The main objective of this year's Budget is to contribute to the long-term economic development, social harmony and stability of Hong Kong under the policy direction of "revitalising the economy, promoting employment and improving people's livelihood".

The Budget has put forward directions for Hong Kong's long-term development as well as measures to improve people's livelihood. By adopting a two-pronged approach, we will, on the one hand, provide tax concessions to reduce the burden of taxpayers and, on the other, continue to implement various measures actively to support the disadvantaged and help them achieve self-reliance and improve their livelihood.

Three quarters of the tax relief measures proposed in the Budget are one-off, and the remainder are recurrent measures. This arrangement both follows the principle of prudent management of public finances and leaves wealth with the community where affordable, while providing some headroom for the next Government. I am glad that the community generally supports these measures and arrangements.

During the debate in late March, some Legislative Council members criticised this Budget as lacking in direction for long-term development. I do not agree with this and consider such criticism unfair.

In making every policy or decision, we always have the well-being of the citizens and long-term interests of Hong Kong at heart. Economic development is a continual process and the Government has striven all along to enhance Hong Kong's competitiveness, taking into account our various long-term development needs.

In addition, Hong Kong is a market-oriented free economy. The Government's role is to provide the market with a sound regulatory framework and efficient infrastructure and create a favourable environment in which all businesses may flourish.

The Budget has clearly set out the directions and constituents for Hong Kong's sustained economic development. Hong Kong must keep moving towards high value-added production and a knowledge-based economy. We should reinforce our competitive edge by vigorously developing our financial services, trade, logistics and tourism industries, continue to improve our business environment and promote fair competition.

At the same time, we need to create an environment conducive to a knowledge-based economy by pooling talent, encouraging creative industries and facilitating research and development.

As I mentioned in the Budget speech, furthering our economic integration with the Mainland is the key to Hong Kong's development. We should grasp the present opportunities and, with our advantage in having the Mainland as our hinterland, coupled with our own international outlook, in accordance with the principle of a mutually-beneficial partnership, bring into full play our competitive edge as the international centre providing services to the Mainland market.

Take financial services as an example. We should seize the opportunities now presented by the Mainland's pressing demand for quality financial services. Following the principles of complementarity, co-operation and interaction, we can help enhance the efficiency of financial intermediation in the Mainland and facilitate reform of the Mainland's financial system, thereby developing Hong Kong into a world-class international financial centre for our nation.

Furthermore, we should not judge the Government's long-term development blueprint by the budget of a single year. The Chief Executive's Policy Address and the Report on the Economic Summit on "China's 11th Five-Year Plan & the Development of Hong Kong" have already discussed in great detail the directions for Hong Kong's future development and how to enhance the long-term competitiveness of our economy through various concrete measures.

I have also proposed and implemented, in the four budgets during my term of office, a number of measures conducive to Hong Kong's long-term development to ensure our prosperity and stability.

Examples of such measures include:

* abolition of estate duty and exemption of offshore funds from profits tax to consolidate our position as a major asset-management centre;

* active promotion of CEPA, Pan-Pearl River Delta co-operation and development of renminbi business to further our economic integration with the Mainland;

* support for the development of applied scientific research as well as our design and creative industries;

* heavy investment in education and implementation of various schemes to upgrade our human capital; and

* allocation of resources to promote the development of social enterprises and strengthen family support.

As Hong Kong is a highly externally-oriented economy, it is susceptible to economic changes in the external environment. Although the overall global economy is faring quite well as the International Monetary Fund has recently forecast that world economic growth may reach 5% this year, there remain a number of uncertainties.

For example, given the slowdown in the US economy, the market is expecting a reduction in interest rates. However, with increasing core inflationary pressure, any US interest-rate hike would have a great impact on the market, and increase the chance of economic recession in the US, which, in turn, will affect global economic performance.

In addition, we should be particularly watchful for financial market risks and global trade imbalances. Furthermore, some members have pointed out that Hong Kong will continue to face different challenges in future, such as a shortage of adequate convention and exhibition facilities to meet increasing demand. We will stay alert to the various challenges ahead and respond positively, so as to enhance the competitiveness of Hong Kong.

Creating employment opportunities is one of our major considerations in formulating government policies. In developing each new policy, I will consider whether it would have a positive effect on Hong Kong's economy and create more employment opportunities in the labour market.

As I mentioned in the Budget, given the booming economy in recent years and the implementation of many measures to revitalise the economy, total employment has increased by more than 310,000 over the low point in 2003, and about 40% of these jobs require relatively low skills.

I am, however, aware that individual sectors and some low-skilled workers are still facing great difficulties brought about by economic restructuring. I have always emphasised that, rather than just providing able-bodied job seekers with welfare benefits, we hope to assist them by providing proper employment support and training, thereby helping them overcome work barriers and enhance their employability, and encouraging them to re-enter the labour market and achieve self-reliance.

The pilot transport support scheme proposed in the Budget will encourage unemployed and low-income people living in remote areas to seek jobs and work across districts. We have further relaxed the eligibility criteria of the scheme to benefit more people in need, reflecting the Government's serious attitude to promoting employment.

I appreciate the community's deep concern over the youth employment problem. Apart from the initiatives mentioned in the Budget speech, the Labour Department has been providing comprehensive employment services to job seekers through various programmes.

With two more job centres coming into operation in Yuen Long and North Districts in September last year, the total number of job centres has increased to 12.

To strengthen employment support to young people and enhance their employability, two youth employment resource centres will be set up in 2007-08 to provide one-stop integrated services on career counselling, value-added training and self-employment support to participants of the Youth Work Experience and Training Scheme and the Youth Pre-Employment Training Programme and other young people aged between 15 and 29. We will also provide transport support for the participants of these two programmes.

Some members, chambers of commerce and professional bodies have suggested that we should reduce the profits-tax rate and introduce group loss relief and loss carry-back arrangements to sharpen our competitiveness.

I am of the view that our low and simple tax regime is still very competitive both regionally and internationally and that our low tax rate is only one of the features of our favourable business environment.

Besides, the current practice of allowing businesses to offset their losses indefinitely against the profits of future years is already very attractive to investors. Nevertheless, we do need to review our tax system from time to time to ensure the competitiveness of our business environment.

The health of our public finances has a major bearing on the stability of our monetary and financial systems, investor confidence, and the sustainable development of our economy as a whole.

In the past few years, whether in good times or bad, we have maintained strict fiscal discipline and ensured the efficient use of resources. We have worked hand in hand with the community to tide us over the difficult times of successive years of fiscal deficit and restore the health of our public finances.

With our strong economic recovery, many items of government revenue have recorded significant growth. As the Government's financial position has improved markedly, there is room for us to implement more generous tax concessions to share the fruits of economic prosperity with the community.

In this year's Budget, I have adopted a two-pronged approach. On the one hand, we have budgeted a total of over $20 billion to introduce a number of tax relief and one-off measures to share wealth with the community. The measures include:

* reverting the marginal bands and marginal rates for salaries tax to their 2002-03 levels;

* increasing the child allowance to $50,000 for each child;

* introducing an additional one-off child allowance of $50,000 for each newborn baby;

* increasing the amount of deduction for self-education expenses to $60,000; and

* waiving 50% of salaries tax assessed for the last financial year, subject to a cap of $15,000, which will benefit all salaries taxpayers.

Waiving rates for the first two quarters of this year, subject to a cap of $5,000 per quarter for each rateable tenement, will benefit all rate-paying families and businesses, including public-housing residents, middle-class families and small and medium enterprises.

Reducing the rate of stamp duty on transactions of properties with a value between $1 million and $2 million will help ease the burden of many families in purchasing their own home.

On the other hand, we will continue to address the needs of the disadvantaged. In this connection, the Budget has proposed a series of measures, including the introduction of a pilot transport support scheme to encourage people to work across districts, relaxation of two requirements in relation to disregarded earnings under the Comprehensive Social Security Assistance Scheme and the setting up of a child-development fund to help the grassroots improve their livelihood.

I have also proposed to provide one additional month of basic assistance for CSSA and Social Security Allowance recipients to share the fruits of economic prosperity with them. The Secretary for Health, Welfare & Food has just responded to the points raised on issues concerning social welfare and helping the disadvantaged.

The estimated total spending on social welfare for 2007-08 amounts to $37.4 billion, instead of merely $900 million, as some members have suggested. Social welfare is the second biggest expenditure item after education. This reflects the fact that we are positively committed to helping the disadvantaged.

Some members have queried whether the Government has deliberately underestimated the fiscal surplus. I have explained in my Budget speech that the variances between the revised and original estimates are essentially due to our economy's better-than-expected performance.

Government revenue from various sources, including investment income and revenue from land premiums, stamp duty, profits tax and salaries tax, is also significantly higher than the original estimates.

Besides, the government accounts involve huge sums of spending and revenue and thousands of individual items. A slight difference between the estimated and actual figures in some items would result in bigger variances in the consolidated figures. This is perfectly understandable.

Moreover, in expenditure planning and the actual utilisation of resources, all government departments observe the principle of prudent fiscal management. Therefore, the relevant departments should not be criticised when their actual expenditure is lower than the estimates, provided they maintain quality of service.

Some members have also suggested that recurrent expenditure should increase to a greater extent in certain areas. Although there is now a substantial surplus in the government accounts, history tells us that government revenue fluctuates with changes in the economic cycle, and government expenditure lacks flexibility.

Therefore, we must examine all expenditure proposals critically, subject to the principles of prudent fiscal management and keeping spending within the limits of revenues, and with due regard to the actual situation and the community's requirements.

Although the problem of our fiscal deficit has been overcome for the time being, I agree that there are still some long-term issues that need to be addressed, such as an ageing population, rising medical spending, a narrow tax base and volatile revenues.

If not tackled in a timely manner, they will bring enormous pressure to bear on our public finances in the medium to long term.

We have just concluded a nine-month consultation on tax reform, and we are grateful to various sectors for their views. This consultation exercise has provided a good opportunity to engage the community at large in considering the issues that will affect the long-term development of Hong Kong. I believe we have made a good start.

Involving the public in policy deliberations demonstrates our commitment to "always people first". Moreover, to reduce investment-income volatility, this Budget has proposed to revise the income-sharing arrangement between the fiscal reserves and the Exchange Fund. I am glad this revision has been well received by the community. While observing the principle of maintaining the robustness of the Exchange Fund, we will explore ways to increase its return.

During the debate last month, many members expressed concern about the level of our fiscal reserves. Some Members thought the Exchange Fund had usable assets of more than $1 trillion and suggested that some of these could be used to finance government expenditure. In fact, the so-called $1 trillion comprise not only the monetary base and the accumulated surplus of the Fund, but also the Government's fiscal reserves.

Article 113 of the Basic Law clearly stipulates that the Exchange Fund shall be used primarily for regulating the exchange value of the Hong Kong dollar. The Exchange Fund Ordinance also provides that the fund shall be used principally for purposes affecting either directly or indirectly, the exchange value of the currency of Hong Kong, and then to maintain the stability and integrity of our monetary and financial systems, with a view to maintaining Hong Kong as an international financial centre.

To achieve these statutory objectives, the Exchange Fund needs to have adequate resources. As such, the monetary base and the accumulated surplus of the Fund, which stand at about $800 billion, should not be used to finance government spending.

Our handling of the fiscal reserves, which amount to about $360 billion, can, however, be more flexible. The Budget has indeed proposed revising the income-sharing arrangement between the fiscal reserves and the Exchange Fund to increase the Government's investment income and enhance its stability.

I would like to reiterate that maintaining adequate fiscal reserves can help ease the impact arising from economic downturns or setbacks caused by external factors, and can improve the ability of the Exchange Fund to maintain, as and when necessary, the stability and integrity of our monetary and financial systems, which is crucial to the economic stability and prosperity of Hong Kong. Therefore, the Government cannot redeploy the fiscal reserves irresponsibly to finance spending items, in particular on a recurrent basis.

We should not forget that, due to the economic downturn but given the need, nevertheless, to maintain government services, our fiscal reserves had shrunk by more than $190 billion -  more than 40% - over seven years from $457.5 billion at the end of March 1998.

During a recession, it is possible that the reserves could be used up in a few years. Nevertheless, I agree that the reserves need not keep expanding, but rather they should be maintained at an appropriate level to meet our needs. As such, we need to consider the issue further.

The Government is committed to promoting long-term economic development and helping the disadvantaged. I believe that this Budget has struck the right balance between reviving the economy, promoting employment and improving people's livelihood, and can achieve its goal of benefiting people from all walks of life.

After the announcement of the Budget, many citizens and people from various sectors of the community have expressed their support through a variety of channels. I would like to take this opportunity to extend my heartfelt thanks to them. Their support represents the public's approbation of government policies, and is a great encouragement to us.

We will, in pursuance of the "proactive, pragmatic, always people first" concept of governance, continue our efforts to build a more prosperous, harmonious and vibrant Hong Kong.

Financial Secretary Henry Tang gave this address on the Appropriation Bill 2007 in the Legislative Council.