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accruing on the government's assets, excluding the assets of the Exchange Fund). The balance of payments problem is seen as
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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 understanding 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 expenditure. It has 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 competitive up-bidding of wages and that this cannot be allowed to continue. Even so, the government is acutely aware of the political difficulty of cutting back on 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 product).
36. All these points (against raising taxes, against borrowing and against increasing expenditure) have a certain validity, but it could be argued that they tend generally to be expounded far more vigorously than is warranted. Tax rates have been raised before and there is no overwhelming reason why they should not in moderation, be raised again. Equally, a more relaxed attitude towards borrowing could be appropriate. This is particularly true in the case of external borrowing since this would not immediately affect the balance of payments. And it is particularly the case also on borrowing for capital projects: at the present time the surplus on recurrent account still finances more than 30% of the government's expenditure on capital account (though this proportion has declined significantly, from about 75% in 1971). Furthermore increased public openGL PLE, even when it proceeds at a faster rate than the gross domestic product, will not of necessity impair the growth prospects of the export sector. Quite apart from situations where
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