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CONFIDENTIAL
AGENDA ITEM 2: PROSPECTS FOR THE 1977/78 BUDGET
1.
Lord Goronwy-Roberts said that he had been concerned at the Financial Secretary's statement earlier this year to the effect that 20% of the GDP was the limit for public expenditure. Sir M MacLehose said that the purpose of the forthcoming budget was to finance our agreed programmes. He hoped his figures would not be wrong but at this stage the intention was that the total budget would be HK$8,600 million, which was an increase of 23% on real terms, involving a 17% increase in recurrent expenditure and a 47% increase in capital expenditure. Hong Kong had been dogged by the problem of under-spending in their capital programme; this was a problem with which all present would probably be familiar.
2.
The budget was to be financed, with current rates of taxation unchanged, and with a total deficit of HK$300 million overall (effectively to deficit on the capital account) by:
(a) an updating of rateable values. The revaluation had been held up for several years and a considerable projected increase in the rate yield for 1977/8 was the result. If they kept the same "poundage", this would lead to a 100% increase in revenue, but so large an increase was unneces- sary and politically unacceptable. They had tentatively decided on about a 30% increase in revenue; and
(b) there would be an increase in personal allowances designed to remove from the ambit of taxation a whole series of accounts which were too small to be worth while taxing. In a sense this pushed the tax burden one stage further up.
These measures, at constant tax rates, would ensure the funding of the programme, allowing for the deficit.
3. Lord Goronwy-Roberts said that he particularly wanted a picture of the Governor's thoughts on the next budget. It would be both necessary and useful for him to be given as much information as possible as far ahead as possible, so that he could comment from both an economic and political viewpoint. He had a number of questions; the first was on the 20% limit to which he had already referred: the second was on the Government's intention to return to a balanced budget by 1978 (with which he had no quarrel); the third concerned the Financial Secretary's statement that that he would not use Hong Kong's fiscal system to pursue social ends. Lord Goronwy-Roberts understood, however, that
Mr Haddon-Cave's statements to this effect were not hard and fast rules. Sir M MacLehose said that the effect of the budget was wholly social. Mr Haddon-Cave would not of course say a thing of this sort in these terms again. Everybody in Hong Kong knew that the effect of the budget had been to take from the haves and give to the have nots. Mr Haddon-Cave said that he had not used the language attributed to him. He had made it very clear that his dictum was not a hard and fast rule but, in the very vulnerable situation in which Hong Kong found itself, they needed trip wires or guide lines to ensure that their financial policy did not go wrong. The precise percentage 20, 21, 22 - was not very important. Lord Goronwy-Roberts asked if the HK$8,600 million represented a real increase, and if it was at 1976 prices. Sir M MacLehose said that the answer to both points was in the affirmative but that he must reserve his position on the final figure in case it was not reached.
CONFIDENTIAL