Under the 'one country, two systems' principle, the HKSAR shall continue to adopt social, economic and political systems distinct from those in the Mainland, following the reunification in July 1997. The Basic Law, as the constitutional law of the HKSAR, gives a firm protection to this principle. Hong Kong shall continue to uphold the rule of law, maintain an effective executive-led Government, sustain an efficient Civil Service, practise free enterprise and free trade, follow prudent financial management policies, and keep a simple and predictable tax system with a low tax rate.

By adhering to the rule of 'maximum support and minimum intervention', the Government does not seek to influence the overall economic structure through regulations, tax policies or subsidies. Business decisions are left to investors and entrepreneurs, as they are deemed to have a better understanding of market needs. The Government will consider intervening only when the market fails to work efficiently. Thus the Government sees its primary roles as: first, to provide a business-friendly environment such that more high value-added activities will be developed; secondly, to provide quality education, training and retraining so as to enable the workforce to benefit from a knowledge-based economy; and thirdly, to provide a quality living environment in order to help retain local professionals and attract overseas talents to build their home and career in Hong Kong. This market-led approach has provided the Hong Kong economy with much vitality and flexibility over the years, which is a key factor underlying Hong Kong's continued economic success and resilience from external shocks.

The Government advocates free and fair competition. It has made considerable strides in liberalising the securities, futures and banking industries, and opening up the telecommunications, information technology and broadcasting markets. The increased competition has not only brought in more participants, both local and foreign, but also stimulated businesses in Hong Kong to raise their stake both at home and abroad. Most of all, consumers benefit from better quality of service and lower prices.

The Basic Law stipulates that Hong Kong shall maintain its status as an international financial centre. The past decade saw remarkable growth in Hong Kong's financial services in banking, insurance, securities trading and fund management. The Government will strive to continuously enhance Hong Kong's position in this regard, by maintaining a world-class supervisory regime without over-regulation, by providing the most up-to-date financial infrastructure and a well-trained and highly adaptable workforce, and by sustaining an open and competitive financial market. Complementing these are a robust monetary regime, a stable currency and a sound banking sector.

The Government will continue to adhere to prudent fiscal practice, while maintaining a simple tax structure with low tax rate that will sustain workers' incentive to work and entrepreneurs' incentive to invest. The current corporate profits tax rate and standard tax rate, at 16 per cent and 15 per cent respectively, are low by international standards. Another crucial aspect of fiscal policy is to maintain a slim and efficient government, so as not to crowd out an excessive amount of resources from the private sector. In concrete terms, the Government undertakes to contain the growth rate of public expenditure within the trend growth rate of the economy over the medium term. In addition, it strives to spend within its means, thereby keeping the budget in balance and leaving the substantial fiscal reserves to cater for grave adversities. Prudent fiscal practice is amongst the crucial elements that instil confidence of international investors in the Hong Kong economy.

The Government controls its finances through a series of fund accounts. The General Revenue Account is the main account for day-to-day departmental expenditure and revenue collection. Eight other funds exist mainly to hold investments or to finance capital expenditure and government loans. They are the Capital Works Reserve Fund, Capital Investment Fund, Civil Service Pension Reserve Fund, Disaster Relief Fund, Innovation and Technology Fund, Land Fund, Loan Fund and Lotteries Fund.

The Capital Works Reserve Fund finances the public works programme, land acquisitions, capital subventions, major systems and equipment items, computerisation and the payment of redemption money in respect of land exchange entitlements. Its income is derived mainly from land premia.

The Capital Investment Fund finances the Government's capital investments, such as equity injections in the Airport Authority, the Kowloon-Canton Railway Corporation and the MTR Corporation Limited, and capital investments in the Hong Kong Housing Authority. Its income is derived mainly from appropriation from the General Revenue Account and dividends.

The Civil Service Pension Reserve Fund acts as a reserve to meet payment of civil service pensions in the unlikely event that the Government cannot meet such liabilities from the General Revenue Account. Its income is derived from investment earnings.

The Disaster Relief Fund finances grants for humanitarian aid in relief of disasters that occur outside Hong Kong. Its income is derived mainly from appropriation from the General Revenue Account and investment earnings.

The Innovation and Technology Fund finances projects that contribute to innovation and technology upgrading in the manufacturing and service industries, as well as those that contribute to the upgrading and development of the manufacturing and service industries. Its income is derived mainly from investment earnings.

The Land Fund was established on July 1, 1997 to enable the investments held by the former Trustees of the HKSAR Government Land Fund to be formally brought into the Government's account. Its income is derived from investment earnings.

The Loan Fund finances loan schemes such as housing loans and student loans. Its income is derived mainly from appropriation from the General Revenue Account, loan repayments, and interest on loans.

The Lotteries Fund finances welfare services through grants and loans. Its income is derived mainly from the sharing of the proceeds of the popular Mark Six lotteries.

The Government manages its finances against the background of a rolling five-year, medium-range forecast of expenditure and revenue. This provides a model for the Government's overall consolidated financial position.

The most important principle underlying the Government's management of the public finance is that government expenditure, over time, should not grow faster than the economy as a whole. The Budget presented by the Financial Secretary to the legislature each year is developed against the background of the medium-range forecast to ensure that full regard is given to this principle and to longer-term trends in the economy.

In accounting terms, public expenditure is taken to include expenditure by the Housing Authority, the two former Provisional Municipal Councils (up to December 31, 1999), the Lotteries Fund and government trading funds, all expenditure charged to the General Revenue Account^{(Note

1)} and expenditure financed by the Government's statutory funds other than the Capital Investment Fund. Government grants and subventions to institutions in the private or quasi-private sectors are included, but not spending by organisations in which the Government has only an equity stake (such as the MTR Corporation Limited, the Kowloon-Canton Railway Corporation and the Airport Authority). Similarly, debt repayments and equity payments are excluded as they do not reflect the actual consumption of resources by the Government.

Public expenditure in 1999-2000 totalled $269.5 billion. The Government itself accounted for $214.5 billion^{(Note

1)}. The growth rate over the preceding year was 1.0 per cent in nominal terms or 0.5 per cent in real terms. Some $72.2 billion, or 26.8 per cent of the public expenditure in 1999-2000, was of a capital nature. An analysis of expenditure by function is at Appendix 11. The growth rate of public expenditure is compared with the rate of economic growth at Appendix 13.

Total government revenue in 1999-2000 amounted to $233.0 billion. The consolidated cash surplus for the year was $10.0 billion. Details of revenue by source and of expenditure by component for 1999-2000 and 2000-01 (Revised Estimate) are at Appendix 14.

The draft estimates of expenditure on the General Revenue Account are presented by the Financial Secretary to the legislature when he delivers his annual budget speech. In the Appropriation Bill introduced to the legislature at the same time, the Administration seeks appropriation of the total estimated expenditure on the General Revenue Account. The estimates of expenditure contain details of the estimated recurrent and capital expenditure of all government departments, including estimates of payments to be made to subvented organisations and estimates of transfers to be made to the statutory funds.

The Government's consolidated account recorded a surplus of $10.0 billion in 1999-2000. The accumulated balances at the end of 1999-2000 stood at $444.3 billion. These balances form the Government's fiscal reserves and are available to meet any calls on its contingent liabilities and enable it to cope with any short-term fluctuations in expenditure relative to revenue.

The Housing Authority, operating through the Housing Department, is financially autonomous. The Government provides the authority with capital and land on concessionary terms to build public housing for rent and for sale. The authority's recurrent expenditure, for clearances and squatter control is financed from the General Revenue Account.

A trading fund is a department — or part of one — providing services on a commercial or quasi-commercial basis through the operation of a separate accounting system. Unlike a vote-funded department, trading funds are allowed to retain revenue generated to meet expenditure in providing the services and to finance future expansion.

Purchases of goods and related services required by government departments are undertaken centrally by the Government Supplies Department, which provides similar services to certain non-government organisations, such as the Hospital Authority and the Vocational Training Council. These goods and related services are normally obtained by competitive tendering, without giving preference to any particular source of supply, to ensure that users' needs are met at the best possible price, having regard to life-time cost and reliability of supply. Helping users to derive the best value in their purchases, the department formulates a specific strategy for each type of purchase based on market conditions, focusing on meeting requirements for high-value and critical items by cost-effective and reliable means.

Public tender procedures are widely used for general and common items. As a means to save administrative costs, invitations to tender or quote for low value purchases are normally confined to registered suppliers. Restricted or single tender procedures are used where open competitive tendering would not be an effective means such as in cases involving compatibility with existing equipment, or patented/proprietary items, or unforeseen urgency. For complex and critical purchases, suppliers may be required to undergo a qualification exercise before tendering to ensure that they are capable in terms of financial and technical standing and reliability in performance.

Tender invitations are published in the Government of the Hong Kong Special Administrative Region Gazette and four local newspapers and are mailed to suppliers registered with the department. Consulates and overseas trade commissions are also informed. To allow easy access by suppliers outside Hong Kong, the department also includes its tender invitations and related information on the Internet. As a further enhancement of services, an Electronic Tendering System was introduced in April, enabling subscribers to download tender documentation and to submit tender offers by electronic means.

In 1999-2000, the department placed orders of a total value of $6.55 billion, purchasing from 39 different countries. The major sources of supply were the United States, France, the United Kingdom, Japan and the Mainland. Major items of purchase included computer systems, pharmaceutical supplies, aircraft and spares, medical equipment and telecommunication equipment.

Supplies of goods to meet general needs are held in the purpose-built Government Logistics Centre in Chai Wan which came into operation in late 1996. The operations are assisted by a modern computerised system with bar-coding functions which provides, among others, on-line communication with customers. In 1999-2000, the total value of stock items acquired and issued to customers were $340 million and $342 million, respectively.

The department also seconds supplies staff to other departments to ensure a professional approach to acquisition and maintenance of stores and equipment.

Hong Kong's tax system is simple and relatively inexpensive to administer. Tax rates are low, and the Government accords a high priority to curbing tax evasion and minimising opportunities for tax avoidance. The major sources of revenue are profits tax, salaries tax, investment returns as well as revenue from land transactions. Other significant sources include rates, stamp duty on property and stock transactions, betting duty, fees and charges for services provided by the Government and duties on certain specified commodities. (For major sources of revenue, see Appendix 16).

The Inland Revenue Department collects about 40 per cent of total revenue, including profits and salaries taxes, stamp duty, betting duty, estate duty and hotel accommodation tax. Profits and salaries taxes, which together accounted for about 30 per cent of total revenue in 1999-2000, are levied under the Inland Revenue Ordinance. Persons liable to these taxes may be assessed on three separate and distinct sources of income: business profits, salaries and income from property.

Profits tax is charged only on net profits arising in Hong Kong, or derived from a trade, profession or business carried on in Hong Kong. At present, profits of unincorporated businesses are taxed at 15 per cent and profits of corporations at 16 per cent.

Profits tax is paid initially on the basis of profits made in the year preceding the year of assessment and is subsequently adjusted according to profits actually made in the assessment year. Generally, all expenses incurred in the production of assessable profits are deductible. There is no withholding tax on dividends paid by corporations. Interest income, other than that received by financial institutions, and dividends received from corporations are exempt from profits tax. In 1999-2000, the Government received about $37.7 billion in profits tax, or about 16 per cent of total revenue.

Salaries tax is charged on emoluments arising in, or derived from, Hong Kong. The basis of assessment and method of payment (including provisional payments) are similar to the system for profits tax. Tax payable is calculated on a sliding scale which progresses from 2 per cent, 7 per cent and 12 per cent on the first, second and third segments of net income (that is, income after deduction of allowances) of $35,000 each, respectively, and then to 17 per cent on the remaining net income. No one, however, needs to pay more than the standard rate of 15 per cent of his or her total income. The earnings of husbands and wives are reported and assessed separately. However, where either spouse has allowances that exceed his or her income, or when separate assessments would result in an increase in salaries tax payable by the couple, they may elect to be assessed jointly. Salaries tax contributed some $24.8 billion, or about 11 per cent of total revenue, in 1999-2000. Owing to generous personal allowances under Hong Kong tax law, about 63 per cent of the SAR's workforce has no salaries tax liability at all.

Owners of land or buildings in Hong Kong are charged property tax at the standard rate of 15 per cent of the actual rent received, less an allowance of 20 per cent for repairs and maintenance. There is a system of provisional payment of tax similar to that for profits tax and salaries tax. Property owned by a corporation carrying on a business in Hong Kong is exempt from property tax (but profits derived from ownership are chargeable to profits tax). Receipts from property tax totalled about $1.2 billion in 1999-2000.

The Stamp Duty Ordinance imposes fixed and ad valorem duties on different classes of documents relating to assignments of immovable property, leases and share transfers. The revenue from stamp duties accounted for about 5 per cent of total revenue, or about $12.1 billion, in 1999-2000.

A duty is imposed on bets on horse racing administered by the Hong Kong Jockey Club and on the proceeds of Mark Six lotteries — the only legal forms of betting in Hong Kong. The rate of duty is 12 per cent or 19 per cent on betting proceeds (depending on the type of bet placed) and 25 per cent on the proceeds of lotteries. The yield in 1999-2000 totalled some $11.9 billion, and accounted for about 5 per cent of total revenue.

Estate duty is imposed on estates valued at over $7.5 million, at levels ranging from 5 per cent to a maximum of 15 per cent, while a hotel accommodation tax of 3 per cent is imposed on expenditure on accommodation by guests in hotels and guesthouses.

Under the Dutiable Commodities Ordinance, duties are levied on only four types of commodities — hydrocarbon oil, alcoholic beverages, other alcohol products (i.e. methyl and ethyl alcohol) and tobacco products, both locally manufactured and imported. The Customs and Excise Department is responsible for collecting these duties. In 1999-2000, the department collected duties worth $7.4 billion or about 3 per cent of total revenue.

The Rating and Valuation Department is responsible for the billing and collection of rates, which are levied on landed properties at a specified percentage of their rateable value. In 2000-01, the rates percentage charge is 5 per cent. The revenue raised provides a stable and reliable revenue stream for the Government.

The rateable value of a property is an estimate of its annual rent as at a designated date. In order to better reflect prevailing market rents, revaluations of rateable values is now conducted on an annual basis. The current Valuation List took effect on April 1, 2000 with rateable values reflecting rental values at October 1, 1999.

The Valuation List as at March 31, 2000 contained about 1 780 000 assessments. In 1999-2000, the total revenue from rates was $12.8 billion. Up to December 31, 1999, $3.2 billion of the rates revenue collected was credited to the Provisional Urban Council and $2.6 billion, was credited to the Provisional Regional Council in order to help finance the various public services provided by those bodies. Following the dissolution of Provisional Municipal Councils on January 1, 2000, all rates revenue is credited to the Government's General Revenue Account.

The Rating and Valuation Department is also responsible for the billing and collection of Government rent which is payable from July 1, 1997 for land leases granted on or after May 27, 1985, and on the extension of non-renewable land leases. The latter comprise all land leases in the New Territories and New Kowloon north of Boundary Street which were renewed on June 28, 1997. Government rent is levied at 3 per cent of the rateable value of the lot and is adjusted in step with changes in the rateable value. There were about 1 240 000 assessments in the Government Rent Roll as at March 31, 2000. The total government rent collected in 1999-2000 was $4 billion.

The Government derives significant amounts of revenue from other sources. Fees and charges for services provided by government departments generated about $10.9 billion, or about 5 per cent of total revenue, in 1999-2000. It is government policy that fees should in general be set at levels sufficient to recover the full cost of providing the services. Certain essential services are, however, subsidised by the Government or provided free of charge. The Government continued the freeze on most fees and charges in 1999-2000. A further $3.3 billion was generated by government-operated public utilities, accounting for about 1 per cent of the total revenue. The most important of these, in revenue terms, is waterworks.

Also, in 1999-2000, the Government collected $19.0 billion, amounting to about 8 per cent of the total revenue, from investments and rents from government properties (excluding the revenue collected from government rent which is charged at 3 per cent of rateable value).

Lastly, some $34.8 billion, or about 15 per cent of the total revenue in 1999-2000, was generated from land transactions. All revenue from land transactions is credited to the Capital Works Reserve Fund to help finance the Public Works Programme.

Note 1: With effect from January 1, 2000, services provided through the two former Provisional Municipal Councils are provided directly by the Government and the expenditure is charged to the General Revenue Account.