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

15 20

Strong GDP growth through 2005

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

Chart 2

10 5 1996-2005 trend growth 0 -5 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2000 2001 2002 2003 2004 2005 7.6

25

Double-digit export growth

Year-on-year rate of change in real terms (%) 20 15 10 5 Exports of goods and services 0 -5 -10 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2000 2001 2002 2003 2004 2005 10.7

Chart 3

Chart 4

Domestic demand also played a role in recovery

Year-on-year rate of change in real terms (%) 20 15 10 5 0 -5 Investment Private consumption expenditure -10 -15 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2000 2001 2002 2003 2004 2005 7.5

3.7

GDP growth led by trading and financial/professional services

2001-2003 (%) 2004 (%) 2005 Q1-Q3 (%) Chart 5 Manufacturing Construction Services Wholesale, retail and import and export trades, restaurants and hotels Transport, storage and communications Financing, insurance, real estate and business services Community, social and personal services -9.8

-2.9

3.0

4.6

3.0

2.9

1.3

1.7

-9.8

9.9

15.1

13.9

13.1

2.6

0.8

-4.4

8.1

11.2

13.5

9.3

0.7

Broad-based improvement in labour market

    Improvements across all sectors, all age groups and attainment all levels of education Long-term unemployment declining Wages reversed decline and rising back Earnings of lower-income families also improving Chart 6

240 000 jobs created since 2003 trough

Chart 7

Lower skilled jobs (106 000 or 43.5%) Others (4 000 or 1.5%) Managers and administrators (72 000 or 29.7%) Professionals (30 000 or 12.5%) Associate professionals (31 000 or 12.8%)

0 1 2 3 4 5 6 7 9 8 Unemployment rate and unemployment CSSA cases Percent Seasonally adjusted unemployment rate Unemployment CSSA cases Case number ('000) 60 55

Chart 8

50 45 40 35 30 25 20 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2001 2002 2003 2004 2005

Chart 9

0 2 1 3 4 5 Labour income rising back as labour market improves Year-on-year rate of change (%) Payroll per person engaged Wages -1 -2 -3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2000 2001 2002 2003 2004 2005 Q1-Q3 3.5

0.6

Chart 10

The rising share of services in HK's economy

100 % of GDP 80 60 Other services (e.g. retail trade, catering, residential real estate development) Community, social and personal services 40 Financial services Professional services and other producer services 20 Trading and logistics 0 1996 1997 1998 1999 2000 2001 2002 2003 2004

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

Chart 11 1995 2000 2005 (*) Excluding FDH workers No of managerial, professional or administrative workers (’000) 780 966 1 159 Share in Employment* (%) 28 32 36

Employment by occupation category

Chart 12

Workers earning $5,000 – $8,999 down markedly … while those earning $15,000 or more rose Percent 100 20.7% $15,000 and above 31.8% 80 29.9% 60 $9,000 - $14,999 30.5% 40 42.9% $5,000 - $8,999 32.1% 20

Chart 13

0 6.5% Q3 1995 Less than $5,000 5.7% Q3 2005

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

Chart 15

Economy set for still solid growth in 2006

12 10 8 6 4 Rate of change in real terms (%) GDP 2 0 -2 -4 -6 1996 1997 1998 1999 2000 (*) Mid point of the range forecast.

10-year trend growth (1996-2005) 4 - 5% 2001 2002 2003 2004 2005 2006* (Forecast)

Inflation creeping up but low in 2006

4 2 0 8 Rate of change (%) 6 Composite CPI 2.3

-2 -4 -6 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 (Forecast)

Chart 16

2005-06 Budget Revised Estimate

 Consolidated surplus  Operating surplus  : $4.1 billion : $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

 Chart 18

Fiscal Targets

Fiscal targets set two years ago for 2008-09 achieved three years early:  Operating expenditure ≤ $200 billion  Balance in Consolidated Account Operating Account  Public expenditure ≤ 20% of GDP 2004-05 $196.9 billion 2005-06 RE $194.7 billion 2005-06 RE Surplus $4.1 billion Surplus $5.8 billion 2004-05 19.9% 2005-06 RE 18.1%

  Chart 19

Enhancing Our Economic Competitiveness

Economic co-operation with Mainland  Implementation of CEPA and Pan-PRD Agreement Business environment   Review of Competition Policy 38 recommendations by Economic and Employment Council adopted to cut red tape and streamline procedures

Enhancing Our Economic Competitiveness

 Business environment  Business Facilitation Advisory Committee to conduct in-depth reviews of licensing procedures for selected activities Chart 20



Enhancing Our Economic Competitiveness

Financial services  Expanding Renminbi development objective  business: a major 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 Chart 21

Chart 22 

Enhancing Our Economic Competitiveness

Developing tourism  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

Enhancing Our Economic Competitiveness

 Developing logistics   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 Chart 23

Chart 24

Enhancing Our Economic Competitiveness

 Pooling of talent  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

Chart 25

Estimates of Expenditure 2006-07

 Total Government Expenditure $245.6 billion, of which >60% on Education, Social Welfare, Health and Security   Investing in Education – Expenditure of $56.5 billion – Additional $1.1 billion for Language Fund in total this year and next Providing basic security net – 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

Estimates of Expenditure 2006-07

Chart 26  Health – 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 – Earmarking $29 billion a year for projects over next 5 years – Creating 14 000 construction jobs in 2006-07 – 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 Civil Service – Down from 198 000 in 2000 to around 160 000 in March 2007 as scheduled Chart 27

“Green” Tax

 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 Chart 28

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:  Lower marginal rates: Present Proposed 2% 8% 2% 7% 14% 20% 13% 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 Chart 30

Chart 31

Revenue profile in 2006-07

Profits Tax (27.5%) $70.7B

Salaries Tax, Personal Assessment and Property Tax (16.1%) $41.5B

Rates (6.0%) $15.4B

Stamp Duties (5.8%) $14.8B

Land Premium (11.9%) $30.5B

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

Properties and Investments (6.2%) $16.0B

Operating revenue (81.5%) $209.6B

Capital revenue Other Capital Revenue (6.6%) $17.2B

Other Operating Revenue (3.9%) $10.0B

(18.5%) $47.7B

Betting Duty (4.6%) $11.9B

Duties Land Fund (3.1%) (2.6%) $6.6B

$8.0B

Government revenue Total : $257.3 Billion

Recurrent Government Expenditure by Policy Area Group

Education Social Welfare Health Security Infrastructure Environment and Food Economic Community and External Affairs Housing Support

Recurrent Government Expenditure 2005-06 Original Estimate $ billion %

49.1

24.7

33.9 29.4 23.2 11.2 7.9 7.9 6.8

17.0 14.8 11.6 5.6 4.0 4.0 3.4

0.2 29.5

199.1

0.1 14.8

100.0

2006-07 Original Estimate $ billion %

47.9

23.9

34.6 29.9 23.5 11.3 8.6 8.0 7.0

17.3 15.0 11.7 5.7 4.3 4.0 3.5

0.1 29.0

199.9

0.1 14.5

100.0

Chart 32

Total Government Expenditure by Policy Area Group

Education Social Welfare Health Security Infrastructure Economic Environment and Food Community and External Affairs Housing Support

Total Government Expenditure 2005-06 Original Estimate $ billion %

58.6

23.6

35.9

14.5

32.2 26.2 27.0 11.6 10.8 8.3

13.0 10.6 10.9 4.7 4.3 3.4

0.2 37.0

247.8

0.1 14.9

100.0

2006-07 Original Estimate $ billion %

56.5

23.0

36.2

14.8

32.3 27.1 24.3 11.8 11.6 8.4

13.2 11.0 9.9 4.8 4.7 3.4

0.2 37.2

245.6

0.1 15.1

100.0

Chart 33

2006 Medium Range Forecast

$ billion Operating revenue Operating expenditure Operating surplus Capital revenue Capital spending (including payments from the Capital Investment Fund) Repayment of government bonds and notes Capital financing surplus Consolidated surplus Fiscal reserves - as a number of months of government expenditure 2006-07 2007-08 2008-09 2009-10 2010-11 209.6 209.0 0.6 215.8 214.2 1.6 227.3 219.6 7.7 239.7 225.1 14.6 253.6 230.7 22.9 47.7 40.1 2.6 5.0 5.6 306.4 15 52.9 44.2 - 8.7 10.3 316.7 15 62.3 44.1 2.7 15.5 23.2 339.9 15 52.1 44.1 3.5 4.5 19.1 359.0 16 55.6 45.9 - 9.7 32.6 391.6 17 Chart 34

$ billion

Surplus Forecast

Chart 35 06-07 07-08 Operating Surplus Conslolidated Surplus 08-09 09-10 10-11

Thank you

Chart 36