Download LCQ7: GDP and public expenditure (3

Press Release
LCQ7: GDP and public expenditure
Wednesday, July 3, 2002
Following is a question by the Hon Martin Lee and a written reply by the Secretary for
Financial Services and the Treasury, Mr Frederick Ma, in the Legislative Council today (July 3):
Question:
Will the Government:
(a) provide this Council with a "long-term growth curve" of Hong Kong's Gross Domestic Product
("GDP") (compiled by using the expenditure approach and applicable to the ensuing text)
calculated on the basis of constant market prices, and with an analysis of the duration of each
economic cycle and the years when each cycle began and ended, since GDP was first compiled;
(b) provide an analysis of the short-term impact of the public expenditure on GDP; and
(c) advise this Council of the elasticity of GDP relative to the public expenditure and of the
multiplier effect of public expenditure, calculated by using the latest data;
if the above figures are not available, of the reasons for that, and whether it plans to make such
calculations?
Reply:
(a) The Census and Statistics Department has been compiling the expenditure-based Gross
Domestic Product as from the reference year of 1961. Over the past 40 years, the Hong Kong
economy had gone through a number of ups and downs, with the growth rate of the economy as
measured by the constant price GDP also showing much variations between periods, as broadly
described below.
In the 1960s and 1970s, the Hong Kong economy expanded at a robust pace averaging at
around 9% per annum. For these two periods, the troughs occurred in 1966/1967 and 1974/1975
respectively. The former trough was caused by the social instability in the mid-1960s, while the
latter trough was due to the global economic recession after the oil crisis.
As the economy became increasingly mature, Hong Kong's economic growth proceeded at a
slower rate of around 6.5% per annum in the 1980s. During this period, there were brief relapses
in 1982 and 1985, both affected by a setback in the external economic environment at that time, as
well as in 1989.
The Hong Kong economy still maintained a steady and notable growth in the early to
mid-1990s, averaging at around 5% per annum between 1991 and 1997. Then, with the outbreak
of the Asian financial crisis in the latter part of 1997, the Hong Kong economy suffered a severe
setback, and for the first time it recorded negative growth on an annual basis in 1998. The
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economy soon rebounded, and attained double-digit growth in 2000. But upon the global
economic downturn last year, the Hong Kong economy slowed down abruptly during the course of
the year, and had only a slight growth for 2001 as a whole. Affected by these two significant
setbacks, the Hong Kong economy yielded growth averaging at only around 2% per annum
between 1998 and 2001.
From this, it is clear that owing to the relatively small scale of the Hong Kong economy and
its high degree of external orientation, the vicissitudes of the economy are bound to be influenced
largely by fluctuations in the global economy.
(b) The Government's budgetary figures are generally presented on the basis of fiscal account and
for that account public expenditure is 22% of GDP. However, the way this question is asked
requires it to be presented as the share of public expenditure reckoned on a GDP basis instead of on
a fiscal basis.
The Hong Kong economy is predominantly led by the private sector. Public sector
expenditure, reckoned on a GDP basis, accounted for around 12% of GDP in 2001(Note). Of this,
the share of government consumption expenditure in GDP was 8%, and the combined share of
public sector expenditures on building and construction and on machinery and equipment in GDP
was 4%.
With consumers' propensity to save and the leakage to imports both rendering a diluting or
offsetting effect, an increase in public sector expenditure on the whole would only render a limited
short-term boost to GDP. If the Government seeks to raise public sector expenditure year after
year for the sake of stimulating the economy, this would inevitably impose increasingly heavy
burden on public finances. Besides, undue expansion of the public sector would also take up an
excessive amount of resources in the economy, thereby hampering resource usage efficiency and
overall economic vitality.
Note: Generally speaking, public sector expenditure reckoned on a GDP basis covers the
expenditures incurred by Government departments themselves, as well as by some
quasi-government non-profit bodies. On the other hand, it does not include the expenditures of
those Government departments and statutory entities engaged in the production of goods and
services principally for sale to the public, such as the Housing Department, Post Office and Water
Supplies Department. Furthermore, expenditures incurred by the Government in the provision of
social welfare and public assistance are also not included, because such expenditures are in the
nature of transfer payments and not direct consumption of economic resources.
(c) Crude estimates from the econometric model are as follows :
Broad category
of public
sector
expenditure
--------------
Multiplier effect
of increasing the
respective public
sector expenditure
by $1 on
Hong Kong's GDP
----------------------($)
Effect of increasing
the respective public
sector expenditure by
one percentage
point on the growth
rate of
Hong Kong's GDP
----------------------(% point)
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Government consumption
expenditure
0.7
0.057
Public sector
Expenditure on building
and construction
0.5
0.015
0.15
0.001
Public sector expenditure
on machinery and equipment
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