• The Budget is not expected to have any substantial impact on the economy in view of the significant import leakage of infrastructure spending. The effect of budget concessions will be offset by the cut in civil servants' pay.
  
  
• Although the pledge to balance the books by 2006-07 through cost cutting is ambitious, it is the right direction to close the budget deficit gap.

The 2002/03 Budget unveiled by, Mr. Antony Leung, Financial Secretary of the Hong Kong SAR Government on 6 March 2002 should be well received by the business sector. Although the budget contains no special measures to help the private sector, the proposal to cut the size of the government down to 20% of GDP reduces the chance of raising tax to close the deficit gap. The concessions offered in the Budget will cost HKD6.4bn, and will partly be paid for by the pay cut for civil servants - HKD3bn this fiscal year (HKD6bn full year) - and other revenue measures totalling HKD0.4bn. As a result, the stimulation effect of the HKD3bn net outlay will be minor. Though the forecast deficit of HKD45.2bn this year suggests an expansionary budget, most of the extra spending will be on infrastructure projects, which have tremendous import leakage, thereby weakening any multiplier effect. In general, the Budget is fiscally neutral.

The main focus of the Budget was the pledge made by the Financial Secretary to achieve a balanced Budget by 2006-07 -- largely through controlling public expenditure growth. Based on Budget projections, it appears that a freeze in civil servant headcount for another couple of years is necessary, unless there are large-scale layoffs through natural attrition. Growth in government expenditure will fall from 6.2% in nominal terms to a contraction of 0.4% in 2003-04 with increases pegged at a maximum of 1.5% until 2006-07. Although there could be wage increases in the private sector or a re-emergence of inflation, the government will still need to keep civil servants' pay unchanged. The real challenge of balancing the Budget will be in the coming years. This year is only the first step in the right direction.

Though the direction is right, implementation will be the key rather than setting the targets - Mr Leung's predecessor Donald Tsang set similar targets in his early budgets, but the implementation was derailed by demands for relief measures in the Asian financial crisis. However, we should give Mr Leung the benefit of the doubt for his first Budget. He has at least shown some courage in cutting civil servants' pay.