2006-07 Budget

2006-07 Budget

Briefing for the Hong Kong Consular Corps

By the Government Economist and the Deputy Secretary for Financial Services and the Treasury

22 February 2006

Economic performance

9 quarters of above-trend growth

Broad-based upturn

Trade, financial and producer services, and tourism are the bright spots

Construction still weak

Significant and broad-based job creation

Inflation creeping up but still benign

Chart 1

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q42000 2001 2002 2003 2004 2005

0

5

10

15

20

-5

Year-on-year rate of change in real terms (%)

1996-2005 trend growth

7.6

Strong GDP growth through 2005

Chart 2


0

5

10

15

20

25

-5

-10


Exports of goods and services

10.7

Double-digit export growth

Chart 3


0

5

10

15

20

-5

-10

-15


Investment

Private consumption expenditure 7.5

3.7

Domestic demand also played a role in recovery

Chart 4

2001-2003 2004 2005 Q1-Q3

(%) (%) (%)

Manufacturing -9.8 1.7 0.8

Construction -2.9 -9.8 -4.4

Services 3.0 9.9 8.1

Wholesale, retail and import and export trades, restaurants and hotels

4.6 15.1 11.2

Transport, storage and communications

3.0 13.9 13.5

Financing, insurance, real estate and business services

2.9 13.1 9.3

Community, social and personal services

1.3 2.6 0.7

GDP growth led by trading and financial/professional services

Chart 5

Broad-based improvement in labour market

Improvements across all sectors, all age groups and all levels of education attainment

Long-term unemployment declining

Wages reversed decline and rising back

Earnings of lower-income families also improving

Chart 6

Lower skilled jobs(106 000 or 43.5%)

Managers and administrators

(72 000 or 29.7%)

Professionals(30 000 or 12.5%)

Associate professionals(31 000 or 12.8%)

Others(4 000 or 1.5%)

240 000 jobs created since 2003 trough

Chart 7

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q42001 2002 2003 2004 2005

0

1

2

3

4

5

6

7

8

9Percent

20

25

30

35

40

45

50

55

60Case number ('000)

Seasonally adjusted unemployment rate Unemployment CSSA cases

Unemployment rate and unemployment CSSA cases

Chart 8

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q32000 2001 2002 2003 2004 2005

0

1

2

3

4

5

-1

-2

-3

Year-on-year rate of change (%)

Wages

Payroll per person

engaged

Q1-Q3

3.5

0.6

Labour income rising back as labour market improves

Chart 9

1996 1997 1998 1999 2000 2001 2002 2003 20040

20

40

60

80

100% of GDP

Other services(e.g. retail trade, catering, residential real estate development)

Trading and logistics

Community, social and personal services

Financial services

Professional services and other producer services

The rising share of services in HK's economy

Chart 10

No of managerial, professional or administrative

workersShare in

Employment*

(’000) (%)

1995 780 28

2000 966 32

2005 1 159 36

One out of three people in HK’s workforce are managerial, professional or administrative workers

(*) Excluding FDH workers

Chart 11

Employment by occupation category

Chart 12

Q3 Q31995 2005

0

20

40

60

80

100

Percent

20.7%

29.9%

42.9%

6.5%

31.8%

30.5%

32.1%

5.7%

$9,000 - $14,999

$15,000 and above

$5,000 - $8,999

Less than $5,000

Workers earning $5,000 – $8,999 down markedly …while those earning $15,000 or more rose

Chart 13

2006 Economic outlook

GDP growth to settle back to more sustainable growth of 4 - 5%, still above past 10-year trend of 3.9%

Another year of broad-based growth

But risks from external environment and feed-through of higher interest rates

Labour market to improve further

Inflation edging up but still healthy

Chart 14

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006*

0

2

4

6

8

10

12

-2

-4

-6

Rate of change in real terms (%)

GDP

10-year trend growth (1996-2005)

(Forecast)

4 - 5%

(*) Mid point of the range forecast.

Economy set for still solid growth in 2006Chart 15

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0

2

4

6

8

-2

-4

-6

Rate of change (%)

Composite CPI

(Forecast)

2.3

Inflation creeping up but low in 2006Chart 16

2005-06 Budget Revised Estimate

Consolidated surplus : $4.1 billion

Operating surplus : $5.8 billion

Both Operating and Consolidated Accounts in surplus for first time since 1997-98

Operating expenditure $2.2 billion less than 2004-05

Chart 17

Fiscal Targets

Operating expenditure ≤ $200 billion

2004-05

2005-06 RE

$196.9 billion

$194.7 billion

Balance inConsolidated AccountOperating Account

2005-06 RE Surplus $4.1 billion Surplus $5.8 billion

Public expenditure≤ 20% of GDP

2004-05

2005-06 RE

19.9%

18.1%

Fiscal targets set two years ago for 2008-09 achieved three years early:

Chart 18

Enhancing Our Economic Competitiveness

Economic co-operation with Mainland

Review of Competition Policy

38 recommendations by Economic and Employment Council adopted to cut red tape and streamline procedures

Chart 19

Implementation of CEPA and Pan-PRD Agreement

Business environment


Business Facilitation Advisory Committee to conduct in-depth reviews of licensing procedures for selected activities

Chart 20

Business environment


Financial services

Chart 21

Expanding Renminbi business: a major development objective

Reduce SFC trading levy by 20%, saving $300 million a year

Legislation to strengthen regulation of listed corporations, and establish the Financial Reporting Council to supervise their auditors

Branding: Ideal platform for Mainland enterprises and funds to reach international market


Developing tourism

Chart 22

Total visitor arrivals over 23 million and receipts > $100 billion

Expand Individual Visit Scheme from 38 cities to 44

Disneyland and Asia World-Expo open in 2005: Ngong Ping 360, Wetland Park, Dr Sun Yat-sen Museum and Ocean Park redevelopment yet to come

Cruise terminal


Developing logistics

Chart 23

Develop major cross-boundary linkages

Digital Trade and Transportation Network System

Attract more vessels to use port facilities

Gold depository at Hong Kong International Airport


Pooling of talent

Chart 24

Provide 1 800 additional university hostel places, at a cost of $350 million, for local and exchange students

“Quality Migrant Scheme” to attract overseas and Mainland talent

Estimates of Expenditure 2006-07 Total Government Expenditure $245.6 billion,

of which >60% on Education, Social Welfare, Health and Security

Investing in Education

Chart 25

– Expenditure of $56.5 billion

– Additional $1.1 billion for Language Fund in total this year and next

– Expenditure of $36.2 billion, of which 2/3 on CSSA/SSAS

– About $100 million additional recurrent funding for disadvantaged

– $230 million over five years to strengthen employment assistance and support social enterprises

Providing basic security net

Estimates of Expenditure 2006-07

Health

Chart 26

– Increased recurrent funding over three years to strengthen HA’s financial position

– Banning backyard poultry keeping and developing Preparedness Plan in line with WHO

– Alternative Financing Arrangements for Healthcare under study

Estimates of Expenditure 2006-07 Infrastructure

Chart 27

– Major projects under planning to be accelerated: NLH connection to HZM Bridge; Tamar; Kai Tak; and Central-Wan Chai Bypass

– Improved fiscal position allows additional funding if required

– Down from 198 000 in 2000 to around 160 000 in March 2007 as scheduled

Civil Service

– Earmarking $29 billion a year for projects over next 5 years

– Creating 14 000 construction jobs in 2006-07

“Green” Tax

Chart 28

Impose “green” taxes on tyres and plastic bags

Product Eco-responsibility Bill

Tyres:Impose a levy; require trade to recover and recycle

Plastic bags:Agree on reduction target with major supermarket chains and implement pilot scheme. For longer term, ban free distribution and tax them

Goods and Services Tax

Broaden and stabilize revenue base

Announce detailed proposals and launch public consultation in mid 2006

Relief and compensation to lessen impact (e.g. tourists, CSSA, other taxes)

Chart 29

Salaries Tax Concessions

Share wealth with people where practicable:

Chart 30

Lower marginal rates:Present Proposed 2% 2% 8% 7% 14% 13% 20% 19%

3/4 of taxpayers to benefit at cost of $1.5 billion a year

Extend limit for deduction for home loan interest from 7 years to 10, costing $1.2 billion in 2006-07

Properties and Investments(6.2%) $16.0B

Rates (6.0%) $15.4B

Other Operating Revenue(3.9%) $10.0B

Land Premium(11.9%) $30.5B

Duties (2.6%

) $6.6B

Utilities, Fees and Charges(5.7%) $14.7B

Salaries Tax, Personal Assessment

and Property Tax (16.1%) $41.5B

Betting Duty (4.6%) $11.9B

Stamp Duties (5.8%) $14.8B

Profits Tax(27.5%) $70.7B

Government revenue

Total : $257.3 Billion

Other Capital Revenue(6.6%) $17.2B

Operating revenue(81.5%) $209.6B

Capital revenue(18.5%) $47.7B

Revenue profile in 2006-07

Land Fund (3.1%) $8.0B

Chart 31

Recurrent Government Expenditure by Policy Area Group

2005-06 Original Estimate


$ billion % $ billion % Education 49.1 24.7 47.9 23.9 Social Welfare 33.9 17.0 34.6 17.3 Health 29.4 14.8 29.9 15.0 Security 23.2 11.6 23.5 11.7 Infrastructure 11.2 5.6 11.3 5.7 Environment and Food 7.9 4.0 8.6 4.3 Economic 7.9 4.0 8.0 4.0 Community and External Affairs

6.8 3.4 7.0 3.5

Housing 0.2 0.1 0.1 0.1 Support 29.5 14.8 29.0 14.5 Recurrent Government Expenditure

199.1 100.0 199.9 100.0

Chart 32

Total Government Expenditure by Policy Area Group



$ billion % $ billion % Education 58.6 23.6 56.5 23.0 Social Welfare 35.9 14.5 36.2 14.8 Health 32.2 13.0 32.3 13.2 Security 26.2 10.6 27.1 11.0 Infrastructure 27.0 10.9 24.3 9.9 Economic 11.6 4.7 11.8 4.8 Environment and Food 10.8 4.3 11.6 4.7 Community and External Affairs

8.3 3.4 8.4 3.4

Housing 0.2 0.1 0.2 0.1 Support 37.0 14.9 37.2 15.1 Total Government Expenditure

247.8 100.0 245.6 100.0

Chart 33

2006 Medium Range Forecast

$ billion

2006-07 2007-08 2008-09 2009-10 2010-11

Operating revenue 209.6 215.8 227.3 239.7 253.6

Operating expenditure 209.0 214.2 219.6 225.1 230.7 Operating surplus

0.6 1.6 7.7 14.6 22.9

Capital revenue 47.7 52.9 62.3 52.1 55.6 Capital spending (including payments from the Capital Investment Fund)

40.1 44.2 44.1 44.1 45.9

Repayment of government bonds and notes 2.6 - 2.7 3.5 - Capital financing surplus

5.0 8.7 15.5 4.5 9.7

Consolidated surplus

5.6

10.3

23.2

19.1

32.6

Fiscal reserves - as a number of months of government

expenditure

306.4 15

316.7 15

339.9 15

359.0 16

391.6 17

Chart 34

0

100

200

300

400

06-07 07-08 08-09 09-10 10-11

Operating Surplus

Conslolidated Surplus

$ billion Surplus Forecast

40

30

20

10

0

Chart 35

Thank you

Chart 36

2006-07 Budget

Documents

Transcript of 2006-07 Budget