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22 May 2002
Dear Colleagues,
2002 Civil Service Pay Adjustment
I am writing to inform you of the Chief Executive in Council's decision this morning to offer to the staff sides of the central consultative councils a pay reduction for the civil service by 4.42% for the directorate and the upper salary band, 1.64% for the middle salary band and 1.58% for the lower salary band. A final decision on the size of this year's pay adjustment will be made in the light of the staff sides' comments on the pay offer.
In deciding to offer a negative pay adjustment across the civil service this year, we have given careful consideration to all relevant factors under the existing civil service pay adjustment mechanism, including the net pay trend indicators derived from the 2001/02 Pay Trend Survey, the state of the economy, budgetary considerations, changes in the cost of living, the staff sides' pay claims and civil service morale. As you will appreciate, this is a difficult decision to take and one that was made after thorough deliberations within the Administration.
The Hong Kong economy underwent a distinct downturn in 2001 and economic activity remained generally modest in the early part of this year. For the third consecutive year, we have recorded deflation in the domestic economy, with the unemployment rate reaching a record high in the first quarter of this year.
At the same time, the Government is facing serious budgetary situation. In the 2002-03 Budget, the Financial Secretary estimated a consolidated deficit of $65.6 billion and $45.2 billion for 2001-02 and 2002-03 respectively. To tackle the structural fiscal deficit, the Government has set three targets to be achieved by 2006-07, which are to attain a balanced Consolidated Account, to attain a balanced Operating Account and to reduce public expenditure to 20% of GDP or below. In pursuit of these targets, the Government will contain the annual growth of government expenditure, a very substantial part of which is accounted for by personnel-related expense for the civil service and subvented organisations.
The Composite Consumer Price Index, which is based on the expenditure patterns of households with average monthly expenditure of $4,400 to $64,000, has declined by 1.8% for the year ending 31 March 2002, over the same period in 2001. Other Consumer Price Indices have registered similar decreases.
In addition to the above factors, we further note from the results of this year's Pay Trend Survey that there had been negative movements in the pay adjustments for all three salary bands. In such circumstances, we consider that our pay offer of a negative pay adjustment in line with the net pay trend indicators is very reasonable and has struck a balance between the concern of colleagues and the wider interests of the community.
It is the Administration's intention to implement the pay reduction, if finally decided, by legislation. In view of concerns among colleagues and in the community about the lawfulness of such an approach, I wish to take the opportunity to clarify the matter.
In the event that the Administration finally decides on a negative pay adjustment for civil servants based on all relevant considerations under the established mechanism, we need to ensure that the decision is implemented with certainty. According to the standard memorandum on conditions of service (MOCS) that governs the employment arrangements of a civil servant, the Government reserves the right to alter any of the officer's terms of appointment, and/or conditions of service set out in the MOCS or letter of appointment, should the Government at any time consider this to be necessary. Legal advice on this variation clause is that it does not expressly reserve the right to reduce the pay of civil servants. In order to ensure that the pay adjustment decision, if approved, will be implemented with certainty, we propose to seek the enactment of a specific piece of legislation to cater for this year's civil service pay adjustment. The proposed legislative approach will provide for an express reduction of civil service pay by the specified percentages and provide that each officer's contract shall be modified to the extent of the statutory variation. It thus ensures that subject to the passage of the legislation by the Legislative Council, the policy decision to reduce civil service pay made in accordance with the established pay adjustment mechanism will be implemented with unquestionable certainty.
Let me stress that the proposed legislation is entirely consistent with the relevant provisions of the Basic Law, including Articles 100 and 160. On Article 160, our legal advice is that the provision ensures that the contracts valid immediately prior to 1 July 1997 are not affected by the change of sovereignty. It does not prevent subsequent amendments to those contractual arrangements, provided those amendments do not contravene other provisions in the Basic Law. While, therefore, it is arguable that it would protect the salaries contractually payable on 30 June 1997, it would not protect any subsequent addition to an officer's salary and would not inhibit a statutory reduction back to the levels as at 30 June 1997.
The pay reduction, if finally approved, will take prospective effect from 1 October 2002. We consider this a reasonable arrangement to allow time for colleagues to make appropriate financial arrangements before the pay reduction takes effect.
The pay reduction, if approved, will not affect the way pension entitlement is calculated. As currently provided in law, pensions are to be calculated on the basis of the highest substantive salary drawn by an officer in the course of his service. Contract gratuities, on the other hand, are to be calculated based on a certain percentage specified in the employment contract of the total basic salary drawn during the agreement period.
I have gone to some length to explain the rationale for the Administration's decision on the pay offer put to the staff sides today and the need for implementing a negative pay adjustment, if finally agreed, by legislation. I hope with this explanation, colleagues will be able to consider this year's pay adjustment in a reasonable and objective manner. The community as a whole is going through a difficult phase. As civil servants, we are called upon to demonstrate to the people we serve that we are willing to stand by the rest of the community and to share the burden at this time of difficulty.
Some staff unions have indicated that they will take action against any reduction of civil service pay and its implementation by legislation. I hope they will calm down and analyse the situation dispassionately. The negative pay adjustment offered by the Administration is indeed very reasonable and mild. Furthermore, if one takes a closer look at the draft Bill, one can see that the provisions therein concern only this year's pay adjustment. There is absolutely no authorisation for the Administration to alter at will civil service remuneration packages in the future. I am confident that colleagues on the whole are understanding and will remain firmly committed to their duties and responsibilities, and will continue to serve with diligence and professionalism.
I shall write again when the Chief Executive in Council has made a final decision on the size of this year's civil service pay adjustment.
Yours sincerely,
(Joseph W P Wong)
Secretary for the Civil Service
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