III Fiscal Outlook and Policy Options
Author:
Ms. Hong Liang
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Language:
English
Print Publication Date:
12 Feb 2004
Keywords:
OP; price; SAR.; Hong Kong SAR; wage bill; remuneration package; adjustment system; IMF staff estimate; pay policy; Total expenditures; Civil service; Health care spending
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Abstract

Fiscal policy in Hong Kong SAR has traditionally been conservative. The fiscal balance remained in surplus between FY1985 and FY1997, resulting in an accumulated fiscal reserve of about 35 percent of GDP in FY1997. In addition, fiscal policy had not been used as a countercyclical tool before the Asian crisis.1

Fiscal policy in Hong Kong SAR has traditionally been conservative. The fiscal balance remained in surplus between FY1985 and FY1997, resulting in an accumulated fiscal reserve of about 35 percent of GDP in FY1997. In addition, fiscal policy had not been used as a countercyclical tool before the Asian crisis.1

The fiscal position has gradually deteriorated, however, since FY1998 (Figure 3.1). A cyclical rise in the budget deficit has been combined with a structural weakening of the fiscal position, leading to consolidated deficits of 5 percent of GDP in FY2001 and 51/2 percent of GDP in FY2002. In February 2002, the government’s Task Force on Public Finances found rising structural deficits in recent years primarily owing to (1) lower revenues from land sales and taxes, (2) falling investment income, and (3) the government expenditure deflator rising faster than the general price level. Its report noted that the operating account had been in deficit since FY1998. Furthermore, without investment income, the operating deficits since FY1998 would have been much larger (Table 3.1). IMF staff estimates also indicate that substantial structural deficits have emerged, increasing from 51/2 percent of GDP in FY2001 to 61/2 percent in FY2002.2

Figure 3.1.
Figure 3.1.

Fiscal Developments

(In percent of GDP)

Sources: Hong Kong SAR authorities; and IMF staff estimates.1The IMF’s definition of the structural balance excludes asset-related transactions, land premium, investment income, privatization receipts, equity injections, and the impact of cyclical fluctuations.
Table 3.1.

Operating Account:

(In percent of GDP)

article image
Source: Hong Kong SAR authorities.

This section aims to

  • provide indicative estimates of how revenue and expenditure might evolve over the next five years under two fiscal-consolidation scenarios, each with a different mix of revenue/expenditure measures designed to bring the fiscal position into balance by FY2006;

  • examine different revenue-raising measures in light of the findings of the Advisory Committee on New Broad-Based Taxes;

  • discuss features of major government expenditure components (civil service pay, education, health, and welfare) using comparative perspectives, highlighting their rapid growth in both nominal and real terms in recent years; and

  • offer some thoughts on areas where potential expenditure savings could be made.

Medium-Term Fiscal Outlook

The findings of the Task Force on Public Finances illustrate the precarious fiscal situation in Hong Kong SAR in the medium term. The budget model developed by the task force takes into account the prevailing government expenditure and revenue developments, notably that government expenditure has been growing faster than nominal GDP, and the likely impact of the consolidation of the property market and the aging population. The task force concluded that without corrective measures, continued sizable deficits in the range of 4–5 percent of GDP per annum are probable in the medium term, leading to a depletion of fiscal reserves by FY2008 at the latest, followed by a rising debt burden.3 In contrast, IMF staff projections indicate that—owing to higher projected deficits in FY2002 and FY2003 than those based on the task force’s assumptions—in the absence of specific reform measures, Hong Kong SAR’s fiscal reserves could be depleted as early as FY2006. (Figure 3.2).

Figure 3.2.
Figure 3.2.

No-Policy-Action Scenario

(In percent of GDP)

Source: IMF staff estimates.

The government announced, in the FY2002 budget, its intention to return to a balanced budget by FY2006. In the FY2003 budget, it reaffirmed this objective and proposed to achieve fiscal consolidation using a three-pronged approach based on cutting expenditures, increasing tax rates, and boosting economic growth.

Two scenarios have been developed by the IMF staff to illustrate the implications of choosing a different mix of expenditure and revenue for achieving the targeted fiscal consolidation in the medium term.

Basic Assumptions4

  • In both scenarios, real GDP growth is assumed to be 1.5 percent in 2003, gradually returning to its potential of 3.5 percent annually over the medium term. Deflation is projected to continue at 2.6 percent in 2003 and to gradually dissipate by FY2006. For FY2003, the revenue and expenditure assumptions are based on the March 2003 budget proposal. The cost of the temporary-relief measures proposed in April 2003 to mitigate the economic impact of SARS is included in the calculation of the fiscal deficit for FY2003 but is not included in deficit projections for subsequent years, given that these were one-time measures.

  • On the revenue side, all recurrent revenue items (except investment income) are assumed to grow at the same rate as nominal GDP, and capital revenues (including land premiums) are assumed to be 2.8 percent of nominal GDP annually, in line with their historical averages before the mid-1990s. A nominal rate of return of 5 percent is assumed for investment income on fiscal reserves.

  • On the expenditure side, the government expenditure deflator is assumed to grow at the same rate as nominal GDP after FY2006, when a balanced budget is achieved; and social security expenditure is projected to grow in line with the long-term population projections.5

Path of Fiscal Consolidation

  • Under both scenarios, the fiscal deficit would widen to 6.3 percent of GDP in FY2003, or 1 percent of GDP higher than was proposed in the March budget, on account of the temporary SARS relief package. At the same time, the proposed revenue measures, mainly increases in tax rates on profits and salaries, are expected to yield a total of HK$14 billion in additional revenues over the period FY2003–FY2005 (Figure 3.3).

  • In Scenario 1, no further revenue measures are introduced after FY2003. As a result, an expenditure cut (excluding social security expenditure) of 10.5 percent per annum for three years will be needed for Hong Kong SAR to reach a balanced budget by FY2006. This implies a revenue/expenditure-to-GDP ratio of 15 percent in the long run. In this scenario, revenue efforts provide about 20 percent of the required fiscal adjustment of 5–6 percent of GDP.

  • In Scenario 2, a goods and services tax (GST) of 3 percent is assumed to be introduced in FY2005, with a projected revenue yield of 1.4 percent of GDP. Consequently, expenditure (excluding social security expenditure) will need to be cut by only 7.2 percent per annum between FY2004 and FY2006, resulting in an expenditure-to-GDP ratio of 16.8 percent in the long run. In this scenario, revenue efforts contribute about 45 percent of the required fiscal adjustment (Figure 3.4).

Figure 3.3.
Figure 3.3.

Scenario 1: Fiscal Consolidation Path Without Introduction of a Goods and Services Tax (GST)

(Percent of GDP)

Source: IMF staff estimates.
Figure 3.4.
Figure 3.4.

Scenario 2: Fiscal Consolidation Path With Introduction of a GST

(Percent of GDP)

Source: IMF staff estimates.

The two fiscal-consolidation scenarios illustrate that the share of government expenditures in GDP needs to be adjusted significantly if Hong Kong SAR intends to maintain its tradition of having low taxes. In the absence of significant new revenue measures besides the GST, and assuming the shares of property- and stock-related revenues in GDP return to their pre-1990 levels, the total government expenditure-to-GDP ratio would need to be cut from its current level of nearly 20 percent to 16–17 percent by FY2006 to balance the budget. If a GST were not introduced, the expenditure-to-GDP ratio would need to fall to around 15 percent.

Revenue Structure

Notable features of Hong Kong SAR’s revenue structure are (1) the tax burden is low (9 percent of GDP) and the tax system is simple; (2) the tax base is narrow, with neither general-consumption taxes nor any import duties, and a majority of the working population is outside the tax net; and (3) nontax revenues, mainly from proceeds of land sales and investment income, generally account for almost half of total revenue (Table 3.2).

Table 3.2.

Revenue Structure:

(In percent of total government revenue, unless otherwise indicated)

article image
Sources: Hong Kong SAR authorities; and IMF staff estimates.

Hong Kong SAR’s heavy reliance on asset-related revenue makes its revenue system highly volatile and procyclical. Total fiscal revenues averaged 17 percent of GDP between FY1990 and FY2002, with a standard deviation of 2 percent. Land revenue and stamp duties are the most volatile revenue components, and are closely correlated with movements in property and stock prices. Moreover, investment income on the government’s asset holdings in the Exchange Fund has become another major contributor to the volatility of fiscal revenues in recent years. Without this investment income, the fiscal deficits since FY1998 would have been much larger.

The Advisory Committee on New Broad-Based Taxes concluded, in its report in 2002, that a low-rated GST would be the best option for Hong Kong SAR to broaden its tax base. A 3 percent GST is estimated to yield around $18 billion (1.4 percent of GDP in 2001) in additional revenue annually. Implementation of a GST in Hong Kong SAR, however, may require two to three years of preparatory work. Administrative preparation will need to cover a wide range of tasks, such as drafting legislation; carrying out consultation, publicity, and education; determining and meeting staffing needs; undertaking training of staff; developing systems, procedures, and forms for collection; and preparing manuals and guidelines.

To compensate for revenue shortfalls pending the implementation of the GST, the advisory committee cited the following interim options: higher income tax rates, lower personal income tax deductions, and a land and sea departure tax. The FY2003 budget set a target of raising revenue by HK$20 billion by FY2006. Measures for raising HK$14 billion in additional revenues, mainly through increases in rates of profits and salaries taxes, have been proposed. The government indicated that other revenue measures would be introduced in the next few years to bring in the additional HK$6 billion needed to achieve the revenue target by FY2006. It has also declared that a GST is essential for broadening the tax base and stabilizing public revenues in the long term. In view of the long lead time required for its implementation, technical preparations for a GST will have to get under way in the near future if it is to make a significant contribution to Hong Kong SAR’s medium-term fiscal-consolidation objective.

Government Expenditures

Nominal government expenditures have persistently grown faster than nominal GDP, since prices pertaining to government spending have risen faster than the general price level. This has resulted in an increase in the government expenditure-to-GDP ratio from less than 15 percent in FY1990 to close to 20 percent in FY2002.6 One of the key reasons for the price rigidity of government expenditure is that salaries of civil servants and employees of government-funded organizations, pensions, and social-security payments have not been adjusted downward in nominal terms to account for deflation (Figure 3.5).

Figure 3.5.
Figure 3.5.

Changes in Government Consumption Expenditure (GCE) Deflator and Gross Domestic Product (GDP) Deflator

(In percent)

Source: Hong Kong SAR authorities.

Education (21 percent of total public expenditures), health care (12 percent), and welfare (12 percent) are the major areas of public expenditures. Expenditures in all three areas have grown faster in real terms than GDP over the last few years. In particular, welfare spending has more than doubled over the past decade (Figure 3.6).

Figure 3.6.
Figure 3.6.

Major Public Expenditure Areas

(In percent of GDP)

Sources: Hong Kong SAR authorities; and IMF staff estimates.

Given the heavy wage content of government expenditure, it is useful to first examine issues relating to civil-service pay and then discuss developments in the three major expenditure areas. The analysis will incorporate some cross-country comparative perspectives using available data. Two indicators are frequently used to compare subcategory government expenditures internationally: these are subcategory expenditures as a percentage of GDP and as a percentage of total public expenditure. It should be noted that total government expenditure as a percentage of GDP, currently at 20 percent, is very low by international standards. This reflects the deliberate policy of maintaining a small government in Hong Kong SAR. On average, government expenditures were more than 40 percent of GDP in Organization for Economic Cooperation and Development (OECD) countries in 2001. Therefore, the notion of affordability of a particular public service in Hong Kong SAR should be analyzed within the institutional setting of a small government rather than of a welfare state.

Civil-Service Pay

The civil service in Hong Kong SAR employs about 5 percent of the labor force, with an associated wage bill of 5.5 percent of GDP in FY2001, compared with 4.2 percent of GDP, on average, for high-income countries, as estimated by the World Bank.7 However, as a percentage of total government expenditure, the civil-service wage bill in Hong Kong SAR—at 30 percent—is almost twice as high as in other high-income countries. In addition, personnel-related expenses account for 70 percent of government operating expenditure. Civil servants account for about half of these expenses, with the rest consisting of payroll expenses for employees of government-funded organizations (“subvented employees”), whose wages are linked to those of civil servants. Aside from salary payments, various benefits and allowances make up a significant portion of the remuneration package for civil servants.

The civil-service-pay adjustment system has relied heavily on a formula-based mechanism intended to achieve broad comparability with the private sector in Hong Kong SAR. Comparability is often difficult to establish, however, since there is no comparable activity in the private sector for some government activities, such as maintaining a police force. The last pay-level survey was done in 1986, and pay-trend surveys are conducted annually as a basis for annual civil-service-pay adjustment. Nominal wages continue to be adjusted upward even though the overall economy has been experiencing persistent deflation (Figure 3.7).8 As a result, the wage bill has grown by 11 percent per annum in real terms since FY1998.9

Figure 3.7.
Figure 3.7.

Nominal Versus Real Wage Bill

(FY 1990 = 100)

Sources: Hong Kong SAR authorities; and IMF staff estimates.

Generally, civil-service remuneration packages compare favorably with those in the private sector. The average government-to-private sector wage ratio stood at 3.3 in 2002, compared with an East Asian average of 2.9.10 However, the economic downturn since 1997 has brought to the forefront the issue of perceived pay disparities between the civil service and the private sector.11 Although median earnings (including bonus) for all industries grew at an average rate of 0.8 percent in nominal terms between FY1997 and FY2001, the annual nominal increase in the civil-service wage bill was 6.9 percent during the same period. A pay-level survey conducted in 1999 on starting salaries resulted in the downward adjustment of starting pay of 6–31 percent for the majority of civil-service grades.

To address concerns about the current annual pay-adjustment mechanism, a task force was set up in early 2002 to conduct a comprehensive review of the pay policy and system for the civil service. An analytical study was carried out on the latest developments in civil-service-pay administration in five countries (Australia, Canada, New Zealand, Singapore, and the United Kingdom).12 Among the study’s findings on common trends in pay policy were that affordability within budget constraints has become a dominant consideration, with correspondingly less importance given to formal pay comparability with the private sector. In addition, a clean wage policy consolidating various benefits and allowances with base salaries has been a common feature in the surveyed countries, since it has provided administrative cost savings, reduced opportunities for abuse, and allowed greater spending flexibility for staff.

In its “Phase One Final Report,” the task force recommended that (1) in the short run, priority be given to conducting a pay-level survey and adopting appropriate interim measures for annual civil-service-pay adjustment pending the outcome of the pay-level review; and (2) performance pay and flexible pay ranges, decentralization of pay administration, and a clean wage policy be introduced in the medium-to-long term. In February 2003, the government announced its decision to reduce the salaries of civil servants to the level, in cash terms, in effect at the end of June 1997. In addition, the government intends to implement a number of improvements to the pay-adjustment system for the civil service, including completing a new pay-level survey by 2004.

Education, Health Care, and Welfare Spending

Education

Education spending, the largest expenditure component in the budget, has grown by more than 7 percent annually in real terms since FY1996, compared with average real GDP growth of about 2.7 percent. The entire education system in Hong Kong SAR, from primary school to university, is basically financed by the government, but each school has considerable flexibility and autonomy in managing its own operations and resources. There is universal attendance from age 6 to 15 (the dropout rate is minimal by international standards), and upper-secondary and tertiary education are highly subsidized.

Hong Kong SAR’s pattern of distribution of resources among different levels of education differs considerably from those of other countries (Bray, 1993). In developed countries, resources tend to be more evenly distributed among students at all levels. Although spending per student in higher education is usually more than in primary or secondary schools, the gap is relatively small. The disparity between government spending on higher education and on basic education, however, is significant in Hong Kong SAR. The low level of funding for primary schools is particularly noticeable. Per pupil spending by the government for primary education is about 60 percent of the OECD average (Table 3.3).

Table 3.3.

Expenditures per Student, by Level of Education, 1999:

(In equivalent U.S. dollars converted using PPPs)

article image
Sources: OECD (2002a); and IMF staff estimates. Notes: OECD denotes the Organization for Economic Cooperation and Development. PPP denotes purchasing power parity.

Hong Kong SAR allots one-third of its expenditure to tertiary education. Apart from some postsecondary and vocational programs, the enrollment rate for government-funded universities was only 17 percent of the relevant age group in 2001, compared with more than 50 percent in most OECD countries. Some residents have chosen to study abroad, in part owing to the intense competition for places in local institutions of tertiary education. The low enrollment rate for higher education has permitted the government to maintain high-cost institutions and charge low fees. Per student expenditure in government-funded universities was about US$26,000 in 1999, almost two times higher than the OECD average. Students contributed, on average, another US$4,000 a year in fees and charges.

Salaries constitute the largest part of recurrent expenditures on education. More than 80 percent of spending on schools went to recurrent expenditures, which are basically teachers’ salaries. Again, the disparity between higher education and primary education is significant.13 The average remuneration package for college professors in Hong Kong SAR is one of the most expensive in the world. It is about 11 times per capita GDP and five times as expensive as those for secondary school teachers. In addition, remuneration packages are equalized across different academic fields.

The need for Hong Kong SAR to upgrade the skill level of its labor force will create new demands on educational spending in the near term. For example, if the current unit cost for higher education is maintained, doubling the university enrollment rate to 34 percent would imply additional educational spending of HK$13 billion (1.1 percent of GDP). Furthermore, to increase the percentage of college-degree holders among primary and secondary teachers, as has been set out as an objective by the government, would also have significant budgetary implications.

Health Care

Health care expenditures, the third-largest spending item in the government budget, have grown by more than 6 percent annually in real terms since FY1996, partly because of the aging of the population.14 As a percentage of GDP and as a percentage of total government expenditure, health care spending in Hong Kong SAR is not high by OECD standards. However, based on current population trends, public health spending is projected to double by 2015 and may account for as much as 20–22 percent of total government expenditure.15

Fees in public hospitals and clinics are heavily subsidized and have not risen in line with costs. The fee structure is uniform, irrespective of the individual patient’s ability to pay, but fees may be reduced or waived in cases of financial hardship. The government finances 97 percent of inpatient costs and 93 percent of outpatient costs in public health care facilities. In total, user fees paid by patients finance less than 5 percent of public health expenditures.

Welfare

Welfare spending has grown rapidly in the last decade, reflecting rising cash and housing assistance to the elderly, immigrants from mainland China, and the unemployed (Table 3.4). The number of recipients of Comprehensive Social Security Assistance (CSSA) has grown progressively since the program’s introduction in 1993, and nominal payments have not been adjusted in line with deflation over the past four years. There are concerns that the benefit levels have become increasingly attractive vis-à-vis wages.

Table 3.4.

Estimated Comprehensive Social Security Assistance (CSSA) Expenditure, by Type of Case, FY1995–FY2002:

(In millions of Hong Kong dollars)

article image
Source: Hong Kong SAR authorities.

Options for Controlling Expenditures

Affordability within a tightening budget constraint has become a dominant consideration for governments in many industrial countries when allocating public resources among different policy areas. Although there are no available economic theories that can lay out optimal public resource allocations, experiences of other industrial countries can be helpful in identifying areas for possible expenditure cuts and rationalizations.

The FY2003 budget has set the target for expenditure reductions by FY2006 at HK$20 billion, which would amount to a 10 percent reduction in total expenditures. In the FY2003 budget, the government has identified a number of areas for expenditure reductions. Further reductions may be required in these and other areas to achieve the targeted expenditure cuts.

  • Recent developments in civil-service pay, particularly compared with pay in the private sector, and the changing economic situation in Hong Kong SAR highlight the need for reform. It is generally acknowledged that a good civil-service-pay system helps attract and retain talent and reduce corruption. The public sector wage bill, which accounts for a substantial share of operating expenditures, may, however, have to be reduced significantly to achieve the targeted fiscal consolidation. The FY2003 budget has proposed a 6 percent cut in the public sector wage bill and a 10 percent cut in the civil-service workforce. These measures are expected to yield HK$12 billion in savings. The government should also consider delinking the pay system for employees in government-funded organizations from that of the civil service to reduce wage rigidity in the public sector. Moreover, completing the pay-level survey expeditiously would help facilitate the process of further rationalizing civil servants’ compensation.

  • Given the weak fiscal position, a major change in the structure of educational finance is needed to improve the quality of basic education and expand higher education. Areas of improvement could include (1) adjusting the distribution of spending among different levels of education, with more resources allocated to basic education; (2) promoting private provision of education; (3) experimenting with a voucher system; (4) substantially increasing fees charged for tertiary education; and (5) recruiting more tuition-paying university students from mainland China (in effect, exporting education services). Furthermore, although the quality of education is difficult to assess, especially at the university level, the high per-student spending warrants further review of the pay system for university professors. Teacher salaries should be delinked from civil-service pay and aligned more closely with international norms.

  • Greater burden sharing with the private sector is needed to keep the government’s share of health expenditure steady at its current level of 21/2 percent of GDP. This could be achieved through higher user fees, introducing means testing, and encouraging more private insurance. Also, given the higher quality of health care services in Hong Kong SAR, high-income individuals from the mainland could be attracted to come and use the health care services (in effect, exporting health care services). The government has already taken a number of steps in these areas. It has also commissioned a comprehensive review of the existing fee structure in the public health care sector to achieve better targeting and prioritizing of finite public subsidies to the most needy.

  • Some adjustments in the CSSA program appear warranted if the spiraling welfare budget is to be controlled. The FY2003 budget proposed an 11.1 percent reduction in welfare benefits. The government has also taken initiatives to encourage capable CSSA recipients to become self reliant. Some restructuring of this program, such as reducing the length and replacement ratio of benefits for able-bodied individuals, may, however, be needed to mitigate disincentive effects that could dissuade them from actively seeking reemployment and that may have contributed to rising long-term unemployment.

Conclusions

During the last decade, Hong Kong SAR has undergone a tremendous change in its public finances. On the one hand, the scale, expenditure, and outcome of its provision of social services have improved significantly. Housing, medical, educational, and social welfare services have gradually become a vital part of the social fabric. On the other hand, Hong Kong SAR’s narrow tax base and heavy reliance on asset-related revenues have constrained the government’s ability to finance its recurrent expenditures, especially during economic downturns.

Fiscal policy in Hong Kong SAR has reached a critical stage. The mounting deficits have already raised concerns in international and local markets. Concrete and credible measures to rein in the deficits are therefore crucial for the long-term sustainability of the public finances and the stability of the linked exchange rate system. The medium-term fiscal consolidation program in Hong Kong SAR has to strike a balance between the need to provide comprehensive social services to its citizens and its tradition of limiting the size and role of the government in economic and social affairs. On the one hand, if Hong Kong SAR wants to maintain a small government by keeping its current revenue system, major reforms are needed in the civil service and social services (education, health care, and welfare) to bring the government expenditure-to-GDP ratio back to the 16–17 percent range. On the other hand, if the current level and coverage of social services are to be maintained or expanded, taxes will have to be raised significantly.

Appendix. Assumptions for Medium-Term Projections

Table A.3.1.

Assumptions for Medium-Term Projections

article image
Note: CPI denotes the consumer price index.

Demographic parameters are based on Hong Kong SAR Population Projections 2000–2029 and Hong Kong SAR’s 2001 Population Census.

Parameters are drawn from the budget model in the Final Report by Hong Kong SAR’s Task Force on Review of Public Finances (2002).
1

Note that this analysis is based on data available as of July 2003. Fiscal developments since then do not substantially alter the thrust of the policy analysis in this section.

2

The structural fiscal balance is used to measure the impact of discretionary fiscal policy on domestic demand. The IMF’s definition excludes asset-related transactions, land premiums, investment income, privatization receipts, equity injections, and the impact of cyclical fluctuations.

3

The portion of fiscal reserves held in foreign currencies is included in the official foreign exchange reserves of Hong Kong SAR.

4

The details for the key parameters of the IMF staff’s projections are set out in the appendix. It should be noted that the medium-term projections are based on a partial-equilibrium analysis and should be viewed more as illustrations of the plausible future fiscal path than as firm results.

5

The revenue and expenditure parameters are largely drawn from the assumptions in the budget model in the “Final Report of the Task Force on Review of Public Finances,” Hong Kong SAR, February 2002.

6

Although the Basic Law of Hong Kong SAR stipulates that the government should keep expenditure growth commensurate with the growth rate of GDP, it does not specify explicitly whether such growth should be measured in nominal or real terms.

7

See the World Bank’s Administrative and Civil Service Reform website (http://www1.worldbank.org/publicsector/civilservice/) for cross-country data on government employment and wages.

8

The assumption of a 4.75 percent cut in civil-service pay in the FY2002 budget met with strong opposition and was implemented only halfway.

9

In this section, the government wage bill refers to total government personnel-related expenses. The composite consumer price index (CPI) series is used in this study to derive the real growth rates of various public expenditures to estimate the extent to which public expenditures have grown faster than the overall economy.

10

This ratio is estimated using median earnings (including bonuses) for all industries and the average salary of a civil servant, derived by dividing the total civil-service wage bill by the number of civil servants.

11

A study commissioned by the Hong Kong SAR General Chamber of Commerce found in February 2003 that pay for government employees was 17 percent higher than average pay for employees in the business sector. When the cost of benefits is added (even excluding housing and education), the gap widens to 40 percent.

12

The study was to cover the following five areas: (1) the pay policies, pay system, and pay structure; (2) the experience of replacing fixed pay scales with pay ranges or other pay systems; (3) the pay-adjustment system and mechanism; (4) the experience with introducing performance-based rewards to better motivate staff; and (5) the experience with simplification and decentralization of pay administration.

13

In FY2001, fewer than 50 percent of teachers in government and government-aided primary schools and 80 percent of teachers in secondary schools were university graduates.

14

Traditionally, housing has been an important public spending item, but it is not included in social spending in this paper.

15

See Harvard Consultancy Team, 1999, “Improving Hong Kong SAR’s Health Care System: Why and for Whom?” (Hong Kong SAR: Health and Welfare Bureau).

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Cover Hong Kong SAR
Hong Kong SAR
Meeting the Challenges of Integration with the Mainland
ISBN:
9781589062948
ISSN:
0251-6365
Publication Date:
12 Feb 2004
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781589062948.084
Pages:
71
  • Figure 3.1.
    View in gallery
    Figure 3.1.

    Fiscal Developments

    (In percent of GDP)

  • Figure 3.2.
    View in gallery
    Figure 3.2.

    No-Policy-Action Scenario

    (In percent of GDP)

  • Figure 3.3.
    View in gallery
    Figure 3.3.

    Scenario 1: Fiscal Consolidation Path Without Introduction of a Goods and Services Tax (GST)

    (Percent of GDP)

  • Figure 3.4.
    View in gallery
    Figure 3.4.

    Scenario 2: Fiscal Consolidation Path With Introduction of a GST

    (Percent of GDP)

  • Figure 3.5.
    View in gallery
    Figure 3.5.

    Changes in Government Consumption Expenditure (GCE) Deflator and Gross Domestic Product (GDP) Deflator

    (In percent)

  • Figure 3.6.
    View in gallery
    Figure 3.6.

    Major Public Expenditure Areas

    (In percent of GDP)

  • Figure 3.7.
    View in gallery
    Figure 3.7.

    Nominal Versus Real Wage Bill

    (FY 1990 = 100)

Figure 3.1.

Fiscal Developments

(In percent of GDP)
Figure 3.2.

No-Policy-Action Scenario

(In percent of GDP)
Figure 3.3.

Scenario 1: Fiscal Consolidation Path Without Introduction of a Goods and Services Tax (GST)

(Percent of GDP)
Figure 3.4.

Scenario 2: Fiscal Consolidation Path With Introduction of a GST

(Percent of GDP)
Figure 3.5.

Changes in Government Consumption Expenditure (GCE) Deflator and Gross Domestic Product (GDP) Deflator

(In percent)
Figure 3.6.

Major Public Expenditure Areas

(In percent of GDP)
Figure 3.7.

Nominal Versus Real Wage Bill

(FY 1990 = 100)