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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
Chart 1
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 2
Strong GDP growth through 2005
20
Year-on-year rate of change in real terms (%)
15
10
7.6
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
Chart 3
Double-digit export growth
25
Year-on-year rate of change in real terms (%)
20
15
10
Exports of goods
and services
10.7
5
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
Chart 4
Domestic demand also played a role in recovery
20
Year-on-year rate of change in real terms (%)
15
Private
consumption
expenditure
10
Investment
5
7.5
3.7
0
-5
-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
GDP growth led by trading and
financial/professional services
Chart 5
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
Chart 6
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 7
240 000 jobs created since 2003 trough
Lower skilled jobs
(106 000 or 43.5%)
Others
(4 000 or 1.5%)
Managers and
administrators
(72 000 or 29.7%)
Associate professionals
(31 000 or 12.8%)
Professionals
(30 000 or 12.5%)
Chart 8
Unemployment rate and
unemployment CSSA cases
9
8
Percent
Case number ('000)
Seasonally adjusted unemployment rate
Unemployment CSSA cases
7
60
55
50
6
45
5
40
4
35
3
30
2
1
25
0
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
Labour income rising back as
labour market improves
5
Year-on-year rate of change (%)
4
3
Q1-Q3
Payroll per
person
engaged
3.5
2
1
0.6
Wages
0
-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
Chart 10
The rising share of services in HK's economy
100
% of GDP
80
Other services
(e.g. retail trade,
catering, residential
real estate
development)
60
Community, social
and personal services
Financial services
40
Professional services
and other producer
services
20
Trading and logistics
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
Chart 11
One out of three people in HK’s workforce are
managerial, professional or administrative workers
No of managerial,
professional or
administrative
workers
Share in
Employment*
(’000)
(%)
1995
780
28
2000
966
32
2005
1 159
36
(*) Excluding FDH workers
Chart 12
Employment by occupation category
Chart 13
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
20
0
6.5%
Q3
1995
Less than $5,000
32.1%
5.7%
Q3
2005
Chart 14
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 feedthrough of higher interest rates

Labour market to improve further

Inflation edging up but still healthy
Chart 15
Economy set for still solid growth in 2006
12
Rate of change in real terms (%)
10
GDP
8
10-year
trend growth
(1996-2005)
6
4 - 5%
4
2
0
-2
-4
-6
1996
1997
1998
1999
2000
(*) Mid point of the range forecast.
2001
2002
2003
2004
2005
2006*
(Forecast)
Chart 16
Inflation creeping up but low in 2006
8
Rate of change (%)
6
4
Composite
CPI
2
2.3
0
-2
-4
-6
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
(Forecast)
Chart 17
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 18
Fiscal Targets

Fiscal targets set two years ago for 2008-09 achieved
three years early:
 Operating expenditure
≤ $200 billion
2004-05
$196.9 billion
2005-06 RE
$194.7 billion
 Balance in
Consolidated Account
Operating Account
2005-06 RE
 Public expenditure
≤ 20% of GDP
2004-05
19.9%
2005-06 RE
18.1%
Surplus $4.1 billion
Surplus $5.8 billion
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
Chart 20
Enhancing Our Economic
Competitiveness

Business environment

Business Facilitation Advisory Committee to
conduct in-depth reviews of licensing
procedures for selected activities
Chart 21
Enhancing Our Economic
Competitiveness

Financial services

Expanding Renminbi
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
business:
a
major
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
Chart 23
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 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
Chart 26
Estimates of Expenditure 2006-07

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
Chart 27
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 28
“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 29
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 30
Salaries Tax Concessions

Share wealth with people where practicable:

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
Chart 31
Revenue profile in 2006-07
Salaries Tax, Personal
Assessment
and Property Tax (16.1%) $41.5B
Profits Tax
(27.5%) $70.7B
Rates (6.0%) $15.4B
Stamp Duties
(5.8%) $14.8B
Utilities, Fees and Charges
(5.7%) $14.7B
Land Premium
(11.9%) $30.5B
Properties and Investments
(6.2%) $16.0B
Other Capital Revenue
(6.6%) $17.2B
Operating revenue
(81.5%) $209.6B
Capital revenue
(18.5%) $47.7B
Betting Duty (4.6%) $11.9B
Other
Duties Land Fund (3.1%) $8.0B
Operating (2.6%)
Revenue $6.6B
(3.9%)
Government
$10.0B
revenue
Total : $257.3 Billion
Chart 32
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
17.0
29.4
14.8
23.2
11.6
11.2
5.6
7.9
4.0
7.9
4.0
6.8
3.4
2006-07
Original
Estimate
$ billion
%
47.9
23.9
34.6
17.3
29.9
15.0
23.5
11.7
11.3
5.7
8.6
4.3
8.0
4.0
7.0
3.5
0.2
29.5
0.1
14.8
0.1
29.0
0.1
14.5
199.1
100.0
199.9
100.0
Chart 33
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
13.0
26.2
10.6
27.0
10.9
11.6
4.7
10.8
4.3
8.3
3.4
2006-07
Original
Estimate
$ billion
%
56.5
23.0
36.2
14.8
32.3
13.2
27.1
11.0
24.3
9.9
11.8
4.8
11.6
4.7
8.4
3.4
0.2
37.0
0.1
14.9
0.2
37.2
0.1
15.1
247.8
100.0
245.6
100.0
Chart 34
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
215.8
227.3
239.7
253.6
209.0
0.6
214.2
1.6
219.6
7.7
225.1
14.6
230.7
22.9
47.7
40.1
52.9
44.2
62.3
44.1
52.1
44.1
55.6
45.9
2.6
5.0
8.7
2.7
15.5
3.5
4.5
9.7
5.6
10.3
23.2
19.1
32.6
306.4
15
316.7
15
339.9
15
359.0
16
391.6
17
Chart 35
Surplus Forecast
$ billion
40
400
30
300
20
200
100
10
0
06-07
07-08
Operating Surplus
Conslolidated Surplus
08-09
09-10
10-11
Chart 36
Thank you