certain political considerations which necessarily determined our approach to some of the problems at issue. It would in my view have been quite wrong, and indeed not helpful to the Governor, to suggest that these problems did not exist, principally in the interest of the Governor's laudible desire to defend his
advisers. However, I think the new draft will meet our essential objectives while at the same time not arousing controversy on what are essentially side issues, and being more palatable in
Hong Kong.
5. A more crucial difficulty was, however, that the Hong Kong Paper began from the assumption that acceptable social programmes were the first requirement and that the question of finance for them should be seen as of secondary importance. This of course conflicted fundamentally with the Planning Paper approach which suggested that the fiscal problem was the real issue and that if this could be satisfactorily settled, the right social programmes involving public expenditure would follow. The Hong Kong approach was of course the more traditional one; but the purpose of the Planning Paper was to suggest an alternative which might provide a solution to the problems of the past. I was worried that a policy based upon the Hong Kong approach would result as before in continuing dispute over what was acceptable and desirable in each of the various sectors when, lying behind the Hong Kong approach, is over-cautious views on what the economy could afford. However I think we have now found a way of marrying these two approaches by a formula which provides for substantial annual growth in public expenditure.
6. The next stage will be to produce a draft by tomorrow evening for consideration by all interested Departments in the office and Sir Denys on Thursday. Mr Cortazzi will be in the Chair and Mr Lipsey will also be present. I should add that we had a most useful meeting with Mr Lipsey today who suggested some rearrangement of the material in the light of ministerial priorities. He also agreed to the proposed approach to public sector spending mentioned above. And finally, he seemed agreeable to a compromise
-2-