Fiscal Policy

Michael Ka Yiu Fung

Professor in Business Economics,

CUHK Business School

Director, Programme for Economic Education, HKIAPS, CUHK

1

Fiscal Policy

• Aggregate Demand and Aggregate Supply Framework

• Data – U.S., Japan, EU, Mainland China, Hong Kong

• Issues – Long term fiscal planning in Hong Kong

• Budget 2015-2016

• Data Response Questions from Budget

2

Fiscal Policy

1. Aggregate Demand – Aggregate Supply

Framework

3

Macroeconomics

R. Glenn Hubbard and Anthony Patrick O’Brien

Fifth Edition, Pearson

4

Fiscal policy Changes in federal taxes and purchases that are

intended to achieve macroeconomic policy objectives.

Automatic stabilizers Government spending and taxes that automatically

increase or decrease along with the business cycle.

Automatic Stabilizers versus Discretionary Fiscal Policy

The word automatic in this case refers to the fact that changes in these types of

spending and taxes happen without actions by the government.

With discretionary fiscal policy, the government takes actions to change

spending or taxes.

Fiscal Policy

• Standard AD-AS Model

• Dynamic AD-AS Model

• Limits of Fiscal Policy

• Fiscal Deficit and Debt

• Long-run Effects

6

Fiscal Policy

1.1 Standard AD-AS Model

7

Fiscal Policy

The economy begins in recession

at point A, with real GDP of $14.2

trillion and a price level of 98.

An expansionary fiscal policy will

cause aggregate demand to shift

to the right, from AD1 to AD2,

increasing real GDP from $14.2

trillion to $14.4 trillion and the

price level from 98 to 100 (point B).

Expansionary fiscal policy involves increasing government purchases or

decreasing taxes.

Cutting the individual income tax will increase household disposable income,

the income households have available to spend after they have paid their taxes,

and consumption spending.

Expansionary and Contractionary Fiscal Policy

The economy begins at point A,

with real GDP at $14.6 trillion and

the price level at 102.

Because real GDP is greater than

potential GDP, the economy will

experience rising wages and prices.

A contractionary fiscal policy will

cause aggregate demand to shift to

the left, from AD1 to AD2,

decreasing real GDP from $14.6

trillion to $14.4 trillion and the price

level from 102 to 100 (point B).

Fiscal Policy

Contractionary fiscal policy involves decreasing government purchases or

increasing taxes.

Policymakers use contractionary fiscal policy to reduce increases in aggregate

demand that seem likely to lead to inflation.

Expansionary and Contractionary Fiscal Policy

Fiscal Policy

1.2 Dynamic AD-AS Model

10

The overview of fiscal policy we just finished contains a key idea:

Government can use fiscal policy to affect aggregate demand,

thereby changing the price level and the level of real GDP, however, because it

ignores two important facts about the economy:

1. The economy experiences continuing inflation, with the price level rising

every year.

2. The economy experiences long-run growth, with the LRAS curve shifting to

the right every year.

A dynamic aggregate demand and aggregate supply model takes these two

facts into account, providing us with a more complete understanding of

fiscal policy.

An Expansionary Fiscal Policy

in the Dynamic Model

The economy begins in

equilibrium at point A,

at potential real GDP of $14.0

trillion and a price level of 100.

Without an expansionary policy,

aggregate demand will shift

from AD1 to AD2(without policy),

which is not enough to keep

the economy at potential GDP

because long-run aggregate supply

has shifted from LRAS1 to LRAS2.

The economy will be in short-run equilibrium at point B,

with real GDP of $14.3 trillion and a price level of 102.

Increasing government purchases or cutting taxes will shift aggregate demand

to AD2(with policy).

The economy will be in equilibrium at point C, with real GDP of $14.4 trillion,

which is its potential level, and a price level of 103.

The price level is higher than it would have been without an expansionary fiscal policy.

A Contractionary Fiscal Policy

in the Dynamic Model

The economy begins in

equilibrium at point A,

with real GDP of $14.0 trillion

and a price level of 100.

Without a contractionary

policy, aggregate demand

will shift from AD1 to

AD2(without policy),

which results in a short-run

equilibrium beyond potential

GDP at point B, with real

GDP of $14.5 trillion and a

price level of 105.

Decreasing government purchases or increasing taxes can shift aggregate demand

to AD2(with policy).

The economy will be in equilibrium at point C, with real GDP of $14.4 trillion,

which is its potential level, and a price level of 103.

The inflation rate will be 3 percent, as opposed to the 5 percent it would have been

without the contractionary fiscal policy.

Fiscal Policy

1.3 Limits of Fiscal Policy -

Multiplier and Crowding-out Effect

14

Multiplier effect The series of induced increases in consumption spending that

results from an initial increase in autonomous expenditures.

Economists refer to the initial increase in government purchases as autonomous

because it is a result of a decision by the government and is not directly caused

by changes in the level of real GDP.

The increases in consumption spending that result from the initial autonomous

increase in government purchases are induced because they are caused by the

initial increase in autonomous spending.

The Effect of Changes in Tax Rates

A change in tax rates has a more complicated effect on equilibrium real GDP

than does a tax cut of a fixed amount.

The higher the tax rate, the smaller the multiplier effect.

A cut in tax rates affects equilibrium real GDP through two channels:

1. A cut in tax rates increases the disposable income of households, which

leads them to increase their consumption spending.

2. A cut in tax rates increases the size of the multiplier effect.

Crowding Out in the Short Run

An Expansionary Fiscal Policy

Increases Interest Rates

If the federal government

increases spending,

the demand for money will

increase from Money

demand1 to Money demand2

as real GDP and income rise.

With the supply of money

constant, at $950 billion,

the result is an increase in

the equilibrium interest rate

from 3 percent to 5 percent,

which crowds out some

consumption, investment,

and net exports.

The Size of the Multiplier: A Key to Estimating the Effects of

Fiscal Policy

Economist Type of Multiplier Size of Multiplier

Congressional Budget Office Government purchases 1.0–2.5

Lawrence Christiano, Martin

Eichenbaum, and Sergio Rebelo

Government purchases 1.05 (when short-term interest

rates are not zero); 3.7 (when

short-term interest rates are

expected to be zero for at least

five quarters)

Tommaso Monacelli, Roberto Perotti,

and Antonella Trigari, Universita

Bocconi

Government purchases 1.2 (after one year) and 1.5 (after

two years)

Ethan Ilzetzki, London School of

Economics, Enrique G. Mendoza, and

Carlos A. Vegh, University of Maryland

Government purchases 0.8

Valerie Ramey, University of

California, San Diego

Military expenditure 0.6–1.1

Robert J. Barro, Harvard University,

and Charles J. Redlick, Bain Capital,

LLC

Military expenditure 0.4–0.5 (after one year) and 0.6–

0.7 (after two years)

Estimates of the Size of the Multiplier

Determinants of the Size of Multiplier

• Trade openness • Labor market rigidity • The size of automatic stabilizers • The exchange rate regime • The debt level • Public expenditure management and revenue

administration • The state of the business cycle • Degree of monetary accommodation to fiscal

shocks Fiscal Multipliers: Size, Determinants, and Use in Macroeconomic Projections Prepared by Nicoletta

Batini, Luc Eyraud, Lorenzo Forni, and Anke Weber, IMF, September 2014

19

Fiscal Policy

1.5 Government Deficits and Debts

20

Budget deficit The situation in which the government’s expenditures are

greater than its tax revenue.

Budget surplus The situation in which the government’s expenditures are less

than its tax revenue.

The Federal Budget Deficit, 1901–2011

During wars, government spending increases far more than tax revenues, increasing the

budget deficit.

The budget deficit also increases during recessions, as government spending increases

and tax revenues fall.

Note: The value for 2011 is an estimate prepared by the Congressional Budget Office in June 2011.

The Federal Government Debt, 1901–2011

The federal government debt increases whenever the federal government runs a budget

deficit.

The large deficits incurred during World Wars I and II, the Great Depression, and the 1980s

and early 1990s increased the ratio of debt to GDP.

The large deficits of 2009 to 2011 caused the ratio to spike up to its highest level since 1947.

The total value of U.S. Treasury bonds outstanding is referred to as the federal

government debt or, sometimes, as the national debt.

Is Government Debt a Problem?

The federal government is not in danger of defaulting on its debt because it can

raise the funds it needs through taxes or spending cuts to make the interest

payments on the debt, which are currently about 10 percent of total federal

expenditures.

If an increasing debt drives up interest rates, crowding out of investment

spending may occur, which means a lower capital stock in the long run and a

reduced capacity of the economy to produce goods and services.

This effect is somewhat offset if some of the government debt was incurred to

finance improvements in infrastructure, such as bridges, highways, and ports;

to finance education; or to finance research and development.

Fiscal Policy

1.6 Long-run Effects

25

Tax wedge The difference between the pretax and posttax return to an

economic activity.

The Long-Run Effects of Tax Policy

Because fiscal policy actions primarily affect aggregate supply rather than

aggregate demand, they are sometimes referred to as supply-side economics.

The tax wedge applies to the marginal tax rate, which is the fraction of each

additional dollar of income that must be paid in taxes.

When workers, savers, investors, or entrepreneurs change their behavior as a

result of a tax change, economists say that there has been a behavioral

response to the tax change.

We next look briefly at the effects on aggregate supply of cutting some common

taxes.

• Corporate income tax. The federal government taxes the profits earned by

corporations under the corporate income tax.

Cutting the marginal corporate income tax rate would encourage investment

spending by increasing the return corporations receive from new investment

goods, potentially increasing the pace of technological change if innovations

are embodied in these goods.

• Taxes on dividends and capital gains. Corporations distribute some of

their profits in the form of payments known as dividends to shareholders, who

may benefit from higher corporate profits by receiving capital gains, which are

increases in the prices of assets.

Lowering the tax rates on dividends and capital gains increases the supply of

loanable funds from households to firms, increasing saving and investment and

lowering the equilibrium real interest rate.

• Individual income tax. Sole proprietorships’ profits and households’ returns

from saving are taxed at the individual income tax rates.

So, cutting these rates not only reduces the tax wedge faced by workers,

thereby increasing the quantity of labor supplied, but also raises the return to

entrepreneurship, encouraging the opening of new businesses, and increases

the return to saving.

In addition to the potential gains from cutting individual taxes, there are also

gains from tax simplification.

If the tax code were greatly simplified, the economic resources currently used

by the tax preparation industry would be available to produce other goods and

services.

In addition to wasting resources, the complexity of the tax code may also distort

the decisions made by households and firms.

A simplified tax code would increase economic efficiency by reducing the

number of decisions households and firms make solely to reduce their tax

payments.

Tax Simplification

The Economic Effect of Tax Reform

Figure 27.16

The Supply-Side

Effects of a Tax

Change

The economy’s

initial equilibrium

is at point A.

With no tax change,

the long-run

aggregate supply

curve shifts to the

right, from LRAS1

to LRAS2.

Equilibrium moves

to point B, with the

price level falling

from P1 to P2

and real GDP increasing from Y1 to Y2.

With tax reductions and simplifications,

the long-run aggregate supply curve shifts further to the right, to LRAS3,

and equilibrium moves to point C, with the price level falling to P3

and real GDP increasing to Y3.

Most economists would agree that there are supply-side effects to reducing

taxes:

Decreasing marginal income tax rates will increase the quantity of labor supplied,

cutting the corporate income tax will increase investment spending,

and so on.

The magnitude of the effects is the subject of considerable debate, however.

Economists who are skeptical of their magnitude believe that tax cuts have their

greatest effect on aggregate demand rather than on aggregate supply.

Ultimately, the debate over the size of the supply-side effects of tax policy may

subside over time as more studies are conducted on the effects of differences in

tax rates on labor supply and on saving and investment decisions.

How Large Are Supply-Side Effects?

Fiscal Policy

2.1 Data – U.S., Japan, and European Countries

31

General Government Revenue

of Japan and US from 2009 to 2013

33.1%

32.4%

33.1% 33.1%

33.9%

30.2% 30.6%

30.9% 31.2%

33.1%

28.0%

29.0%

30.0%

31.0%

32.0%

33.0%

34.0%

35.0%

2009 2010 2011 2012 2013

% o

f G

DP

Japan US

Source: OECD General government revenue (indicator) (2015)

32

General Government Spending of Japan and US from 2009 to 2013

41.9%

40.6%

42.2% 42.0%

42.4%

42.9%

42.6%

41.5%

40.1%

38.7%

36.0%

37.0%

38.0%

39.0%

40.0%

41.0%

42.0%

43.0%

44.0%

2009 2010 2011 2012 2013

% o

f G

DP

Japan US

Source: OECD General government spending (indicator) (2015)

33

General Government Deficit of Japan and US from 2009 to 2013

-8.8% -8.3%

-8.8% -8.7% -8.5%

-12.7% -12.0%

-10.6%

-8.9%

-5.6%

-14.0%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2009 2010 2011 2012 2013

% o

f G

DP

Japan US

Source: OECD General government deficit (indicator) (2015)

34

General Government Debt of Japan and US from 2009 to 2012

Source: OECD General government debt (indicator) (2015)

207.3% 210.6%

226.5% 234.8%

104.9% 115.3%

121.0% 123.8%

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

2009 2010 2011 2012

% o

f G

DP

Japan US

35

Major Foreign Holders of the US Treasury Securities

(Balance in December 2014 and 2011)

Country / Region

December 2014 (US$ billion)

December 2011 (US$ billion)

China 1,240.8 (20.4%)

1,151.9 (23.0%)

Japan 1,197.5 (19.7%)

1,058.1 (21.1%)

UK 212.6 (3.5%)

114.3 (2.3%)

HK 182.3 (3.0%)

121.7 (2.4%)

Germany 79.7

(1.3%) 60.7

(1.2%)

Others 3,163.7 (52.1%)

2,500.2 (49.9%)

Total 6,076.6 (100%)

5,006.9 (100%)

Note: Source: US Department of Treasury (2015)

36

General Government Revenue of Selected EU Countries from 2010 to 2013

44.1% 45.7%

43.7% 44.7%

39.8%

41.4%

46.1%

47.7%

40.4%

45.8%

34.0%

36.0%

38.0%

40.0%

42.0%

44.0%

46.0%

48.0%

50.0%

2010 2011 2012 2013

% o

f G

DP

EU (28 countries) Germany UK Italy Greece

Source: Eurostat (2015)

37

General Government Expenditure of Selected EU Countries from 2010 to 2013

49.1%

47.9%

44.7%

49.9%

47.1%

50.5% 50.6% 51.4%

58.5%

40.0%

42.0%

44.0%

46.0%

48.0%

50.0%

52.0%

54.0%

56.0%

58.0%

60.0%

2010 2011 2012 2013

% o

f G

DP

EU (28 countries) Germany UK Italy Greece

Source: Eurostat (2015)

38

Fiscal Surplus or Deficit of Selected EU Countries from 2010 to 2013

-6.5%

-3.4%

-4.2%

0.0%

-10.1%

-5.7%

-4.4%

-2.9%

-11.0%

-12.7% -14.0%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

2010 2011 2012 2013

% o

f G

DP

EU (28 countries) Germany UK Italy Greece

Source: Eurostat (2015)

39

General Government Gross Debt of Selected EU Countries from 2011 to 2014

86.8%

74.7%

89.4%

132.1%

177.1%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

180.0%

200.0%

2011 2012 2013 2014

% o

f G

DP

EU (28 countries) Germany UK Italy Greece

Source: Eurostat (2015)

40

Fiscal Policy

2.2 Data - Mainland China

41

Mainland China: National Revenue (財政收入),

National Expenditure (財政支出), Fiscal Surplus or Deficit from 2005 to 2014

Source: National Bureau of Statistics China (2015)

17.0% 17.8% 19.1% 19.4% 19.8% 20.3%

21.5% 22.0% 22.0% 22.1% 18.3% 18.6% 18.6% 19.8%

22.1% 22.0% 22.6% 23.6% 23.8% 23.8%

-1.2% -0.8% 0.6%

-0.4%

-2.3% -1.7% -1.1% -1.6% -1.9% -1.8% -5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

% o

f C

hin

a G

DP

National fiscal revenue National fiscal expenditure Fiscal surplus or deficit

42

Proportion of GDP: Outstanding Balance of Central Government Debt (中央財政國債餘額) in China from 2005 to 2014

17.5% 16.1%

19.4%

16.8% 17.4%

16.5%

14.9% 14.5% 14.8% 15.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

% o

f n

om

inal

GD

P

Source: National Statistics Bureau of China, Ministry of Finance of PRC (2015) 43

Government Debt in China

Source: Debt and (Not Much) Deleveraging, McKinsey Global Institute, February 2015. 44

Fiscal Policy

2.3 Data – Hong Kong

45

(Slide 53 Original) Proportion of GDP: HK Government Revenue, Spending, Surplus or Deficit, Fiscal Reserve

from FY 1995/96 to 2013/14

Source: HK Census and Statistics Department (2015), Fiscal Budget (various years)

15.8%

20.4% 21.0%

16.1%

14.1%

20.0%

-0.3%

6.3% 1.0%

13.0%

33.3% 34.9%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0% 1

99

5-9

6

19

96

-97

19

97

-98

19

98

-99

19

99

-00

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

20

12

-13

20

13

-14

% o

f H

K N

om

inal

GD

P

Government revenue Government spending

Surplus or deficit in consolidated account Fiscal reserve

46

Proportion of GDP: HK Government Revenue, Spending without Subvention, Surplus or Deficit, Fiscal Reserve

from FY 1995/96 to 2013/14

15.8%

20.4% 21.0%

-0.3%

6.3% 1.0%

13.0%

33.3% 34.9%

11.6% 14.7%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

19

95

-96

19

96

-97

19

97

-98

19

98

-99

19

99

-00

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

20

12

-13

20

13

-14

% o

f H

K G

DP

Government revenue Surplus or deficit in consolidated account

Fiscal reserve Government expenditure without subvention

Source: HK Census and Statistics Department (2015), Fiscal Budget (various years) 47

What is Government Spending?

48

What are Government Purchases?

49

Proportion of Real GDP: Government Consumption Expenditure,

Gross Domestic Fixed Capital Formation by Public Sector and Government Purchases

10.6%

9.2%

6.8%

4.9%

17.4%

14.1%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Shar

e o

f re

al G

DP

in c

hai

ned

20

12

do

llars

Government consumption expenditure Gross domestic fixed capital formation by public sector

Government purchases

Source: HK Census and Statistics Department (2015) 50

HK Government Consumption Expenditure by Social and Economic Functions in 2000 and 2014

Function / 2000 Shares 2014* Shares Growth

HK$ Million % HK$ Million % %

General public services 14,383.8 11.7% 20,501.5 11.2% 42.5%

Public order, safety

and defense 30,826.2 25.1% 43,687.1 23.8% 41.7%

Economic affairs 13,989.3 11.4% 25,177.8 13.7% 80.0%

Environmental protection 7,345.7 6.0% 10,048.6 5.5% 36.8%

Housing and community

amenities 1,649.4 1.3% 2,333.3 1.3% 41.5%

Health 36,483.4 29.8% 54,855.2 29.9% 50.4%

Recreation, culture

and religion 7,158.2 5.8% 10,959.2 6.0% 53.1%

Education 8,128.9 6.6% 10,945.6 6.0% 34.7%

Social protection 2,656.3 2.2% 5,260.4 2.9% 98.0%

Government consumption

expenditure 122,621.1 100.0% 183,768.7 100.0% 49.9%

Note: The figures have been adjusted by GDP deflator. 2014 figures were calculated by calendar year so they were preliminary., which might be subject to revision. Source: HK Census and Statistics Department (2015) 51

(Slide 57) Gross Domestic Fixed Capital Formation by Public Sector in 2000 and 2014

(Chained 2012 dollars)

Year Gross domestic

fixed capital formation

(Public sector) (HK$ Million)

Share of total gross

domestic fixed capital formation

(%)

Percentage Growth (%)

2000 70,541 20.1 NA

2014 105,638 20.0 49.8

52

Fiscal Policy

3. Major Issues in Hong Kong

53

Report of the Working Group on Long-Term Fiscal Planning

HK SAR Government

2014

54

Fiscal Health of Hong Kong

• Ten successive years of budget surplus since 2004-05.

• Fiscal reserves reach some $750 billion, which is about 21 months of government expenditure or over 30% of the nominal Gross Domestic Product (GDP).

55

Ageing

• In 2012, total population in Hong Kong was 7.1 million; this is forecast to grow by about 19% to 8.5 million in 2041.

56

Ageing

• The age group between 15 and 64 is forecast to drop 4%, from 5.3 million to only 5.1 million in 2041.

• By contrast, the age group of 65 and above is forecast to grow 161%, from 980 000 in 2012 to 2 560 000 in 2041.

57

Ageing

• The elderly dependency ratio (ratio of those aged 65 and above to those aged 15 to 64) would increase from 18.3% in 2012 to 49.7% in 2041.

• The median age for Hong Kong was 42.8 in 2012; it is forecast to be 51.8 by 2041.

58

Population Changes by Age Groups in Hong Kong

Source: Report of the Working Group on Long-Term Fiscal Planning (Phase One) (2014) 59

Age-sensitive Items in Government Expenditure Forecast

Source: Report of the Working Group on Long-Term Fiscal Planning (Phase One) (2014) 60

Economic Growth

• GDP growth was 8.9% per annum in the 1970s, 7.4% per annum in the 1980s, and 5.0% per annum in the mid-1990s. Trend growth averaged at 3.4% per annum in the post-1997 era.

61

Declining Labour Force after 2018

Source: Report of the Working Group on Long-Term Fiscal Planning (Phase One) (2014) 62

Decelerating Economic Growth over the Long Term

Source: Report of the Working Group on Long-Term Fiscal Planning (Phase One) (2014) 63

Economic Growth

• The Base Case assumptions from 2014 to 2041 imply an average projected real GDP growth rate of 2.8% per annum, lower than the historical trend growth rate of 3.4% since 1997-98.

64

Government Revenue Growth since 1997-98

Source: Report of the Working Group on Long-Term Fiscal Planning (Phase One) (2014) 65

Government Revenue

The tax base of profits tax has remained low, with only 11% of (or 94 900) registered corporations paying profits tax for the 2011-12 tax year, compared with 14% for 2007-08 and 2002-03. The top-paying 700 to 800 corporations contributed 64.4% of the overall profits tax revenue for the 2011-12 tax year, compared with 61% for the 1997-98 tax year.

66

Government Revenue

Only 45% of the working population paid salaries tax for the 2011-12 tax year. Reliance on the high-income individuals is also on the rise. In 2011-12 tax year, the top 200 000 salaries tax payers contributed 81.7% of the salaries tax; in 1997-98, they contributed 71.6%.

67

Government Revenue

With an ageing population, the workforce size is projected to reach its peak in 2018 and dwindle throughout the 2020s. There will be pressure on salaries tax and other operating revenues.

68

Government Expenditure Growth since 1997-98

Source: Report of the Working Group on Long-Term Fiscal Planning (Phase One) (2014) 69

Government Expenditure

Although government expenditure has grown faster than government revenue and nominal GDP on average, Hong Kong still managed to achieve budget surpluses since 2004-05 because government expenditure was strictly contained between $220 billion and $250 billion for ten years between 1998-99 and 2007-08; and by 2007-08, government expenditure was $234.8 billion, way less than government revenue at $358.4 billion.

70

Fiscal Outlook: Base Case, No Service Enhancement Scenario

Source: Report of the Working Group on Long-Term Fiscal Planning (Phase One) (2014) 71

Proposed Fiscal Measures

• The Working Group sees the need to contain overall government expenditure growth within the forecast nominal GDP growth rates and to keep the public expenditure at or around 20% of GDP.

72

Proposed Fiscal Measures

• The Working Group recommends that the main priority on the revenue side is to preserve, stabilise and broaden the revenue base.

• Specifically, the Government should avoid excessive reliance on direct taxation, step up tax enforcement, and reinforce the “cost recovery”, “user pays” and “polluter pays” principles, and should enhance the tax regime to ensure that the tax structure can meet the long-term needs of Hong Kong and the fiscal pressures in the long run.

73

Source of Funding for the Future Fund

• Other than proposing a ready "endowment" of about $220 billion from the Land Fund, the Working Group deliberated on whether the Future Fund should have regular top-ups.

• From a practical perspective, the Working Group considers that 25% to 33% would appear to be an appropriate tactical range.

74

Fiscal Policy

4. Budget 2015-2016

75

2015-2016 Budget

http://www.budget.gov.hk/2015/eng/highlights.html 76

2015-2016 Budget

http://www.budget.gov.hk/2015/eng/highlights.html 77

2015-2016 Budget

http://www.budget.gov.hk/2015/eng/highlights.html 78

2015-2016 Budget

http://www.budget.gov.hk/2015/eng/highlights.html 79

2015-2016 Budget

http://www.budget.gov.hk/2015/eng/highlights.html 80

2015-2016 Budget

http://www.budget.gov.hk/2015/eng/highlights.html 81

2015-2016 Budget

http://www.budget.gov.hk/2015/eng/highlights.html 82

2015-2016 Budget

http://www.budget.gov.hk/2015/eng/highlights.html 83

2015-2016 Budget

http://www.budget.gov.hk/2015/eng/highlights.html 84

2015-2016 Budget

http://www.budget.gov.hk/2015/eng/highlights.html 85