People’s Republic of China—Hong Kong Special Administrative Region: Selected Issues
Author: International Monetary Fund
Publication Date:
30 May 2003
eISBN:
9781451816846
ISBN:
9781451816846
Language:
English
Keywords:
ISCR; CR; pay; deflation; productivity; productivity shock; adjustment system; packages compare; pay policy; teacher salary; targeted expenditure cut; Education spending
Download PDF (775.5 KB)

This Selected Issues paper examines the fiscal outlook and policy options for the Hong Kong Special Administrative Region. The paper provides indicative estimates of how revenue and expenditure might evolve in the next five years under two fiscal consolidation scenarios with a different mix of revenue/expenditure measures to bring the fiscal position to balance by FY2006. The paper examines different revenue raising measures in light of the findings by the Advisory Committee on new Broad-Based Taxes. It also offers some thoughts on areas where potential expenditure savings could be made.

Abstract

This Selected Issues paper examines the fiscal outlook and policy options for the Hong Kong Special Administrative Region. The paper provides indicative estimates of how revenue and expenditure might evolve in the next five years under two fiscal consolidation scenarios with a different mix of revenue/expenditure measures to bring the fiscal position to balance by FY2006. The paper examines different revenue raising measures in light of the findings by the Advisory Committee on new Broad-Based Taxes. It also offers some thoughts on areas where potential expenditure savings could be made.

I. Fiscal Outlook and Policy Options in Hong Kong SAR1

A. Introduction

1. Fiscal policy in Hong Kong SAR has traditionally been conservative. The fiscal balance had 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.

Figure I.1:
Figure I.1:

Fiscal Development, FY1997-FY2002

Citation: IMF Staff Country Reports 2003, 142; 10.5089/9781451816846.002.A001

2. However, the fiscal position has gradually deteriorated since FY1998. 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 5½ percent of GDP in FY2002. In February 2002, a government 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. The report noted that operating account had been in deficit since FY1998. Furthermore, without the investment income, the operating deficits since FY1998 would have been much larger (Table I.1). IMF staff estimates also indicate that substantial structural deficits have emerged, increasing from 5½ percent of GDP in FY2001 to 6½ percent in FY2002.2

Table I.1.

Operating Account

(as a percent of GDP)

article image
Source: Data provided by the authorities.

3. This chapter aims to:

  • Provide indicative estimates of how revenue and expenditure might evolve in the next five years under two fiscal consolidation scenarios with a different mix of revenue/expenditure measures to bring the fiscal position to balance by FY2006.

  • Examine different revenue raising measures in light of the findings by the Advisory Committee on new Broad-Based Taxes.

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

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

B. Medium-term Fiscal Outlook

4. 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 arising from the consolidation of property market and ageing population. It concluded that, without corrective measures, continued sizable deficits in the range of 4-5 percent of GDP per annum are projected in the medium term, leading to a depletion of fiscal reserves at latest by FY2008, followed by a rising debt burden.3 IMF staff projections indicate that, in the absence of specific measures, the fiscal reserves could be depleted as early as FY2006 owing to higher projected deficits in FY2002 and FY2003 compared with the Task Force (Figure I.2).

Figure I.2:
Figure I.2:

No Policy Action Scenario

Citation: IMF Staff Country Reports 2003, 142; 10.5089/9781451816846.002.A001

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

6. Two scenarios are developed by the staff to illustrate the implications of a different expenditure and revenue mix to achieve the targeted fiscal consolidation in the medium-term.

Basic Assumptions4

  • In both scenarios, real GDP growth is assumed at 2.2 percent in 2003, gradually returning to its potential of 3.5 percent in the medium term. Deflation is projected to continue at 2 percent in 2003, and gradually dissipate by FY2006.

  • 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 premium) 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 balance budget is achieved, and social security expenditure is projected to grow in line with the long term population projections.5

Path of Fiscal Consolidation

  • In both scenarios, a modest fiscal consolidation of 0.2 percent of GDP is projected in FY2003 as envisaged in the FY2003 budget. In addition, the proposed revenue measures, mainly increases in rates of profits and salaries taxes, are expected to yield a total of HK$14 billion additional revenues implemented over the period of FY2003 and FY2005.

  • In Scenario I, no further revenue measures are introduced after FY2003. As a result, an expenditure cut (other than social security expenditure) of 9 percent per annum for three years will be needed in order 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 (other than social security expenditure) will only need to be cut by 5.7 percent per annum between FY2004 and FY2006, resulting in an expenditure to GDP ratio of 16.5 percent in the long run. In this scenario, revenue efforts contribute about 45 percent of the required fiscal adjustment.

Figure I.3:
Figure I.3:

Scenario 1: Fiscal Consolidation path without the Introduction of GST

Citation: IMF Staff Country Reports 2003, 142; 10.5089/9781451816846.002.A001

Figure I.4:
Figure I.4:

Scenario 2: Fiscal Consolidation Path with ihe Introduction of GST

Citation: IMF Staff Country Reports 2003, 142; 10.5089/9781451816846.002.A001

7. The two fiscal consolidation scenarios illustrate that government expenditures as a percent of GDP are in need of significant adjustment 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 property and stock-related revenues as a percent of GDP returning to their pre-1990 levels, total government expenditure to GDP ratio would need to be cut from its current level of near 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.

C. Revenue Structure

8. 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 no general consumption taxes nor any duty on imports, and a majority of the working population is outside the tax net; (3) nontax revenues account for half of total revenue, mainly from proceeds of land sales and investment income.

Table I.2.

Revenue Structure

(as percent of total government revenue unless otherwise indicated)

article image
Sources: Data provided by the authorities, and staff estimates.

9. The heavy reliance on asset-related revenue makes Hong Kong SAR’s revenue system highly volatile and procyclical. Total fiscal revenues averaged 17 percent of GDP between FY 1990 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 with the Exchange Fund has become another major contributor to the volatility of fiscal revenues in recent years. Without the investment income, the fiscal deficits since FY 1998 would have been much larger.

10. The Advisory Committee on New Broad-Based Taxes concluded in its report in 2002 that a low-rated GST is the best option for Hong Kong SAR to broaden its tax base among different tax measures. A 3 percent GST is estimated to yield around $18 billion (1.4 percent of GDP in 2001) additional revenue annually. However, implementation of a GST in Hong Kong SAR may take two to three years of preparatory work. Administrative preparation will need to cover a wide range of tasks, such as the drafting of legislation; carrying out consultation, publicity, and education; determining and securing staffing needs; undertaking training of staff; developing systems, procedures, and forms for collection; and preparation of manuals and guidelines.6

11. To fill revenue shortfalls pending the implementation of GST, higher rates, lower personal income tax deductions and a land and sea departure tax are cited as interim options by the Advisory Committee. The FY2003 budget set a target of raising revenue by HK$20 billion by FY2006. Measures for raising HK$14 billion 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 an additional HK$6 billion needed to achieve the revenue target by FY2006. They have 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 underway in the near future if it is to make a significant contribution to the medium term fiscal consolidation objective.

D. Government Expenditures

12. Nominal government expenditures have persistently grown faster than nominal GDP, as prices gce Deflator pertaining to government spending have risen faster than the general price level in the economy. This has resulted in an increase in the government expenditure to GDP ratio from below 15 percent in FY1990 to close to 20 percent in FY2002.7 One of the key factors behind 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 I.5:
Figure I.5:

Changes in GCE Deflator and GDP Deflator

Citation: IMF Staff Country Reports 2003, 142; 10.5089/9781451816846.002.A001

13. Education (21 percent of total public expenditures), health (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 in the last few years. In particular, welfare spending has more than doubled over the past decade.

Figure I.6
Figure I.6

Major Public Expend it ore Areas

Citation: IMF Staff Country Reports 2003, 142; 10.5089/9781451816846.002.A001

14. Given the heavy wage content of government expenditure, this section will first examine issues relating to civil service pay, and then discuss developments in the three major expenditure areas. The analysis will incorporate some comparative perspectives with available data. Two indicators are frequently used to compare subcategory government expenditures internationally: these 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 in Hong Kong SAR, 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 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, not of a welfare state.

Civil Service

15. 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.8 However, as a percent of total government expenditure, the civil service wage bill at 30 percent is almost twice as high in Hong Kong SAR as the corresponding ratio in 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, and the rest comprise payroll expenses to 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.

16. The civil service pay adjustment system has relied heavily on a formula-based mechanism premised upon broad comparability with the private sector in Hong Kong SAR. However, comparability is often difficult to establish, as there is no comparable activity in the private sector for some government activities, such as the police. 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 upwards even with the overall economy experiencing persistent deflation.9 As a result, the wage bill has grown by 11 percent per annum in real terms since FY1998.10

17. 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 Asia average of 2.9.11 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.12 While the 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, in the range of 6-31 percent, for the majority grades of civil service.

Figure I.7:
Figure I.7:

Nominal vs. Real Wage Bill

Citation: IMF Staff Country Reports 2003, 142; 10.5089/9781451816846.002.A001

18. To address the concerns on 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 (namely Australia, Canada, New Zealand, Singapore, and the United Kingdom).13 Among its findings on common trends in pay policy in the five surveyed countries, the study points out 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 that consolidates various benefits and allowances with base salaries has been a common feature in the surveyed countries, as it provides administrative cost savings, reduced opportunities for abuse, and greater spending flexibility for staff.

19. The task force in its Phase One Final Report recommended that: (1) in the short run, priority be given to conduct a pay-level survey, and appropriate interim measures be adopted for the 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 should be introduced in the medium- to long-term. In February 2003, the government announced its decision to reduce the salary of civil servants to the level in cash terms as at end-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 and Welfare Spending

Education

20. Education spending, the largest expenditure component in the budget, has grown by more than 7 percent annually in real terms since FY1996, compared to 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 six to 15 (dropout is minimal by international standards), and upper secondary and tertiary education are highly subsidized.

21. As to the distribution of resources among different levels of education, Hong Kong SAR’s pattern differs considerably from that in other countries. In developed countries, resources tend to be more evenly distributed among students at all levels. Although the spending on higher education students is usually more than on primary or secondary school children, the gap is relatively small. The disparity between government spending on higher education and on basic education 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 in Hong Kong SAR is about 60 percent of the OECD average.

22. Hong Kong SAR spends one third of its education expenditure at tertiary level. Apart from some post-secondary and vocational programs, the enrollment rate for government funded universities was only 17 percent of the relevant age group in 2001, compared with over 50 percent in most OECD countries. Some residents have chosen to study abroad, in part owing to the intense competition for places in local tertiary education institutions. The low enrolment 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 on average contribute another US$4,000 a year in fees and charges.

Table I.3.

Expenditures by Level of Education Per Student

(1999, in equivalent U.S. dollars converted using PPPs)

article image
Sources: OECD (2002) and staff estimates.

23. Salaries constitute the largest part of recurrent expenditures on education. More than 80 percent of expenditure at schools went to recurrent expenditure, which is basically teachers’ salaries. Again, the disparity between higher education and primary education is significant.14 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 high as those for secondary school teachers. In addition, remuneration packages are equalized across different academic fields.

24. The need for Hong Kong SAR to upgrade the skill level of its labor force will pose new demands on educational spending in the near term. For example, if the current unit cost for higher education is maintained, doubling the current university enrollment rate to 34 percent would imply additional educational spending of HKS13 billion (1.1 percent of GDP). Furthermore, to increase the percentage of college-degree holders among primary and secondary teachers, as set out by the government, would also have significant budgetary implications.

Health Care

25. 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 ageing of the population.15 As a percent of GDP and as a percent 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 up to 20-22 percent of total government expenditure.16

26. Fees in public hospitals and clinics are heavily subsidized in Hong Kong SAR, and have not risen in line with costs. The fee structure is uniform irrespective of the ability to pay by individual patient, 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 expenses in public health care facilities. In total, user fees paid by patients finance less than 5 percent of public health expenditures.

Welfare Spending

27. Welfare spending has grown rapidly in the last decade, reflecting rising cash and housing assistance to the elderly, immigrants from the Mainland of China, and the unemployed. The number of recipients of the 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-a-vis the relatively slow growth in wages.

Table I.4.

Estimated CSSA Expenditure by Type of Case

(HK$mn): FY1995–FY2000

article image
Sources: Data provided by the Hong Kong SAR authorities.

Options for Controlling Expenditures

28. Affordability to pay within the budget constraint has become a dominant consideration for many governments in 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 in other industrial countries can be helpful in identifying potential areas for expenditure cuts and rationalizations.

29. The FY2003 budget has set the target for expenditure reductions by FY2006 at HKS20 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 efforts may be required in these and other areas to achieve the targeted expenditure cuts.

  • Recent developments in civil service pay, in particular compared with 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. However, the public sector wage bill, which accounts for a substantial share of operating expenditures, may 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 size of the civil service workforce. These measures are expected to yield HK$12 billion savings. The government should also consider de-linking the pay system for the employees in the 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 called for in order 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 towards basic education; (2) promoting private provision of education service; (3) experimenting with a voucher system; (4) increasing fee charges substantially for tertiary education; and (5) recruiting more tuition students from the Mainland of China at the university level (i.e., export of education services). Further, 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 de-linked from civil service pay, and be 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 214 percent of GDP. This could be achieved through higher user fees, introducing means-testing, and encouraging more private insurance. Also, given the relative higher quality of health care services in Hong Kong SAR, the newly rich from the Mainland of China could be attracted to come and use the health care services (i.e., export of health care services). The government has already taken a number of steps in these areas. They have also commissioned a comprehensive review of the existing fee structure in the public health care sector with the objective of better targeting and prioritizing 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 a 11.1 percent reduction in welfare benefits. The government has also taken initiatives to encourage capable CSSA recipients to become self-reliant. However, some restructuring of this program, such as reducing the length and replacement ratio of benefits for able-bodied individuals, may be needed to mitigate disincentive effects that could dissuade them from actively seeking re-employment and that may have contributed to rising long-term unemployment.

E. Conclusions

30. 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 its heavy reliance on asset-related revenues have constrained the government’s ability to finance its recurrent expenditures, especially during an economic downturn.

31. Fiscal policy in Hong Kong SAR has reached a critical stage. The mounting deficits have already raised concerns in international and local markets. Therefore, concrete and credible measures to rein in the deficits are crucial for the long-term sustainability of the public finances, and for 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. If Hong Kong SAR wants to maintain a small government by keeping its current revenue system, major reforms are needed in the areas of civil service and social services (education, health, and welfare) to bring the government expenditure to GDP ratio back to the 16-17 percent range. On the other hand, taxes would have to be raised significantly if the current level and coverage of social services were to be maintained, or even expanded.

ANNEX

Table I.5.

Assumptions for Medium-Term Projections

article image

Parameters are drawn from the budget model in the Final Report by the Task Force on Review of Public Finances.

References

  • Mark Bray, 1993, The Economics and Financing of Education: Hong Kong SAR and Comparative Perspectives, The University of Hong Kong.

  • OECD, 2002, Education At A Glance.

  • OECD, 2002, Highlights of Public Sector Pay and Employment Trends: 2002 Update.

  • Task Force on Review of Public Finances, 2002, Final Report to the Financial Secretary.

  • Advisory Committee on New Broad-based Taxes, 2002, Final Report to the Financial Secretary.

  • Task Force on the Review of Civil Service Pay Policy and System, 2002, Phase One Final Report.

1

Prepared by Jorge A. Chan-Lau.

2

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

3

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

4

The details for the key parameters of staffs projections are set out in Annex. It should be noted that the medium-term projections are based on a partial equilibrium and should be viewed more as illustrations of the plausible future fiscal path rather 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 1973.

6

See the 2001 FAD Technical Report on Policy and Administrative Issues in Introducing a Goods and Services Tax, published with the final Report of the Advisory Committee.

7

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.

8

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

9

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

10

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

11

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

12

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

13

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 of introducing performance-based rewards to better motivate staff; and (5) the experience on simplification and decentralization of pay administration.

14

Less than 50 percent of teachers in government and aided primary schools and 80 percent in secondary schools were university graduates with a degree in FY2001.

15

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

16

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

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
People’s Republic of China—Hong Kong Special Administrative Region: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2003: Issue 142
Publisher:
International Monetary Fund
ISBN:
9781451816846
ISSN:
1934-7685
Pages:
56
DOI:
https://doi.org/10.5089/9781451816846.002

Fiscal Development, FY1997-FY2002

No Policy Action Scenario

Scenario 1: Fiscal Consolidation path without the Introduction of GST

Scenario 2: Fiscal Consolidation Path with ihe Introduction of GST

Changes in GCE Deflator and GDP Deflator

Major Public Expend it ore Areas

Nominal vs. Real Wage Bill