The 2003/04 Budget has indeed fulfilled its purpose to tackle the budget deficit, although the adverse effect on the domestic economy is inevitable. Despite the fact that there could still be a shortfall in revenue as a result of slower economic growth than the government forecast, the deficit gap should narrow by around HKD40 billion - the portion from a combination of revenue raising measures and spending cuts. This effectively lowers the deficit to GDP ratio below the 3% level. Moreover, the fiscal reserves under such circumstances are sufficient to sustain the deficit position for a few more years. By then, the economy may have fully recovered already.

Regarding the budget impact on the economy, it is estimated that the contractionary effect as a result of the budget measures is much less than a 1% deduction from real GDP growth in 2003. However, at the macro level, the projected deficit in 2003/04 (HKD67.9 billion) is not much different from the estimated deficit in 2002/03 (HKD70.05 billion). This suggests that the net impact from last year's position is almost neutral. There is neither additional boosting nor dragging effect on the economy, although the budget measures are basically contractionary.

The comments are of the author's opinion and do not represent the view of HSBC.