Module 12 Public Finance of Hong Kong

1 Carefully study the following information and answer the questions.

 Info. 1: Hong Kong GDP, fiscal surplus and fiscal reserve (the cumulative sum of fiscal surplus)

The HKSAR Government has been

too prudent in managing its finances.
This leads to a large fiscal reserve.
However, the lives of people,
especially the grass roots, have not
improved. The government should
make the best use of its fiscal reserve
to narrow the income gap.

 Info. 2: The opinion of James Tien, the Honorary Chairman of the Liberal Party, on the
government’s large fiscal reserve

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(a) Describe the financial situation of the HKSAR Government during the period
above according to Info. 1.
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During the period above, fiscal surplus was recorded every year. This has led to an increase

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in the fiscal reserve and shows that the government is under a good financial situation.

(b) (i) Describe the trends of Hong Kong’s GDP and fiscal reserve during the
period above.
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‧ From 2004/2005 to 2007/2008, Hong Kong’s GDP has been increasing. It dropped

in 2008/2009 but rose again afterwards.

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‧ Except for 2005/2006 and 2008/2009, the fiscal surplus of Hong Kong showed an
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increasing trend.
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(ii) As shown above, what is the relationship between the economic situation
and the fiscal reserve? Explain your answer.
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During the period above, when the GDP increased, so did the fiscal surplus. This

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shows that when the economic situation is good, the fiscal surplus will increase.

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Therefore, they are positively related.

(iii) Explain why they have the above relationship.

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When the economic situation is good, the tax revenue, land premium and investment

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income of the government will increase. Also, it does not need to use resources to

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boost the economy or provide welfare. As a result, its expenditure will decrease. With

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increased revenue and decreased expenditures, a fiscal surplus results.

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(c) Info. 2 describes a function of public finance. Explain this function.

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James Tien, the Honorary Chairman of the Liberal Party, thinks that the government should

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make the best use of its fiscal reserve to narrow the income gap. This reflects the function of

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public finance that redistributes income to narrow the income gap.

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 Module 12 Public Finance of Hong Kong

(d) (i) According to Info. 2, what is the HKSAR Government’s attitude towards
managing its finances? How is this related to the requirements on the public
finance stated in the Basic Law?
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The HKSAR Government has been too prudent in managing its finances. This is

_____________________________________________________________
because the Basic Law requires the government to keep expenditure within the limits of

_____________________________________________________________
revenues and strive to achieve a fiscal balance. In order to avoid a fiscal deficit caused

_____________________________________________________________
by a decrease in its revenue during economic downturn, the government maintains a

_____________________________________________________________
large fiscal reserve.

(ii) Do you think that this is a good approach towards managing finances?
_____________________________________________________________
No. Being too prudent in managing finances will hinder the government from making

_____________________________________________________________
the best use of its revenue to carry out the functions of public finance and maximise

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social benefits. (Or other possible answers)

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2 Carefully study the following information and answer the questions.

The Budget (2012/13)

 Info. 1: Distribution of the HKSAR Government’s estimated revenue in 2012/13

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Land premiums have been an important source of revenue for the government. In
2010/11, the land premiums received by the government amounted to $60 billion,
which was 16.5% of the total revenue in that fiscal year. Besides land premium, tax
revenue related to real estates such as stamp duty on property transaction was also
large. Moreover, a blooming propety market will lead to increases in profits and
wages of many industries. Revenue from salaries tax and profits tax will increase
accordingly. Once the property market slows down, a poor business environment and
a jump in the fiscal deficit from 1997 to 2003 are very likely to happen again.
Therefore, in order to maintain healthy public finances and positive economic
development, Hong Kong should have its economy transform as soon as possible to
develop more industries.

Local newspapers (integrated report), 22/11/2011

 Info. 2

(a) (i) According to Info. 2, which government’s revenues showed in Info. 1 are
related to real estate?
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Land premium, stamp duty, profits tax and salaries tax

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(ii) What is the total percentage of these items to the government’s total
revenue?
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64.6% (= 15.4% + 9.5% + 27.1% + 12.6%)

(b) Based on the answer to Question (a), deduce the effects of a poor property market
on the financial situation of the HKSAR Government.
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More than 60% of the government’s revenue is related to real estate. Therefore, if the

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property market is poor, the government’s revenue from this aspect will drop significantly.

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This will seriously affect its financial situation.

(c) Why can the development of more industry maintain a healthy public finance and
economic development?
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Economic transformation can prevent the government’s revenue from over-relying on the

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property market. This can help stabilise its source of revenue and maintain a healthy financial

_________________________________________________________________
status more easily. When the government has stable sources of revenue, it can implement

_________________________________________________________________
appropriate policies to promote Hong Kong’s economic development. (Or other possible

_________________________________________________________________
answers)

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 Module 12 Public Finance of Hong Kong

3 Carefully study the following information and answer the questions.

In order to increase the retirement savings

of MPF scheme members, I propose to
make a one-off injection of $6 000 into the
MPF accounts of all eligible employees.
We hope to help more people prepare for
retirement. This measure will neither
increase inflation nor impose a heavy
financial burden on us.

 Info. 1: John Tsang, the Financial Secretary, delivered the 2011/12 Budget

MPF fails to support retirement

People protested against the 2011/12 Budget after it was proposed by John Tsang,
the Financial Secretary. The proposal of injecting $6 000 into the MPF accounts of
employees was particularly controversial. Many people criticised that the
purchasing power of MPF money will fall greatly due to inflation when employees
get back their money at 65 years old. In addition, due to high management fees and
low return, the MPF schemes can neither solve the problems of retirement caused
by an ageing population nor help ease the financial pressure on the government.
Many political parties think that the government should solve the problems in other
ways with its $600 billion reserves.

Local newspapers (integrated report), 3/3/2011

 Info. 2

(a) Why did the government decide to inject $6 000 into the MPF accounts of
employees?
It hoped to help employees prepare for retirement by increasing their retirement savings
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without causing inflation and imposing a heavy financial burden on the government.
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(b) (i) Why did people object to the injection of money into their MPF accounts?
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This is because people can get back their contributions only when they are 65 years

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old. The purchasing power of the contributions at that moment will fall greatly due to

_____________________________________________________________
inflation. Also, the high management fee and low return of the MPF scheme makes it

_____________________________________________________________
difficult to support the retirement of people.

(ii) Explain why the MPF schemes fail to ease the financial pressure on the
government caused by an ageing population.
_____________________________________________________________
The MPF schemes cannot support employees’ living after retirement. As a result,

_____________________________________________________________
employees may need to obtain allowances from the government to meet basic needs.

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Therefore, the financial pressure on the government cannot be eased.

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(iii) If you were the Financial Secretary, how would you make use of the $600
billion reserves to deal with the challenges brought by an ageing population
to public finance? Give two suggestions and explain your answer.
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‧ Use the reserve to subsidise people to buy medical insurances so that they can pay

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for their own medical expenses. This helps reduce public medical expense.

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‧ Increase child care services to encourage people to have children. This helps

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increase the youth population and labour force.

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(Or other possible answers)

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