11 June 2014 Government Budget and Long-Term Fiscal Planning

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Government Budget and Long-Term Fiscal Planning

11 June 2014

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Government Budget

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Government Budget

3 Operating Account

Operating Revenue Salaries tax Profits tax Stamp duties

Investment income General rates Others

Less: Operating Expenditure

Recurrent expenditure Education Health Welfare Others

Non-recurrent expenditure Operating Surplus/Deficit

Capital Account Capital Revenue

Land premium Others

Less: Capital Expenditure

Capital works expenditure Non-works expenditure Capital Surplus/Deficit

Issuance/Repayment of Bonds and Notes

Consolidated Surplus/Deficit

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Estimated government revenue for 2014-15 ($430.1 billion)

4

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Distribution of profits taxpayers for the 2011-12 tax years

5

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Distribution of salaries taxpayers for the 2011-12 tax years

6

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Estimated recurrent expenditure for 2014-15 ($307.4 billion)

7

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Government Revenue and Expenditure

8

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Fiscal Performance

9

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Population Ageing

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Population Changes by Age Groups

11

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Proportion of Different Age Groups to Total Population and Elderly Dependency Ratio

12

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Elderly Dependency Ratio

13

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Revenue of selected economies

14

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Debt level of selected economies

15

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No Policy Change Scenario

18 General government balance (% GDP)

2010 2040f 2050f

Australia (5.3) (8.1) (12.5)

Canada (5.4) (7.6) (10.5)

China (1.7) (12.1) (18.7)

France (7.1) (11.2) (14.8)

Germany (4.1) (8.7) (12.9)

Greece (10.7) (12.1) (16.4)

India (8.3) (8.9) (11.2)

Indonesia (0.7) (5.5) (7.9)

Japan (8.5) (24.3) (30.8)

Korea 1.0 (17.0) (31.3)

Netherlands (5.1) (19.7) (27.1)

Russia (3.5) (24.1) (37.8)

Spain (9.7) (11.1) (17.0)

U.K. (10.2) (15.5) (19.6)

U.S. (9.7) (21.2) (27.8)

Advanced economies (5.3) (10.8) (15.0)

Source: Standard & Poor’s Ratings Services

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No Policy Change Scenario

19 Net general government debt (% GDP)

2010 2040f 2050f

Australia 16.0 78.0 139.0

Canada 48.0 101.0 147.0

China 14.0 108.0 199.0

France 77.0 163.0 228.0

Germany 80.0 130.0 195.0

Greece 143.0 239.0 303.0

India 75.0 109.0 145.0

Indonesia 24.0 55.0 87.0

Japan 105.0 375.0 494.0

Korea 20.0 136.0 313.0

Netherlands 59.0 243.0 380.0

Russia 1.0 215.0 444.0

Spain 51.0 164.0 247.0

U.K. 76.0 223.0 302.0

U.S. 71.0 258.0 366.0

Advanced economies 59.0 137.0 216.0

Source: Standard & Poor’s Ratings Services

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20 Population ageing drives up expenditure

(2013 constant prices)

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21 Population ageing drives up expenditure

(2013 constant prices)

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22 Hospitalisation Rates and Average Length of Stay

Cost 1 : 1.6 Length of

stay 1 : 1.8

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23 Recurrent Subvention to Hospital Authority

(2013 constant prices)

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Macroeconomic Assumptions

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25 Economic growth is expected to settle at a

slower pace

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26 Growth Accounting

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27 Decomposition of Hong Kong’s GDP Growth 1980-2013

* Cyclical fluctuations of real GDP smoothed out.

N.B.: Due to rounding, components may not add up to the totals.

Period

Contribution to labour

productivity growth due to Labour productivity

growth*

Labour force

growth GDP growth*

Capital

deepening TFP growth

(a) (b) (c) = (a) + (b)* (d) (e) = (c) + (d)

1980-1996

(17 years) 1.7% 2.4% 4.0% 2.2% 6.3%

1997-2013

(17 years) 0.7% 1.8% 2.5% 1.2% 3.7%

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28 Labour force is expected to decline after 2018,

only to stabilise in the 2030s

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29 Economic growth potential looks set to decelerate over

the long term as labour force starts to stagnate

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30 Economic growth bound to go lower as the

economy becomes more mature

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31 Real GDP 10-year trend growth rates

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32 Consumer price inflation 10-year trend rates of change

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Revenue Projections

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34 Government Revenue

-30 -20 -10 0 10 20 30 40

91-92 93-94 95-96 97-98 99-00 01-02 03-04 05-06 07-08 09-10 11-12 13-14 Asian

Financial Crisis

IT bubble burst

SARS Global

Financial Crisis

Annual rate of change (%)

Total

Government Revenue

Nominal GDP

(Estimate)

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35 Revenue Projection

(Base Case, No Service Enhancement)

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Expenditure Projections

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37 • No Service Enhancement

• Service Enhancement at

 1%

 2%

 Historical Trend

Education – 3.86%

Social Welfare – 2.8%

Health – 2.63%

on average – 3%

Projection for recurrent expenditure on

Education, Social Welfare and Health

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38 Education

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Social Welfare

39

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Health

40

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41

The average from 1982-83 to 2013-14 is 3.4%

Capital Works

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42 Pensions

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43 Total Government Expenditure

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44 (Annual rate of change)

Projected Trend Growth

(Base Case,

No Service Enhancement)

Trend Growth in recent years

2014-15 to 2041-42

1997-98 to 2014-15

2009-10 to 2014-15

Real GDP 2.8% 3.4% 3.9%

Nominal GDP 4.4% 2.9% 6.0%

Government revenue 4.5% 2.5% 6.2%

Government expenditure 5.3% 4.7% 7.5%

Trend Growth

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45 Housing Authority

• Flats production

 PRH – 20 000 p.a. (unit cost : $0.54 M

^#

)

 HOS – 5 000* p.a. (unit cost: $0.99 M

^#

)

• Cash shortfall

 $490 B (rent increase @ 5% biennially)

 $130 B (rent increase @ 10% biennially)

* 8 000 p.a. announced in 2014 Policy Address

# Figures provided to FC of LegCo in April 2013 based

on HA’s June 2012 Construction Cost Yardstick

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Fiscal Sustainability

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47 Fiscal Outlook

(Base Case, No Service Enhancement)

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48 Fiscal Outlook

(Base Case, Service Enhancement @ 1%)

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49 Fiscal Outlook

(Base Case, Service Enhancement @ 2%)

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50 Fiscal Outlook

(Base Case, Service Enhancement @ Historical Trend)

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Projections of Government Revenue and Expenditure Results of Sensitivity Analyses

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2041-42

Base Case High Case Low Case Shock Case

Revenue in $ billion (% of GDP)

No Service Enhancement 1,407 (19.8%) 2,285 (25.8%) 937 (16.5%) 943 (19.8%)

Service Enhancement at 1% per annum 1,407 (19.8%) 2,135 (24.1%) 937 (16.5%) 943 (19.8%) Service Enhancement at 2% per annum 1,407 (19.8%) 2,076 (23.5%) 937 (16.5%) 943 (19.8%) Service Enhancement at Historical Trend 1,407 (19.8%) 2,076 (23.5%) 937 (16.5%) 943 (19.8%) Expenditure in $ billion (% of GDP)

No Service Enhancement 1,700 (23.9%) 2,010 (22.7%) 1,544 (27.1%) 1,393 (29.3%) Service Enhancement at 1% per annum 2,018 (28.4%) 2,258 (25.5%) 1,829 (32.1%) 1,646 (34.6%) Service Enhancement at 2% per annum 2,413 (34.0%) 2,660 (30.1%) 2,186 (38.4%) 1,965 (41.3%) Service Enhancement at Historical Trend 2,949 (41.5%) 3,253 (36.8%) 2,670 (46.9%) 2,398 (50.4%) Structural deficit starts

No Service Enhancement 2029-30 n.a. 2024-25 2015-16

Service Enhancement at 1% per annum 2024-25 2034-35 2022-23 2015-16

Service Enhancement at Historical Trend 2021-22 2022-23 2020-21 2015-16

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Projections of Government Revenue and Expenditure Results of Sensitivity Analyses

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2041-42

Base Case High Case Low Case Shock Case

Fiscal Reserves depleted

No Service Enhancement 2041-42 n.a. 2034-35 2023-24

Service Enhancement at 1% per annum 2034-35 n.a. 2031-32 2022-23

Service Enhancement at Historical Trend 2028-29 2030-31 2027-28 2021-22

Debt level as at end-March in $ billion (% of GDP)

No Service Enhancement 271 (3.8%) n.a. 3,480 (61.1%) 4,226 (88.8%)

Service Enhancement at 1% per annum 3,188 (44.9%) n.a. 6,097 (107.1%) 6,440 (135.3%)

Service Enhancement at 2% per annum 6,542 (92.1%) 2,676 (30.2%) 9,180 (161.3%) 9,088 (191%)

Service Enhancement at Historical Trend 10,965 (154.3%) 7,497 (84.7%) 13,274 (233.2%) 12,624 (265.2%)

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Proposed Fiscal Measures

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Economic growth needed to avoid structural deficit

• No Service Enhancement

• Service Enhancement

@ 1% per annum

• Service Enhancement

@ 2% per annum

• Service Enhancement

@ Historical Trend

3.1% p.a.

3.6% p.a.

4.4% p.a.

5.4% p.a.

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Recommendations

(A) Containing expenditure growth

• contain expenditure growth within nominal GDP growth

• keep public expenditure at 20% of GDP

• assess fiscal sustainability of new initiatives ⁵⁶

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(B) Preserving, stabilising and broadening the revenue base

• avoid excessive reliance on direct taxation

• step up tax enforcement

• reinforce user pays principles ⁵⁷

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(C) Saving for the future

• “freeze” the Land Fund

• not account for as fiscal reserves

• endowment, withdrawal and operation

• consult stakeholders

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(D) Segregating and balancing the Operating and Capital Accounts

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($ Billion) 2013-14 2014-15 2015-16

Estimate Estimate Forecast

Operating Account

Operating revenue 347.9 348.9 392.3

Less: Operating expenditure (338.8) (325.0) (388.8)

Operating surplus 9.1 23.9 3.5

Capital Account

Capital revenue 99.9 81.2 70.0

Less: Capital expenditure (97.0) (86.2) (101.7)

Capital surplus/(deficit) 2.9 (5.0) (31.7)

Bond repayment - (9.8) -

Consolidated surplus/(deficit) 12.0 9.1 (28.2)

Fiscal reserves at 31 March 745.9 755.0 726.8

Represented by:

Operating Account balance

Opening balance 394.2 413.1

Operating surplus 23.9 3.5

Transfer to Capital Account (5.0) -

Closing balance 394.2 413.1 416.6

Capital Account balance

Opening balance 351.7 341.9

Capital deficit (5.0) (31.7)

Bond repayment (9.8) -

Transfer from Operating Account 5.0 -

Closing balance 351.7 341.9 310.2

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(E) Making clear what the fiscal reserves cover

60 ($ million)

201314 Revised Estimate

General Revenue Account 394,241

Funds with designated use 131,957

Capital Works Reserve Fund 78,679

Capital Investment Fund 1,992

Civil Service Pension Reserve Fund 27,029

Disaster Relief Fund 29

Innovation and Technology Fund 1,801

Loan Fund 1,357

Lotteries Fund 21,070

Land Fund 219,730

Total 745,928

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(F) Stepping up the management of the Government’s assets

• disposal or securitization

• operational and management cost effectiveness

(G) Sustaining the financial health of the Housing Authority

• review the business mode

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Economic growth

Revenue Expenditure

Keep the expenditure within the limits of revenue….

strive to achieve a fiscal balance, avoid deficits and

keep the budget commensurate with the growth rate of its

gross domestic product

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