SECRET UK EYES A
HONG KONG BUDGETARY POSITION
The main features of Hong Kong's budgetary position
were described as follows by the Financial Secretary:·
(a) Substantial budget deficits are forecast for 1975/76 and for the three years 1976/77-1978/79, which are treated as "forecast years" in Hong Kong's budgetary planning (and would also be the first three years to be covered by the next defence contribution agreement) These forecasts assumed a Hong Kong defence contribution of Hong Kong $205m or £17m, and the size of the deficits would be further significantly increased if the Hong Kong defence contribution were raised from this planning figure to the equivalent of 75% of the estimated cost of the reduced garrison. Removing the deficits would require a combination of expenditure cuts and rephasing, tax increases and higher borrowing.
(b) During the period to 1973/74 the Hong Kong economy had been strong and had grown in real terms at an average of 71% to 8% a year. Significant budget surpluses had been achieved. Real growth of 8% had been achieved in 1973/74 and it had been estimated at 4% for 1974/75. However, it now seemed more likely that the actual real growth rate for the year would be only 1-11% and this was partly due to time-lag in receipts from increased profits tax. Growth in 1975/76 was
x expected to be low and of the order of only 2%.
Reserves were now at a critically low level and barely sufficient to cover possible fluctuations in external revenue. However, for the forecast years, it had been assumed that real growth would return to the past high level of 7% per annum. Even if such a recovery were affected, it was considered unlikely that the capital expenditure programme could be wholly financed from the surpluses on recurrent account and capital revenue. Some retrenchment was essential, borrowing would have to
х X be increased and tax increases were not ruled out.
(c) Tax increases however had to be approached with caution. Confidence was essential to the economy and could easily be damaged. Protection of the growth
OAD DAT UK EYES A
/potential
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