SECRET UK EYES 'A'
further pressure on our public expenditure this year we attach even greater importance to this than before. I am aware that Hong Kong has also suffered as a result of the world-wide trading recession and that there is severe pressure on your budget because of, for example, planned social programmes and a tax structure designed to preserve incentiveg. But I would ask you to see the issue in the round. In the decade prior to the onset of the recession Hong Kong's GDP grew at an average annual rate of almost 9% while the UK could only achieve three per cent. Moreover, Hong Kong stands
substantially to benefit more pakyxxfrom the expected upturn in world trade. I see from your 1975/76 Budget speech that a growth rate of 7% after 1976 is being assumed for budgetary planning purposes. This 19 s far in excess of possible growth in the UK which faces a period of hard slog if it is to overcome its economic problems. Even on a rough basis of comparison your current defence contribution is
Tess than one-third of 17 of your national income • In our case, we are spending over 5% of GNP on defence and even after the Defence Review we will be spending over 5% for some years to come. This is in a situation where the British people already face a much
heavier burden of taxation. Tax revenue as a proportion of GDP is three times higher in the UK than it is in Hong Kong.
On any objective view the level of your current defence contribution, determined in an agreement made against the quite different UK situation, and eroded by the progress of inflation and the relative movement of currencies, is low indeed. The time has surely come for Hong Kong to bear a share of its defence costs more in keeping with your wealth and stage of development. Accordingly we are asking that in the new defence costs agreement Hong Kong should contribute by far the greater part of the cost of the garrison required for its security. This cannot be other than unwelcome to you though it will hardly come as a surprise given the gravity of the economic situation described, in which HMG would indeed have been justified in taking the position that the cost of forces stationed far from the area of greatest threat to the UK should be met entirely by those for whose benefit they are deployed.
SECRET
UK EYES LA!