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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