sensible and responsible decision. I hope Members will put aside their short-term political interests and their opposition to every tax proposal without having considered the rationale, and hold in-depth and reasoned discussions on GST during the consultation period.

I firmly believe that my Budget has struck the right balance. With our low taxation, we need to maintain a small government and a low level of expenditure. We need to be alert to the many challenges Hong Kong faces, and save up for any rainy days that lie ahead.

I have responded to the community's aspirations with due regard to our fiscal position. I have taken a principled approach by sharing wealth - to the extent that we can afford this - with the people. I will continue to invest in infrastructure in order to lay a solid foundation for the sustainable development of Hong Kong.

I am planning to strengthen our public finances in the long-term interests of our society. And I am heartened by the views expressed by various sectors of the community and their support for this year's Budget. Apart from making ourselves a just, caring and vibrant special administrative region, we should make an important contribution to the building and development of our nation.

I firmly believe that, for as long as we remain united and continue to work together, we shall be able to make the best of the opportunities in front of us and that Hong Kong will emerge as a better and stronger international city.

Financial Secretary Henry Tang gave this address to the Legislative Council on the Appropriation Bill 2006.