Review : The Financial Secretary of HKSAR, delivered his first Budget speech yesterday. As expected, the Budget is focused on containing government spending to restore fiscal balance. While assuming a cut on civil service pay, officials reiterated that the actual pay adjustment would be based on the private sector's pay trend survey, economic conditions, and staff morale. Nonetheless, the Financial Secretary showed its commitment on controlling government expenditure by reducing the civil service establishment and streamlining and restructuring the bureaucracy. On the revenue side, there is no hike on tax rates, except that on wine. If government spending is under control, the Financial Secretary tends to avoid introducing sales tax in the future. Amidst economic downswing, the Financial Secretary proposed several relief measures via using some fiscal reserves. It is a sharp contrast to the earlier concerns of mounting budget deficits and the need to adjust fees and charges to ease the financial burden.

Our views : Overall, we strongly agree that the government should contain its spending before raising tax rates or introducing new taxes. Although the budget deficit for 2001/02 is running at a record high, there is political and social concerns to raise revenue at the moment on hefty fiscal reserves of around HK$ 370bn. The Financial Secretary (waiting for reports on pay trend survey and government structure review) aims at reducing public expenditure to 20% of GDP. However, having no military spending, the government should trim public spending further to below 18% of GDP, same as the level before the outbreak of financial crisis in 1997. We are also disappointed that the Financial Secretary has no detailed plan on government's asset disposal and privatization of quasi-public enterprises.

Implications : With no hike on major tax rates, it is favourable for HK's economic recovery. Contrary to earlier widespread belief that the government will raise property rates, downward pressure on property shares will ease. The HKD market is expected to have little reaction as the government commitment is generally in line with market expectation of government spending cut. Looking ahead, the market will closely monitor whether the government exercises any effective wage cutting, privatisation and enhanced productivity program measures to contain spending. If a significant deficit could be avoided after five years, the HKD peg will remain resilient.