3.2 Importance of Revenue Sustainability
The Primary Budget position, defined as Operating Revenue less Total Expenditure,
measures the ability of the Government to meet its annual expenditures through taxes, fees
and charges. While the Primary Budget has been positive from the late 1980s to the early
2000s, it has been in deficit for the past four years. While the deficits in some of the years
have been exacerbated by cyclical weakness in economic conditions and shocks such as
9/11 and SARS, the lowering of income tax rates has further eroded the Primary Budget
position.
Despite the Primary Budget deficit, the Government has been able to avoid persistent
deficits in the Overall Budget position, by supplementing operating revenue with Net
Investment Income Contribution (NIIC) from reserves accumulated in the past. Under the
Constitution, the Government is allowed to use up to 50% of NII for current spending needs.
Fiscal sustainability over the medium term depends very much on operating revenues being
sustained as a percentage of GDP.