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Historic HK budget with HK$20b bond scheme
By Jian Er (China Daily HK Edition)
Updated: 2004-03-11 09:05

Financial Secretary Henry Tang made budget history Wednesday by proposing a maximum HK$20 billion government bond to finance infrastructure projects in the 2004/05 financial year.

Tang's bold overall strategy in his maiden budget, which seeks to fight deficit problem, will not involve any major tax increases.

In another milestone move, an internal committee has been set up to study introducing a goods and services tax (GST) in the medium term, which will yield HK$6 billion annually with each single percentage point.

The Hong Kong government has never issued long-term debt instruments and it appears to be more convinced than ever of the need to implement GST to broaden the tax base.

But the bond issue does not indicate any change in the government's prudent budget policy, Tang said. "We will definitely not live on credit."

With the principle of "big market, small government," the financial chief reiterated that the government would first contain expenditure before considering tax increases.

The measures come at a time when Hong Kong's economy has shown signs of a sustainable growth that is projected to reach 6 per cent this year, as compared with 3.3 per cent in 2003. Improving economic performance is expected to help increase government revenue in the coming years.

The city's fiscal deficit in 2003/04 is estimated to be HK$49 billion, or 4 per cent of gross domestic product (GDP) and the shortfall is forecast to be HK$42.6 billion, or 3.4 per cent of GDP in 2004/5.

Riding on a GDP growth of 3.8 per cent over the medium term, the government aims to close the fiscal gap gradually and even generate a slight surplus of HK$6 billion by 2008/09.

"Clearly, Tang has taken the suggestions from various public sectors into full account. If the economy maintains its current momentum, I am confident the goal for eradicating the deficit by 2008/09 is achievable," said Florence Chan, tax partner at Ernst & Young, one of the big four international accounting firms.

Joe Lo, senior economist at Citibank, said the budget report was in line with expectations but still showed the government's deter-mination to balance the books.

"Despite the rapid rebound in the past few months, the economy is still at the initial phase of recovery. Therefore, it has every opportunity to reach fiscal balance within the government specified timeframe," he said.

Besides the stimulus from economic growth, issuing government bonds has been considered as a stop-gap approach to alleviate the deficit problem, especially in a low-interest environment.

Sources said that the HK$20 billion government bond would have a maturity of at least five years with a maximum coupon rate of 5 per cent annually. At these terms, interest costs would amount to about HK$1 billion per year.

"Given sufficient fiscal reserves of HK$266.4 billion and the city's stable credit rating, I expect the government bonds will be quickly snapped up by institutional investors as well as the general public," said K.C. Law, co-chairman of Professional Development (Tax) Committee at ACCA Hong Kong, adding the move would also help improve the development of the long-term capital market in Hong Kong.

In addition, the government assumed that a GST of 5 per cent would generate HK$20-30 billion annually. But it will take at least three years to implement the value-added tax.

Other measures to increase revenue include the Personalized Vehicle Registration Marks Scheme that enables car owners to choose favourable registration marks. It is estimated to yield HK$70 million.

The government will continue selling or securitizing the HK$112 billion government assets and push the rail merger in 2005-06.

Standard & Poor's, one of the world's leading credit rating agencies, said that the budget "sidesteps" fundamental issues. But it said the outlook for reducing the deficit appears more upbeat than it has been over the past 18 months.

The agency said that the government's programme provides a degree of fiscal flexibility. But it cautioned that the programme should not distract the government from its commitment to reforming the tax system and consolidating the deficit.

Vincent Kwan, greater China economist at Hang Seng Bank, pointed out that the government should still keep tight control on its expenditure, which also played a critical role in eliminating the deficit.

The financial secretary said the government would carry out various measures to reduce its operating expenditure from HK$217.4 billion in 2003/04 to HK$200 billion in 2008/09.

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