levies that could not be recouped in export proceeds but also lead to a reduction in the supply of effort since they are econo- mically less efficient than direct taxes). On the other hand, it is argued that increases in existing taxes, particularly salaries and profits (corporation) tax, would eventually lead to demands for higher wages (thereby generating internal inflation), undermine business confidence (thereby leading to an exodus of firms), and encourage widespread tax evasion (an area where it is felt the Chinese could make the French look like amateurs). On the borrow- ing sido, the governmont appoars willing to consider raising Joana for projects which are directly self-liquidating, that is, those which gonorate an identifiable cash flow(such as the Mass Transit Railway or the Lion Rock Tunnel) but otherwise sees medium- to long-term borrowing as likely unduly to strain the balance of pay- ments and/or to involve heavy debt service charges (the charges on the loans envisaged for 1975/76 are being kept below the inter- est accruing on the government's assets, excluding the assets of the Exchange Fund). The balance of payments problem is seen as particularly severe in the case of internal borrowing where the evidence suggests that only the banks would be willing to take up government debt certificates on any large scale (on the understand- ing that they qualified as liquid assets).
35.
In consequence, the government is likely to be even more determined than in 1975/76 to contain the growth of public expendi- ture, and hence further to resist any substantial increase in its contribution towards defence costs. It has, in any event, already been arguing that the public sector is growing too rapidly. In 1973, government expenditure was equivalent to about 16% of the gross domestic product. By 1974 it had risen to 19% and in 1975 it is likely to exceed 20%. The argument here is that resources are being diverted away from the export sector through the compe- titive up-bidding of wages and that this cannot be allowed to continue. Even so, the government is acutely aware of the politi- cal difficulty of cutting backon its housing and social services programmes (expenditure on which is budgeted at over HK$3000 million for 1975/76 - equivalent to nearly 10% of the gross domestic pro- duct).
36. All these arguments (against raising taxes, against borrowing and against increasing expenditure) have a certain validity, but they tend generally to be applied far more rigorously than is warranted, Tax rates have been raised before, and there is no
_nati. overwhelming reason why they should in moderation, be raised
GONITUENITAL
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