Mr O'Keefe
SECRET & INDIV
Thank you. Please see sep mante
HONG KONG: BRIEF FOR MR CORTAZZI'S VISIT
FISCAL POLICY
He
22/1
with eo
1. In his recent despatch on Hong Kong domestic policies the Governor suggested that public expenditure could safely rise to 221% GDP and that social expenditure is planned to rise to 48%
total government expenditure by 1979/80. This implies higher rates of taxation and/or some measure of deficit financing but he emphasises that there are budgetary and other limitations on the speed of progress which, however, are not absolute. The Planning Paper suggests that a rise in government expenditure to 25% of
GNP should be the aim over the next decade and endorses the Governor's view that the 48% target for social expenditure is desirable. We are, however, concerned at the implications of Flags A,B the Financial Secretary's two statements during this year's budget
debate in which he seems to be re-affirming his firm conviction that government expenditure should not rise above 20% of GNP and implying that the rate of growth of social expenditure may actually fall as the economy picks up again after the recent recession.
Flag C
2. The Financial Secretary is prone to keep his own counsel on his future fiscal strategy and it is not clear to us whether his speeches to the Legislative Council represent his settled conviction or are designed to reassure conservative opinion in the Colony while the Inland Revenue Ordinance Review Committee considers the present system of taxation. We have, in fact, been unsighted on Hong Kong's fiscal policy for many years because the 1958 instructions of the then Secretary of State for the Colonies have never, as far as we can tell, been observed by Hong Kong. Nor have they, so far as we can tell, ever been formally abrogated. It should be well known in Hong Kong that fiscal policy is a matter on which Ministers here might wish to comment (paragraph 3(iii) of the then
Mr Lennox-Boyd's despatch); but it may well be that Hong Kong have lost sight of instructions issued so long ago. Since 1958
SECRET & INDIV
/no one