The government of the Hong Kong Special Administrative Region is taking firm measures to rein in its budget deficit which is expected to reach HK$49 billion (US$6.28 billion), or 4 percent of its GDP in fiscal 2003/04.

In what is widely seen as an acceptable maiden budget speech Wednesday, Financial Secretary Henry Tang proposed trimming government expenditures progressively to HK$200 billion in 2008/09 from HK$217.4 billion this fiscal year.

The major reduction is the cut in the size of the civil service. Tang said the government will continue to reduce the size of the service from current 172,000 to 166,500 by the end of March in 2005 and further to 160,000 by 2006/07.

"I fully agree that the government should first put its own house in order by containing expenditure stringently before considering tax increases," said Tang.

But there may not be any need to increase taxes because of the strong recovery of the economy, which generates increased public revenues.

Hong Kong's economy is forecast to register a 6 percent GDP growth this year, as compared with 3.3 percent in 2003. Riding on a GDP growth of 3.8 percent over a medium term, the government aims to eradicate the fiscal deficit and even generate a slight surplus of HK$6 billion by 2008/09.

"In this year's budget, I propose no further increases in salaries tax, profits tax or any other tax," he said.

"A substantial increase in profits tax and salaries tax simply for the sake of financing the deficit could lead to a drain on capital and talent instead, thereby undermining our competitiveness," he added.

Instead, he proposed introduction of goods and services tax (GST) in three years. An internal committee has been set up to consider the implication of such a tax on the overall economy.

According to a rough estimate, each single percentage point in the rate of GST will yield revenues of about HK$6 billion a year.

"As regards the impact of GST on the economy, experience shows that in places that have introduced this tax in recent years, its effects on prices are limited and short-term," Tang continued.

He also proposed the issuing of government bonds to provide additional fiscal flexibility. A maximum of HK$20-billion government bond will be issued to finance infrastructure projects in 2004/05 financial year.

Sources said that the HK$20 billion government bond would have a maturity of at least 5 years with a maximum coupon rate of 5 percent per year. At these terms, interest cost would amount to about HK$1 billion per year.

(China Daily March 11, 2004)