Structure of Government Accounts

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. There are eight other funds established by resolutions of the Legislative Council for specific purposes such as to finance capital works expenditure or government loans and investments. 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 and appropriation from the General Revenue Account.

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 and the Urban Renewal 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 appropriation from the General Revenue Account and investment income.

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.

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 income.

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 income.

The Loan Fund finances loan schemes such as housing loans and student loans. Its income is derived mainly from loan repayments and interest.

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

Management of Public Finances

The principles underlying the Government's management of public finances are set out in the Basic Law: to keep expenditure within the limits of revenues in drawing up the budget, to strive to achieve a fiscal balance, to avoid deficits and to keep the budget commensurate with the growth rate of its gross domestic product. The Budget presented by the Financial Secretary to the legislature each year is developed against the background of a medium-range forecast to ensure that full regard is given to the longer-term trends in the economy.

Public Expenditure

In accounting terms, public expenditure is taken to include government expenditure from the General Revenue Account and the other funds except loans and investment from the Capital Investment Fund, plus expenditure by the Housing Authority and government trading funds. 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, loans and equity injections by the Capital Investment Fund are excluded as they do not reflect the actual consumption of resources by the Government.

The Housing Authority, operating through the Housing Department, is financially autonomous. The Government provides the Authority with capital and land on concessionary terms to finance the provision of public housing rental flat to those in need. Promoting home ownership is no longer one of the Authority's policy objectives and priorities. Against the repositioned policy of providing rental housing to low-income families, minimising market intervention and maintaining a fair and stable operating environment for the private property market, the Authority decided to terminate the Home Assistance Loan Scheme in July 2004.

A trading fund is an accounting entity enabling a department to provide services on a commercial or quasi-commercial basis. Unlike a vote-funded department, a department operating on a trading fund is allowed to retain revenue generated to meet its expenditure and to finance future expansion.

Financial Results

Public expenditure in 2003-04 totalled $271.1 billion. The Government itself accounted for $243.2 billion. The growth rate over the preceding year was 2.9 per cent in nominal terms or 5.2 per cent in real terms. Some $60 billion, or 22.1 per cent of the public expenditure in 2003-04, was of a capital nature. An analysis of expenditure by function is at Appendix 6, Table 6. The growth rate of public expenditure is compared with the rate of economic growth at Table 7.

Total government revenue in 2003-04 amounted to $207.3 billion. The consolidated cash deficit for the year was $40.1 billion. Details of revenue by source and of expenditure by component for 2003-04 and 2004-05 (Revised Estimate) are at Table 8.

The Government's consolidated account recorded a deficit of $40.1 billion in 2003-04. The accumulated balances at the end of 2003-04 stood at $275.3 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.

Revenue Sources

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 (24 per cent) and salaries tax (13 per cent). Other significant sources include revenue from investment returns (7 per cent), utilities, fees and charges for services provided by the Government (6 per cent), land transactions (3 per cent), betting duty (6 per cent), rates (5 per cent), stamp duties (5 per cent) and duties on dutiable commodities (3 per cent). (For major sources of revenue, see Appendix 6, Chart 2)

The Inland Revenue Department collects about 50 per cent of total revenue, including profits tax, salaries tax, property tax, stamp duty, betting duty, estate duty and hotel accommodation tax. Profits, salaries and property taxes, (including tax under personal assessment), which together accounted for about 39 per cent of total revenue in 2003-04, 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 or derived from Hong Kong, from a trade, profession or business carried on in Hong Kong. In 2003-04, profits of unincorporated businesses were taxed at 15.5 per cent and profits of corporations at 17.5 per cent. For 2004-05, profits of unincorporated business will be taxed at 16 per cent while the rate for corporations will remain at 17.5 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 03-04, the Government received about $48.8 billion in profits tax, or about 24 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 in 03-04 was calculated on a sliding scale that progressed from 2 per cent, 7.5 per cent and 13 per cent on the first, second and third segments of net income (that is, income after deduction of allowances) of $32,500 each, respectively, and then to 18.5 per cent on the remaining net income. No one, however, needed to pay more than the standard rate of 15.5 per cent of his or her total income. For 2004-05, the respective rates will be 2 per cent, 8 per cent, 14 per cent and 20 per cent with segments of $30,000 each and a standard rate of 16 per cent. 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 $28.0 billion, or about 13 per cent of total revenue, in 2003-04. Owing to generous personal allowances under Hong Kong tax law, only 37 per cent of the workforce had to pay salaries tax.

Owners of land or buildings in Hong Kong were charged property tax in 2003-04 at the standard rate of 15.5 per cent of the actual rent received, less an allowance of 20 per cent for repairs and maintenance. The standard rate for 2004-05 is 16 per cent. 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 accounted for about 0.5 per cent of total revenue, or about $1 billion in 2003-04.

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 $11.2 billion, in 2003-04.

A duty is imposed on bets on horse racing administered by the Hong Kong Jockey Club, on proceeds of Mark Six lotteries and on gross profits of the Hong Kong Jockey Club's football betting operation — the only legal forms of betting in Hong Kong. The rate of duty on betting proceeds from horse-racing was 12 per cent on standard bets and 20 per cent on exotic bets in 2003-04. (The rate on exotic bets was increased from 19 to 20 per cent with effect from August 1 2003). The duty on football betting, which was introduced on August 1 2003, is charged at a rate of 50 per cent of gross profits. The yield from betting duty in 2003-04 totalled some $11.6 billion, and accounted for about 6 per cent of total revenue.

In 2003-04, estate duty was 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 was 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 2003-04, the department collected duties worth $6.4 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 2004-05, the rates percentage charge is 5 per cent.

The rateable value of a property is an estimate of its annual rent in the open market as at a designated date. In order to better reflect prevailing market rents, revaluation of rateable values is now conducted on an annual basis. The current Valuation List took effect on April 1, 2004 with rateable values reflecting rental values at October 1, 2003.

The Valuation List as at March 31, 2004 contained about 2 134 000 assessments. In 2003-04, the revenue from rates was $11.167 billion, accounting for about 5 per cent of total revenue.

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 group comprises 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 any subsequent changes in the rateable value. There were about 1 580 000 assessments in the Government Rent Roll as at March 31, 2004. The total Government rent collected in 2003-04 was $4.1 billion.

The Government derives significant amounts of revenue from other sources. Fees and charges for services provided by government departments generated about $10.5 billion, or about 5 per cent of total revenue, in 2003-04. 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. Government-operated public utilities generated about $2.9 billion, which accounted for about 1 per cent of total revenue; the most important of these, in revenue terms, is water charges. The Government froze most Government fees and charges in February 1998 to ease the burden on the community at a time of economic setback. Following the gradual recovery of the economy, the Financial Secretary announced in the 2004-05 Budget that the Government would resume the revision of fees for government services and would first deal with fees that do not directly affect people's livelihood or general business activities.

Also, in 2003-04, the Government collected $25.9 billion, amounting to about 12.5 per cent of the total revenue, from investments and interest income on the fiscal reserves.

Lastly, some $5.4 billion, or about 2.6 per cent of the total revenue in 2003-04, 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.

Need to Broaden Tax Base

The Government recognises that the tax base of Hong Kong is very narrow and there is a need to broaden it to enhance the health of our public finances.

For a working population of some 3.2 million, only 1.2 million have to pay salaries tax. Of these, the top 100 000 taxpayers have contributed some 57 per cent of the salaries tax. As for profits tax, the top 500 corporations, which represent only about 1 per cent of the total number of profit-making corporations, have contributed 60 per cent. Compared with overseas developed economies, Hong Kong is more reliant on profits tax and real property-related taxes or non-tax revenue. Since revenue from these sources is sensitive to economic fluctuations, we need to broaden our tax base to ensure a steady source of income to meet our public expenditure needs.

A Goods and Services Tax (GST) is considered a viable option to broaden the tax base. An internal study committee, set up in July 2003 to study the feasibility of a GST, has submitted a report to the Financial Secretary on how a GST would be implemented in Hong Kong. Overseas experience has found that the effects of a GST on the economy are generally limited and short-term. Over the long term, a GST enhances the competitiveness of the economy and stabilises government finances. The Government aims to engage the whole community in rational and constructive discussion before a decision is taken on whether we should have a GST.

Government Logistics Department

Purchases of goods and services required by government departments are undertaken centrally by the Government Logistics Department. These goods and services are normally obtained by competitive tendering, without 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.

'Hong Kong, China' is a signatory to the World Trade Organisation Agreement on Government Procurement (WTO GPA). Government procurement is undertaken in accordance with the principles of openness, transparency, fairness and non-discrimination. Public tender procedures are widely used for general and common items. Restricted or single tender procedures are used when 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 prequalification exercise before tendering to ensure that they are capable in terms of financial and technical capability and reliability in performance. To facilitate sourcing and market research, the department maintains and regularly updates the Supplier Lists which comprise local and overseas suppliers for different categories of commodities and services.

Notices for public and prequalification tenders are published in the Government of the Hong Kong Special Administrative Region Gazette and local newspapers. Firms on the department's Supplier Lists and, in the case of procurements covered by WTO GPA, consulates and overseas trade commissions, are also informed. To allow easy access by suppliers outside Hong Kong, the department also puts its tender notices and related information on the Internet. The Electronic Tendering System, which was introduced in April 2000 and enables subscribers to download tender documents and to submit tender offers by electronic means, has been running smoothly with the number of subscribers rising steadily.

In 2004, the department awarded contracts at a total value of $4.81 billion, purchasing items from 34 different territories. Major items of purchase included pharmaceutical products, computer equipment and software, fuel oils and hydrocarbon lubricants, transportation services, specialised vehicles and spares and food and beverage.

Supplies of essential and emergency items are purchased in bulk and held in the Government Logistics Centre in Chai Wan. User departments can place orders for these items when required. The department has been transferring the common-user items to allocated term contracts for direct delivery from the contractors to user departments on an as-and-when-required basis with a view to avoiding stocking and double handling. The changeover is progressing well and is expected to complete in mid-2005. The total values of stock items acquired and issued to customers were reduced from $223 million and $236 million in 2003 to $65 million and $82 million in 2004 respectively. Resulting from the downsizing of the stocking, the department has taken the following steps to achieve cost-effectiveness and ensure operational efficiency:

The department also deploys supplies staff to other departments to ensure there is a professional approach to procurement and maintenance of stores and equipment.