The Budget 2005-2006: My Views

1
The Budget 2005-2006 My Views

• Stephen Yan-Leung Cheung
• Prof. (Chair) of Finance
• City University of Hong Kong

2
Content

1. Hong Kong Economy
2. How can we position ourselves?
3. Opportunities in China Market
4. Uncertainties

3
Government Deficit (I)
Year 2004-05 (billion) 2005-06 (billion) 2006-07 (billion) 2007-08 (billion) 2008-09 (billion)
Operating revenue 165.6 170.7 177.7 184.9 194.8
Operating expenditure 212.2 210.6 207.1 203.5 200.0
Operating surplus/ (deficit) (46.6) (39.9) (29.4) (18.6) (5.2)
Capital revenue 37.9 56.8 44.5 56.0 49.3
Capital spending (including payments from the Capital Investment Fund) 53.4 52.3 45.9 39.6 37.1
Capital financing surplus/ (deficit) (15.5) 4.5 (1.4) 16.4 12.2
Government bond issuance - Proceeds - Interest expense 20.0 0.5 - 1.0 - 1.0 - 1.0 - 1.0
Capital financing surplus/ (deficit) after bond issuance 4.0 3.5 (2.4) 15.4 11.2
4
Government Deficit (II)
Year 2004-05 (billion) 2005-06 (billion) 2006-07 (billion) 2007-08 (billion) 2008-09 (billion)
Consolidated surplus/ (deficit) before bond issuance - as a percentage of GDP (62.1) 4.9 (35.4) 2.7 (30.8) 2.2 (2.2) 0.2 7.0 0.5
Consolidated surplus/ (deficit) after bond issuance - as a percentage of GDP (42.6) 3.4 (36.4) 2.7 (31.8) 2.3 (3.2) 0.2 6.0 0.4
Fiscal reserves after bond issuance - as number of months of Government expenditure 223.8 10 187.4 9 155.6 7 152.4 8 158.4 8
Public expenditure - as a percentage of GDP 286.0 22.5 277.7 20.8 270.2 19.3 264.3 18.0 259.3 16.9
Source The Budget 2004-05
5
Observations (I)

• Operating revenue cannot cover operating
  expenditure
• Operating deficit will last until 2008/09
• Consolidated deficit will last until 2007/08

6
Observations (II)

• The consolidated surplus/ (deficit) is boosted by
  the 20 billion bond issue
• Interestingly, Mr. Tangs speech did not mention
  about the payment
• Issuing bond is a source of financing not income

7
Operating Expenditure Forecast (in billion)
Target
Forecast
Source The Budget 2004-05
8
Operating Revenue Forecast (in billion)
Target
Forecast
Source The Budget 2004-05
9
Surplus/Deficit Forecast (in billion)
Source The Budget 2004-05
10
Observations (III)

• Operating expenditure drops from 218 billion in
  03/04 to 200 billion in 08/09
• ? 8 decrease
• Operating revenue increases from 155 billion in
  03/04 to 200 billion in 08/09
• ? 29 increase
• Question is how to boost up government revenue

11
Facts

• Hong Kong has a narrow tax-base
• No room to increase direct tax rate
• Salary tax
• Profit tax
• Depend too much on direct tax
• 4060 (indirect tax direct tax)
• Only 40 working population pay salary tax
• For those who pay the standard tax rate (less
  than 1) are responsible for more than 20 of the
  salary tax revenue
• Government becomes serious on GST

12
Economic Situation

• Hong Kong GDP in Q3 increased to 7.2
• Close to the GDP in 2000 Q1, which was 13.6 (IT
  bubble)
• The total exports in Q4 2004 increased around 13
• Tourism, individual travel scheme
• CEPA

13
Property Market Recovery

• Recovery in 2003 Q4 and 2004 Q1
• Number of transactions increased by 22 in the
  first half of 2004 over the second half of 2003
• Average property price dropped slightly recently
  but prices went up by 26 relatively to mid-2003
• Affordability ratio improves substantially

14
Prices for Residential Property
15
Tourism

• Number of tourists arriving at Hong Kong
  increased
• substantially from China, and
• from other destinations
• Number of tourists arriving at Hong Kong in June
  2004 exceeded the pre-SARS level
• In July 2004, number of tourists reached 1.99
  million

16
Visitor Arrivals
17
Consumption

• Private consumption expenditure had an average
  growth of 7 in real term in Q1-3 2004
• The volume of total retail sales increased by
  6.8 in Dec 2004
• Reflection of strong rebound of local consumers
  and tourists

18
Private Consumption Expenditure
19
Hong Kongs Price Movement
20
Market Forecast Hong Kongs Economic Growth
Forecast ()
Government 7.5
BOC HK 7.6
HSBC 7.8
DBS 7.5
Merrill Lynch 8.0
Citibank 6.5
INC 7.5
Sources Census and Statistics Department,
Reuters, and BOCHK Research
21
Hong Kong Economic Situation (I)

• Two Problems
• Deflation
• A period of 5 years 8 months
• CPI increased by 0.2 in Dec 04 but fell by 0.5
  in Jan 05
• Declined in prices were recorded in Jan 2005 for
  housing (-3.1 in the Composite CPI), durable
  goods (-2.0 in the Composite CPI), miscellaneous
  services which cover package tours (-1.6 in the
  Composite CPI), and transport (-0.1 in the
  Composite CPI)

22
Hong Kong Economic Situation (II)

• Unemployment
• Unemployment rate at 6.4 in Nov 04 - Jan 05
• Structural problem
• Possible to drop to 5 - 6
• The age group of 15 -19 has high unemployment
  rate
• How to improve the education level of population?
• How?

23
Uncertainties

• Oil price
• US50/barrel
• US economic figures good/bad?
• US interest rate increase

24
China Economy

• Macro-economic adjustment started to work?
• Fixed asset investment slowed
• 2004 Q1-3 GDP increased 9.5
• Inflation is 1.9 in Jan of 2005
• Prices of food items increased by 4.0
• Prices of non-food items increased by 0.8
• China economy further down may affect the
  external trade of Hong Kong

25
Budget 2005-2006

• Recurrent revenue and non-recurrent revenue will
  increase
• Budget deficit will decrease substantially
• Structural deficit?
• How to match recurrent expenditure with recurrent
  revenue?

26

• END