Budget Briefing for the Hong Kong Consular Corps By the Government Economist and the Deputy Secretary for Financial Services and the Treasury 22 February 2006

Economic performance 9 quarters of above-trend growth Broad-based upturn Trade, financial and producer services, and tourism are the bright spots Construction still weak Significant and broad-based job creation Inflation creeping up but still benign Chart 1

Strong GDP growth through 2005 Chart 2

Double-digit export growth Chart 3

Domestic demand also played a role in recovery Chart 4

Q1-Q3 (%) Manufacturing Construction Services Wholesale, retail and import and export trades, restaurants and hotels Transport, storage and communications Financing, insurance, real estate and business services Community, social and personal services GDP growth led by trading and financial/professional services Chart 5

Broad-based improvement in labour market Improvements across all sectors, all age groups and all levels of education attainment Long-term unemployment declining Wages reversed decline and rising back Earnings of lower-income families also improving Chart 6

Lower skilled jobs ( or 43.5%) Managers and administrators ( or 29.7%) Professionals ( or 12.5%) Associate professionals ( or 12.8%) Others (4 000 or 1.5%) jobs created since 2003 trough Chart 7

Unemployment rate and unemployment CSSA cases Chart 8

Labour income rising back as labour market improves Chart 9

The rising share of services in HK's economy Chart 10

No of managerial, professional or administrative workers Share in Employment* (000)(%) One out of three people in HKs workforce are managerial, professional or administrative workers (*)Excluding FDH workers Chart 11

Employment by occupation category Chart 12

Q Percent 20.7% 29.9% 42.9% 6.5% 31.8% 30.5% 32.1% 5.7% $9,000 - $14,999 $15,000 and above $5,000 - $8,999 Less than $5,000 Workers earning $5,000 – $8,999 down markedly … while those earning $15,000 or more rose Chart 13

2006 Economic outlook GDP growth to settle back to more sustainable growth of 4 - 5%, still above past 10-year trend of 3.9% Another year of broad-based growth But risks from external environment and feed- through of higher interest rates Labour market to improve further Inflation edging up but still healthy Chart 14

* Rate of change in real terms (%) GDP 10-year trend growth ( ) (Forecast) 4 - 5% (*) Mid point of the range forecast. Economy set for still solid growth in 2006 Chart 15

Rate of change (%) Composite CPI (Forecast) 2.3 Inflation creeping up but low in 2006 Chart 16

Budget Revised Estimate Consolidated surplus:$4.1 billion Operating surplus:$5.8 billion Both Operating and Consolidated Accounts in surplus for first time since Operating expenditure $2.2 billion less than Chart 17

Fiscal Targets Operating expenditure $200 billion RE $196.9 billion $194.7 billion Balance in Consolidated Account Operating Account RE Surplus $4.1 billion Surplus $5.8 billion Public expenditure 20% of GDP RE 19.9% 18.1% Fiscal targets set two years ago for achieved three years early: Chart 18

Enhancing Our Economic Competitiveness Economic co-operation with Mainland Review of Competition Policy 38 recommendations by Economic and Employment Council adopted to cut red tape and streamline procedures Chart 19 Implementation of CEPA and Pan-PRD Agreement Business environment

Enhancing Our Economic Competitiveness Business Facilitation Advisory Committee to conduct in-depth reviews of licensing procedures for selected activities Chart 20 Business environment

Enhancing Our Economic Competitiveness Financial services Chart 21 Expanding Renminbi business: a major development objective Reduce SFC trading levy by 20%, saving $300 million a year Legislation to strengthen regulation of listed corporations, and establish the Financial Reporting Council to supervise their auditors Branding: Ideal platform for Mainland enterprises and funds to reach international market

Enhancing Our Economic Competitiveness Developing tourism Chart 22 Total visitor arrivals over 23 million and receipts > $100 billion Expand Individual Visit Scheme from 38 cities to 44 Disneyland and Asia World-Expo open in 2005: Ngong Ping 360, Wetland Park, Dr Sun Yat-sen Museum and Ocean Park redevelopment yet to come Cruise terminal

Enhancing Our Economic Competitiveness Developing logistics Chart 23 Develop major cross-boundary linkages Digital Trade and Transportation Network System Attract more vessels to use port facilities Gold depository at Hong Kong International Airport

Enhancing Our Economic Competitiveness Pooling of talent Chart 24 Provide additional university hostel places, at a cost of $350 million, for local and exchange students Quality Migrant Scheme to attract overseas and Mainland talent

Estimates of Expenditure Total Government Expenditure $245.6 billion, of which >60% on Education, Social Welfare, Health and Security Investing in Education Chart 25 – –Expenditure of $56.5 billion – –Additional $1.1 billion for Language Fund in total this year and next – –Expenditure of $36.2 billion, of which 2/3 on CSSA/SSAS – –About $100 million additional recurrent funding for disadvantaged – –$230 million over five years to strengthen employment assistance and support social enterprises Providing basic security net

Estimates of Expenditure Health Chart 26 – –Increased recurrent funding over three years to strengthen HAs financial position – –Banning backyard poultry keeping and developing Preparedness Plan in line with WHO – –Alternative Financing Arrangements for Healthcare under study

Estimates of Expenditure Infrastructure Chart 27 – –Major projects under planning to be accelerated: NLH connection to HZM Bridge; Tamar; Kai Tak; and Central-Wan Chai Bypass – –Improved fiscal position allows additional funding if required – –Down from in 2000 to around in March 2007 as scheduled Civil Service – –Earmarking $29 billion a year for projects over next 5 years – –Creating construction jobs in

Green Tax Chart 28 Impose green taxes on tyres and plastic bags Product Eco-responsibility Bill Tyres: Impose a levy; require trade to recover and recycle Plastic bags: Agree on reduction target with major supermarket chains and implement pilot scheme. For longer term, ban free distribution and tax them

Goods and Services Tax Broaden and stabilize revenue base Announce detailed proposals and launch public consultation in mid 2006 Relief and compensation to lessen impact (e.g. tourists, CSSA, other taxes) Chart 29

Salaries Tax Concessions Share wealth with people where practicable: Chart 30 Lower marginal rates: PresentProposed 2% 2% 8% 7% 14% 13% 20% 19% 3/4 of taxpayers to benefit at cost of $1.5 billion a year Extend limit for deduction for home loan interest from 7 years to 10, costing $1.2 billion in

Properties and Investments (6.2%) $16.0B Rates (6.0%) $15.4B Other Operating Revenue (3.9%) $10.0B Land Premium (11.9%) $30.5B Duties (2.6%) $6.6B Utilities, Fees and Charges (5.7%) $14.7B Salaries Tax, Personal Assessment and Property Tax (16.1%) $41.5B Betting Duty (4.6%) $11.9B Stamp Duties (5.8%) $14.8B Profits Tax (27.5%) $70.7B Government revenue Total : $257.3 Billion Other Capital Revenue (6.6%) $17.2B Operating revenue (81.5%) $209.6B Capital revenue (18.5%) $47.7B Revenue profile in Land Fund (3.1%) $8.0B Chart 31

Recurrent Government Expenditure by Policy Area Group Chart 32

Total Government Expenditure by Policy Area Group Chart 33

2006 Medium Range Forecast Chart 34

$ billion Surplus Forecast Chart 35

Thank you Chart 36