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concern here that the Hong Kong Government were slipping in implementing the measures agreed. We are encouraged by Philip's statement that the reserves will be drawn on if there is a need
for increased resources to finance programmes.
4. Whilst accepting the fact that the world trade outlook for 1978 and later is uncertain, we are concerned at the implication in the Budget Speech that a mini-recession automatically implies cut-backs in public expenditure. We understand that the new Secretary of State has a stance almost identical with his predecessor on the maintenance of public expenditure levels. In following the policy of reducing public expenditure during the period of recession, the Hong Kong Government, for example, under-estimated in 1975/6 the strength of the economy, a fact which is very clearly brought out in Chart 2 of the Graphic Guide to the 1977/78 Budget.
5. There is concern that the Budget Speech hardly seems to glance at all in the direction of Hong Kong's basic economic and social objectives and the extent to which the Budget is an instrument that can be used to secure them. We know that Philip's present policy is that the Budget should be neutral in economic and monetary terms. However, one would expect in the section on strategy some recognition and elaboration of the economic and social policies of the administration as already announced by you last October, together with their economic and fiscal implica- tions expressed in terms of economic growth, effects on incomes and prices and the Balance of Payments, etc.
6. Despite what Lord Goronwy-Roberts said (paragraph 6(c) of the record of his meeting with you on 9 December), Philip once In his again went back to public dependence on "guide lines". latest Speech it seems that he requires that every variable be in
You some pre-determined relationship to every other variable. will remember that Lord Goronwy-Roberts said that "the public expression of firm criteria for fiscal policy is counter-productive" and ther "there was to be no public setting down of certain principles or constraints". On the other hand, some at least of
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