Briefing for LegCo's Financial Affairs Panel on
the Chief Executive's 1998 Policy Address

9 October 1998

S for Tsy's Speaking Note

Introduction

Finance Bureau's Policy Objective is prudent management of public finances. Our primary aim is to maintain sound and stable public finances and foster a fiscal environment conducive to continued economic growth and success. In meeting this Policy Objective, we will ensure that the right balance is struck between meeting public demand for better government services on the one hand, and adhering to our principles of small government and low taxes on the other. There are 6 Key Result Areas underpinning our Policy Objective. These are -

• Ensure that government expenditure grows no faster than the economy over time and ensure that resources available are used cost-effectively in providing quality services that best meet the needs of the community

• Maintain an effective revenue collection and protection system to cover our spending commitments

• Provide sources of Government finance

• Maintain the level of fiscal reserves within established guidelines through prudent and efficient management

• Improve the efficiency, quality and cost-effectiveness of Government services

• Manage Government's estate cost-effectively and efficiently

Details of our activities and new commitments under these areas for the coming year are set out in our Policy Objective booklet which has been distributed to Members.

2. Today's briefing will focus on two aspects which I believe will be of greater interest to Members. These are -

• First, the overall position on Government expenditure in the coming year and provision of funds for the initiatives announced in the Chief Executive's Policy Address; and

• Second, the launching of an Enhanced Productivity Programme across Government announced by the Chief Executive in the Policy Address.

Overall Position on Government Expenditure

The Trend Growth Rate

3. Members are familiar with the fundamental budgetary guideline of ensuring Government expenditure over time will grow no faster than the trend growth of the economy as a whole. Two points are important here. First, we are looking at the likely performance of the economy over the medium term, not just the present situation. Hence, the Medium Range Forecast (MRF) which the FS publishes annually with his Budget Speech is an important planning tool. For the 1999-2000 Budget, the MRF period covers the five year period 1998-99 to 2002-03. Secondly, we use the trend growth rate as the basis for our control of government expenditure. We have never attempted to control expenditure in line with short term performance of the economy. Had we allowed government expenditure to follow exactly the economic performance of the year, we would have seen considerable fluctuations in government spending over the past decade, for example, when the GDP growth in real terms dropped significantly from 8% in 1988 to 2.6% in 1989, before picked up to 3.4% in 1990 and 5.1% in 1991. Instead, during the same period, the trend growth rate adopted only edged up or down by ? a percentage point.

4. When the FS consulted Members of this Council on expenditure priorities for the coming year in June this year, he already forewarned that the 5% trend growth rate adopted since 1992 is probably not sustainable. Since then, he has revised his GDP forecast for the year 1998 to a negative 4%. Given the present economic climate and the fact that Hong Kong's economic outlook is inevitably affected by external factors, a firm decision on the trend growth rate can only be taken when we have assessed and reassessed all relevant factors and forecasts of the performance of individual components of the economy in the Budget compilation process over the next few months.

5. However, based on the Government Economist's update and related forecasts, we have adopted for the time being a medium term trend growth rate of 4% for the purpose of planning government expenditure in the coming year. In view of prevailing economic conditions, a 4% trend growth may be criticised as overly optimistic. But since we are looking into the medium term, that prospects are rather unpredictable at the moment, we feel justified to use 4%.

Recurrent Expenditure

6. We are therefore planning Government expenditure to increase at 4% in real terms. With a total recurrent expenditure of $170 billion in 1998-99, this means an additional $6.8 billion in 1999-2000 for new or improved services. In the coming year, there will still be substantial growth in the key areas of social services, namely -

7. I should add that within the 12.5% real growth for Social Welfare, over three-quarters of that increase in spending is due to CSSA. (CSSA has an approved provision of $11.5 billion in 1998-99. Taking into account the 4.8% inflationary adjustment to CSSA standard rates from April 1998 and the caseload increase over the past few months, total CSSA spending is likely to be around $13 billion in 1998-99 and $15 billion in 1999-2000.)

8. The 4% growth in recurrent expenditure will enable us to deliver all the pledges in the 1997 Policy Address and the 1998 Policy Address. Other significant initiatives funded under recurrent expenditure in the coming year include the strengthening of public health and food safety, the stepping up of fire prevention and building and slope safety and enforcement against infringement of intellectual property rights.

Capital Works Expenditure

9. Because we have not been able to spend up to the permitted expenditure guideline for capital works in the past few years, there is sufficient capacity to finance a large number of new projects even under a 4% growth. Thus, in this year's resource allocation, we have earmarked funding for over 100 new projects, including the Lantau North-South road link between Tai Ho Wan and Mui Wo, the widening of Tolo Highway and Fanling Highway, the redevelopment and expansion of the Pok Oi Hospital, etc.

10. In the five-year period from 1998 to 2003, we expect to spend $160 billion on capital works projects. The main areas, in order of the size of total spending, are -

Equity Injections, Loans and Grants

11. We have also been able to make use of part of the funding capacity under capital works to finance one-off non-recurrent items. The major ones include -

• the setting up of an Innovation and Technology Fund at a sum of $5 billion;

• a further grant of $500 million to the Employees Retraining Board;

• $100 million for setting up a Film Development Support Fund;

• an additional $330 million to support IT in education;

• $173 million earmarked for developing an Electronic Service Delivery of Government services to the public;

• a further grant of $50 million to the Services Support Fund; and

• a $50 million grant to the Open University Student Loan Fund for providing financial assistance to needy students

12. We will also continue with the planned equity injections into the high priority rail projects and the various loan schemes.

Enhanced Productivity Programme (EPP)

13. I now turn to the second highlight in my briefing which in a way is closely related with the issue of planning Government expenditure.

14. Some Members may recall the expenditure pyramid in our slide presentation during FS's consultation with you. When new money for allocation becomes limited in a slower growth environment, there is increasing pressure to tackle the baseline expenditure. During the consultations, some Members have requested us to drive for higher productivity in the public service in order to do more with less as well as to release existing resources for meeting new demands. EPP is our response.

15. I should make it clear that EPP is not about expenditure cuts or reduction in service or deterioration in standards or quality of the public service. We have made it clear to Heads of Department that we will not accept the delivery of the 5% target productivity gains by cutting back services other than those no longer needed in present day circumstances. They must be genuine productivity gains achieved through one or more of the following -

• process re-engineering aiming at removing duplication of work, streamlining procedures and reviewing work practices;

• better use of technology;

• greater human resource management flexibility such as more use of contract appointments, out-sourcing of work.

16. Of the $170 billion recurrent expenditure, we estimate that some $100 billion are operating expenditure which is susceptible to productivity gains. A 5% productivity gain across the board will be able to release some $5 billion resources for re-allocation to new services. The rest are either statutory or contractual payments which we are required to pay under existing policies. (Examples are pensions, social security, legal aid, and various staff benefits.) We have also taken the decision to exempt school education expenditure from the 5% target in recognition of the many demands placed on schools with their baseline expenditure barely adequate to cope. (Hence for the coming year, we will provide supplementary grants to all public sector schools for school-based management at an annual cost of about $150 million.)

17. Within the 5% target, we will give departmental managers maximum flexibility in determining the best way to find those productivity gains. On both financial and human resource management, we will liberalise the current controls and regulations to facilitate the implementation of productivity initiatives. For example, we will allow a few selected departments to operate on a one-line vote with greater flexibility in the use of resources. We will give greater flexibility to departments to recruit on fixed term or short term contracts.

17. We will be happy to brief Members on how we are doing with EPP from time to time. We also look to Members' support for some of our initiatives which may require approval of the Finance Committee.

18. My colleagues and I are happy to answer any questions from Members.

Finance Bureau
1 October 1998