The first theme of the Budget is diversifying our economy to create wealth for Hong Kong and to provide quality job opportunities and better choices of career development for our young people. The second theme is investing for the future and the third one being caring and sharing. This year, the economy is expected to grow between 3% to 4% in real terms. Last year, the growth was impressive, about 3.8%, the growth momentum carrying on into this year. In terms of inflation, the underlying inflation is estimated to be about 2.5% – still relatively low, although edged up a little bit from that of last year.
We have also taken the opportunity to take stock of what is happening around the world, because we are a very small and open economy. Anything happening outside in the world will unavoidably (affect) us. You are from the business sector so I’m sure you are well aware of this: the first mega trend is the unstoppable wave of innovation and technology which not (only) changes business models but also affects the (lives) of many.
The second trend is the shift of economic gravity from the West to the East. If I may share with you a few figures, in the past decade the economic growth of China accounted for about one-third of global growth, and if we take into consideration other Asian countries like India and the ASEAN countries, the growth in this developing Asia accounted for about two-thirds of global economic growth. So this is very clear.
And the third trend we observe is that protectionism is on the rise. The recent incident between US and China is a very timely case in point. And in terms of our opportunities, of course first and foremost is the development of China and the opportunities that will bring for Hong Kong.
Under the 13th Five-Year Plan, the Central Government pledged to support us not just to continue to develop into a premier financial, trading and shipping centre, but also pledged its support to us to develop innovation and technology as an industry, also with support to us to further enhance our professional services. Two other major initiatives, the Belt & Road and the Guangdong-Hong Kong-Macao Bay Area, also present unprecedented opportunities for Hong Kong.
In terms of challenges, land supply and shortage of workforce and talent are the two key supply-side constraints that we are facing. And how to build consensus among the community to move things forward is also another challenge that we have to tackle.
Facilitator and promoter
In terms of the role of the Government, the way we see it is that Government is not just a public-services provider, not just a regulator, but in the context of economic development we need to play the role of facilitator and promoter. That’s why in the Budget, when we want to develop innovation and technology as a sector for our future economic development and also as a force to cut across different industries to enhance our overall competitiveness, the Government took the initiative to set aside in this year’s Budget over $50 billion to support the innovation and technology sector. And in fact, even in sectors that we are perceived to have competitive advantage, say for example financial services, there are also areas that we can do better. That’s why you can see in the Budget I set aside $500 million to sustain growth and to help us develop areas in financial services that we are not yet at an advanced stage, say for example the bond market. We are going to provide incentives for issuers who have never issued bonds in Hong Kong in the form of subsidies from the Government to the extent of 50% of their issuing expenses and each issuer can claim up to two times – each time about $2.5 million as a cap. So that is something quite unusual when you compare with our past practices.
I give you these two examples with a view to illustrating the position taken by the Government with regard to economic development. For areas that we perceive to have potential, areas that we do think will benefit us in the long term, we won’t hesitate to put resources to that area. And that also applies to, say for example, tax policies. As you may be aware, we are contemplating draft amendment bills to the Legislative Council to enable us to allow super deduction for R&D expenditures.
In terms of innovation and technology, maybe one point I should highlight: out of that over $50 billion, $10 billion is allocated to develop two research clusters – one is on healthcare technologies, the other is on artificial intelligence technologies. The idea is to provide infrastructure and also to allow the Government to provide financial incentives for us to attract renowned overseas or Mainland research institutions, universities and tech companies to come to Hong Kong, to bring along with them also talent. It is because the core competitive factor to ensure the success of innovation and technology is human capital, is talent. We are strong in certain areas in the universities, but if we want to develop that particular sector we need to have a critical mass. So the idea is to provide this platform and incentive so that we can attract more of those institutions to come to Hong Kong, to move some of their research here and to bring along their talent, so that we can take that opportunity also to nurture our own talent, and to be able to create a critical mass of such talent to allow us to bring the industry forward.
Perhaps at this particular juncture it is worth noting that in terms of public expenditure as a percentage of GDP, we have removed the previous cap of public expenditure not to exceed 20% of our GDP. For the coming five years, this percentage will be about 21%. That will give us about $24 billion additional resources for us to use in terms of recurrent and capital expenditure. That is quite something. But this is, let me assure you, a prudent move because, number one, we have very strong fiscal reserves to enable us to do that, secondly, when I take stock of our revenue in the past decade, the total revenue of the Government each year is about 21% of our GDP, so raising that cap is still within our affordability and would enable us to invest in the areas that we need to catch up, say for example healthcare. This year in the Budget I allocated $300 billion from the fiscal reserves, asking the Hospital Authority to advance the planning of the second 10-year hospital development plan and to ask the universities to increase their training capacities for doctors and healthcare professionals in order to prepare ourselves for the fast-ageing society.
(For) our revenue and expenditure situation in the coming five years, it is by and large a break-even situation. And in terms of total expenditure in the year 2018-19 it is about $557 billion, which is about $110 billion higher than five years ago. And if you project that into the future five years, by the end of 2022-23, it will reach about $695 billion. So the increase in expenditure is substantial and that demonstrates one point: that is for this term of Government, we will not be keeping the reserves in the bank but we will make good use of that money to invest, no matter it is in healthcare or education or to invest to foster the development of our economy.
Financial Secretary Paul Chan gave these remarks at the Joint Business Community Luncheon on the 2018-19 Budget on March 28.