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