SECRET
TO ENSURE THAT ALL OPPORTUNITIES FOR ECONOMY ARE TAKEN.
3. YOUR PARA 2C-F. HOD BELIEVE IT IS AGREED THAT, APART FROM UK PAY AND ALLOWANCES, EQUIPMENT EX UK AND AIR TROOPING, THE REMAINING COST OF THE GARRISON (SOME 50%) IS BASED ON HONG KONG PRICES, OF THE REST WIR CHANTER COSTS (5) ARE DETERMINED PRIMARILY BY WORLDWIDE RATES, AND EQUIPMENT EX UK (13) IS SUBJECT TO UK INFLATION. THIS LEAVES PAY AND ALLOWANCES OF UK PERSONNEL (SOME 33%). A NOTE ON THE METHOD OF ASSESSMENT OF LOCAL OVERSEAS ALLOWANCE FOLLOWS BY BAG: THIS DEMONSTRATES THAT PRICES IN
HONG KONG DETERMINE THE OVERALL SIZE OF THE PAY AND ALLOWANCES
BILL, AND MOD CONSIDER THERE IS NOTHING BETWEEN US ON THIS. YOUR
OFFICIALS' CONCERN WAS WITH THE MECHANISM FOR ADJUSTING LOA
DOWNWARDS. IF BASIC PAY ROSE MUCH MORE QUICKLY THAN COSTS IN
HONG KONG. AS THE LAST REVIEW WAS CONDUCTED AFTER THE APRIL 1975 INCREASE IN BASIC PAY, NO PROBLEMS OF DIFFERENTIAL INFLATION ANE LIKELY TO ARISE, AT LEAST IN THE FIRST YEAR OF THE AGREEMENT. 4. LOA ADJUSTMENTS ARE NOT USUALLY MADE BETWEEN REVIEWS WHICH
KORMALLY OCCUR EVERY THREE YEARS. IN FACT INFLATION HAS NORMALLY
INCREASED AT ABOUT THE SAME RATE IN ALL COUNTRIES WHERE WE HAVE PERSONNEL. MOD ACCEPT, HOWEVER, THAT THIS APPLIED BEFORE THE PRESENT HIGH RATES OF INFLATION IN THE UK.
5. THE NEXT SERVICES PAY RISE WILL NOT TAKE PLACE UNTIL APRIL 1976
AND AS PART OF HMG'S COUNTER INFLATION POLICY WILL BE LIMITED TO
PUS STG 6 PER WEEK. THIS WOULD INCREASE THE OVERALL BILL FOR PAY AND ALLOWANCES BY ONLY ABOUT 5% BETWEEN NOW AND MARCH 1977, AND INCREASES IN PAY RATES RATHER THAN INFLATION AS A WHOLE ARE RELEVANT.
WHAT WILL HAPPEN BEYOND THE NEXT PAY RISE IS UNCLEAR BUT CURBS
ON WAGES ARE UNLIKELY TO BE RELAXED SUFFICIENTLY TO REQUIRE MOD TO REVISE THE TERMS OF LOA, BETWEEN THE THREE-YEAR REVIEWS, TO ALLOW FOR DOWNWARD ADJUSTMENTS. IF, NONETHELESS, DIFFERENTIAL RATES CONTINUE, MOD SUGGEST WE REVIEW THE SITUATION EARLY IN 1977/78 TO EXAMINE MEANS OF REDUCING THE HONG KONG LIABILITY. IF IT WOULD BE PRESENTATIONALLY HELPFUL, MOD WOULD ACCEPT SOMETHING ON THESE LINES IN THE MOU, BUT RECIPROCALLY I E THAT IF HONG KONG INFLATION RATES SHOULD RISE ABOVE THOSE IN THE
UK, WAYS WOUDLD BE SOUGHT TO LIMIT THE COST TO UK.
6. MOD THEREFORE BELIEVE THAT THE ONLY PART OF GARRISON COSTS
DIRECTLY SUBJECT TO UK INFLATION IS EQUIPMENT SUPPLIED FROM THE
UK. MOD REPRESENTATIVES ON THE FINANCIAL WORKING GROUP SUGGESTED
APPLYING THE HONG KONG MANUFACTURING INDEX TO THE DOLLAR
EQUIVALENT OF EQUIPMENT COSTS. WHETHER THIS WOULD PRODUCE A
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/SMALLER