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In his 1999 Budget Speech, the Financial
Secretary gave an update of the progress of EPP. He also emphasised that
EPP was not a slogan. It signified the public sector's concerted efforts
to secure lasting and sustainable improvements in the delivery of public
services.
Seen against the fiscal situation described in the 1999
Budget Speech, EPP has added significance. This article explains why. |
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Controlling Government Expenditure
Growth |
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Hong Kong prides itself in its prudent public financial
management, i.e. living within our means. One of our well-established budgetary
principles is to ensure that government expenditure over time grows no
faster than the trend growth of the Gross Domestic Product (GDP) -- a principle
which is enshrined in Article 107 of the Basic Law. Figure 1 below compares
cumulative growth in government expenditure with that in GDP.
Figure 1
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For years, we have been keeping government expenditure
in line with GDP growth. However, for 1998-99 and indeed throughout the
entire medium term, government expenditure has outstripped and will continue
to outstrip GDP growth. This is the result of continuous spending to meet
community needs during the economic downturn. For 1998-99, the economy
contracted by 5.1% while spending was planned at 5% growth. For 1999-2000,
the economy is forecast at a modest growth of 0.5% with spending continued
at 3.5%. Together, they have produced a gap of 13%. Action must be taken
to bridge the gap. To do so, we need to ensure that government expenditure
grows at a rate slower than the forecast growth rate of economy in the
years ahead. FS has announced in his 1999 Budget Speech that while a trend
GDP growth of 3.5% in real terms is adopted for the Medium Range Forecast1,
we will only allow government expenditure to grow by 3% in 2000-01 (over
the estimates for 1999-2000) and by 2.5% in both 2001-02 and 2002-03. |
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"One of our
fundamental budgetary guidelines is to ensure that, over time, government
expenditure grows at a rate no faster than the economy as a whole. In pursuit
of this guideline we have, for many years, planned the growth of government
expenditure in line with the forecast trend growth of GDP."
- The Financial Secretary, 1999
Budget Speech |
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Maintaining Fiscal Balance |
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Article 107 of the Basic Law also stipulates
that in drawing up its budget, the HKSAR shall strive to achieve a fiscal
balance and avoid deficits.
The conscious decision to continue government spending
so as not to drive the economy into deeper recession and to avoid substantial
tax increases so as not to hit businesses and individuals means that a
budget deficit in the short term is inevitable. Figure 2 on the next page
shows the fiscal position over the Medium Range Forecast, projected at
the time of the 1999-2000 Budget.
Figure 2
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Given the circumstances, a deficit budget in the short
term is entirely consistent with the provisions of the Basic Law so long
as it is set in the context of a return to balanced budgets over the medium
term. To achieve this, we need to implement the moderate revenue raising
measures as proposed in the 1999 Budget as well as to strictly control
government expenditure.
A balanced budget over the medium term is vital to the
HKSAR as we need to maintain strong fiscal reserves. The importance of
a healthy reserve was exemplified during the financial turmoil last year.
Because of the short-term fiscal deficit, it is expected that our fiscal
reserves will fall from $458 billion at 1 April 1998 to $383 billion at
31 March 2001 before picking up again over the next two years to a level
of $406 billion at 31 March 2003. This leaves the fiscal reserves within
the guidelines set in the 1998 Budget Speech, albeit at the lower end of
the range. |
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"Even this
reduced level of growth will not bring the cumulative growth in expenditure
fully back in line with cumulative economic growth by the end of the forecast
period. We may well need to maintain a similar degree of restraint over
the growth in expenditure for a further two years after 2002-03.
This underscores the need for us to achieve the savings targeted under
the EPP and to re-prioritise the different areas of government spending."
- The Financial Secretary, 1999
Budget Speech |
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Attacking Baseline Expenditure |
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The target of the short-term phase of EPP
is to reduce recurrent baseline expenditure by 5% by 2002-03. One may not
realise how significant the baseline expenditure accounts for Government
total recurrent expenditure. Baseline expenditure means the recurrent resources
required to fund current activities. The baseline expenditure
is built up over the years. It may contain expenditure on services or activities
which are of lesser priority than other newly emerging public demand. It
may be spent on doing things in an obsolete mode. As illustrated in Figure
3 on this page, baseline expenditure accounts for 96% of the total amount
of recurrent resources available in 1999-2000 under the budgetary guideline
used for planning in 1998. If we are able to take just 1% from the vast
pyramid bottom (the baseline expenditure), it already represents $1,635
million, more than double the total amount of money available
for funding new services in the annual Resource Allocation Exercise.
Figure 3
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Between the baseline expenditure and new money available
for allocation to new or improved services is the earmarked growth. This
chunk of expenditure, in recent years, takes up no less than 3% of expenditure
growth. It is for meeting our obligations, statutory or contractual, and
living up to our past promises. For example, pension payments to retired
civil servants, social security payments to increasing number of people
requiring financial assistance, recurrent consequences of capital projects
coming on stream such as new hospitals and schools. With expenditure growth
moderating, earmarked growth is also an area we need to examine more closely
if we wish to preserve some headroom for allocating to worthwhile initiatives
in the coming years. |
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"There are
specific targets to achieve at every stage of EPP. By 2002-03, managers
are required to reduce operating expenditure by a total of 5 per cent without
prejudicing the quality of services to the public. Concurrently, we will
seek more fundamental reforms in the management and delivery of public
services."
- The Financial Secretary, 1999
Budget Speech |
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