1. The Budget 2005-2006: My Views Stephen Yan-Leung Cheung
Prof. (Chair) of Finance
City University of Hong Kong

2. Content Hong Kong Economy How can we position ourselves?
Opportunities in China Market
Uncertainties

3. Government Deficit (I)
Year
($billion)
($billion)
($billion)
($billion)
($billion)
Operating revenue
165.6
170.7
177.7
184.9
194.8
Operating expenditure
212.2
210.6
207.1
203.5
200.0
Operating surplus/ (deficit)
(46.6)
(39.9)
(29.4)
(18.6)
(5.2)
Capital revenue
37.9
56.8
44.5
56.0
49.3
Capital spending (including payments from the Capital Investment Fund)
53.4
52.3
45.9
39.6
37.1
Capital financing surplus/ (deficit)
(15.5)
4.5
(1.4)
16.4
12.2
Government bond issuance
- Proceeds
- Interest expense
20.0
0.5 -
1.0
Capital financing surplus/ (deficit) after bond issuance
4.0
3.5
(2.4)
15.4
11.2

4. Government Deficit (II)
Year
($billion)
($billion)
($billion)
($billion)
($billion)
Consolidated surplus/ (deficit)
before bond issuance
- as a percentage of GDP
(62.1)
4.9%
(35.4)
2.7%
(30.8)
2.2%
(2.2)
0.2%
7.0
0.5%
after bond issuance
(42.6)
3.4%
(36.4)
(31.8)
2.3%
(3.2)
6.0
0.4%
Fiscal reserves after bond issuance
- as number of months of Government expenditure
223.8 10
187.4 9
155.6 7
152.4 8
158.4
Public expenditure
286.0
22.5%
277.7
20.8%
270.2
19.3%
264.3
18.0%
259.3
16.9%
Source: The Budget

5. Observations (I) Operating revenue cannot cover operating expenditure
Operating deficit will last until 2008/09
Consolidated deficit will last until 2007/08

6. Observations (II)
The consolidated surplus/ (deficit) is boosted by the 20 billion bond issue
Interestingly, Mr. Tang’s speech did not mention about the payment
Issuing bond is a source of financing not income

7. Operating Expenditure Forecast (in $billion)
Target
Forecast
Source: The Budget

8. Operating Revenue Forecast (in $billion)
Target
Forecast
Source: The Budget

9. Surplus/Deficit Forecast (in $billion)
Source: The Budget

10. Observations (III)
Operating expenditure drops from 218 billion in 03/04 to 200 billion in 08/09
→ 8% decrease
Operating revenue increases from 155 billion in 03/04 to 200 billion in 08/09
→ 29% increase
Question is how to boost up government revenue

11. Facts Hong Kong has a narrow tax-base
No room to increase direct tax rate
Salary tax
Profit tax
Depend too much on direct tax
40:60 (indirect tax: direct tax)
Only 40% working population pay salary tax
For those who pay the standard tax rate (less than 1%) are responsible for more than 20% of the salary tax revenue
Government becomes serious on GST

12. Economic Situation Hong Kong GDP in Q3 increased to 7.2%
Close to the GDP in 2000 Q1, which was 13.6% (IT bubble)
The total exports in Q increased around 13%
Tourism, individual travel scheme
CEPA

13. Property Market Recovery
Recovery in 2003 Q4 and 2004 Q1
Number of transactions increased by 22% in the first half of 2004 over the second half of 2003
Average property price dropped slightly recently but prices went up by 26% relatively to mid-2003
Affordability ratio improves substantially

14. Prices for Residential Property

15. Tourism Number of tourists arriving at Hong Kong increased
substantially from China, and
from other destinations
Number of tourists arriving at Hong Kong in June 2004 exceeded the pre-SARS level
In July 2004, number of tourists reached 1.99 million

16. Visitor Arrivals

17. Consumption
Private consumption expenditure had an average growth of 7% in real term in Q
The volume of total retail sales increased by 6.8% in Dec 2004
Reflection of strong rebound of local consumers and tourists

18. Private Consumption Expenditure

19. Hong Kong’s Price Movement

20. Market Forecast Hong Kong’s Economic Growth
Government
7.5
BOC HK
7.6
HSBC
7.8
DBS
Merrill Lynch
8.0
Citibank
6.5
INC
Sources: Census and Statistics Department, Reuters, and BOCHK Research

21. Hong Kong Economic Situation (I)
Two Problems
Deflation
A period of 5 years & 8 months
CPI increased by 0.2% in Dec 04 but fell by 0.5% in Jan 05
Declined in prices were recorded in Jan 2005 for housing (-3.1% in the Composite CPI), durable goods (-2.0% in the Composite CPI), miscellaneous services which cover package tours (-1.6% in the Composite CPI), and transport (-0.1% in the Composite CPI)

22. Hong Kong Economic Situation (II)
Unemployment
Unemployment rate at 6.4% in Nov 04 - Jan 05
Structural problem
Possible to drop to 5 - 6%
The age group of has high unemployment rate
How to improve the education level of population?
How?

23. Uncertainties Oil price US$50/barrel US economic figures good/bad?
US interest rate increase

24. China Economy Macro-economic adjustment started to work?
Fixed asset investment slowed
2004 Q1-3 GDP increased 9.5%
Inflation is 1.9% in Jan of 2005
Prices of food items increased by 4.0%
Prices of non-food items increased by 0.8%
China economy further down may affect the external trade of Hong Kong

25. Budget
Recurrent revenue and non-recurrent revenue will increase
Budget deficit will decrease substantially
Structural deficit?
How to match recurrent expenditure with recurrent revenue?

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