Zita Chan F.5D (4) Economics – Financial Budget 2012-2013 Analysis on the impacts of the two proposal: 1. Increase land supply Since Hong Kong has an excess demand of land, Government plans to develop some new areas in north east New Territories, Hung Shui Kiu(洪水橋), Tung Chung and various quarry sites, also appropriate scale of reclamation outside Victoria Harbour will be carried out to increase the land supply in Hong Kong. Land is regarded as natural resources, the increase in land supply can increase the maximum producing capacity in Hong Kong and the long run aggregate supply (LRAS) will incease (shift right,LRAS1 -> LRAS2), so the potential GDP is increased(yf1 -> yf2). The short run aggregate supply (SRAS) will also increase (shift right, SRAS1 -> SRAS2). Therefore, the general price level will fall (P1 -> P2), the actual output level will rise (ye1 -> ye2). The increase in land supply not just raising the maximum producing capacity but at the same time helps to alleviate the inflation problem in Hong Kong. 2. Tax Rebate Government plans to reduce salaries tax and tax under personal assessment for 2011-12 by 75 per cent in the coming fiscal year, which is at most $12,000. This police will benefits around 1.5 million taxpayers and cost government $8.9 billion. Assuming there is a full employment in Hong Kong originally. The reduction in salaries tax, which is a direct tax, will reduce the tax payable to the government and increases taxpayers’ disposable income. Hence, in short run, the consumption expenditure demanded (C) will be increased and aggregate demand will rise (AD1 -> AD2), price level will also rises (P1 -> P2) and real output level rises (y1 ->y2). In long run, as the actual output level is greater than the potential GDP (y2>yf), there is an inflationary gap (excess demand of inputs and outputs), so the input costs rise and short run aggregate supply falls (SRAS1 -> SRAS2). The general price level will raise further (P2 -> P3) and the output level can return to original level (y2 -> yf). The tax rebate can increase the real output level in Hong Kong in short run, but this will worsen the problem of inflation in long run.