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Mr. Stepat.
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Mr Murray
PS/Lord Goronwy-Roberts
HONG KONG: BUDGET FOR 1977/78
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Following my submission on 17 February concerning the preview of the 1977/78 budget, Lord Goronwy-Roberts sent a message to the Governor of Hong Kong in which he asked for an indication of his thinking about the budgetary strategy and long-term financial planning (FCO telegram no 124 of 18 February).
2. The Governor has responded to Lord Goronwy-Roberts' message in Hong Kong telegrams nos 192 and 193 of 24 February. The first telegram contains a long-term financial planning forecast. It seems broadly acceptable; it provides for a deficit in 1978/9 and 1979/80 and accepts there is some scope for additional social expenditure. In fact, it now seems that the budget for 1977/8 will provide for 39.4% of total expenditure being allocated to social services; this represents an increase of 20% over 1976/7. I am not, however, impressed with the difficulties that the Governor sees. in the way of achieving the total increase in public expenditure which is provided for in the forthcoming budget (paragraph 15 of Hong Kong telegram no. 192). The administrative and physical effort necessary to achieve the increase in capital expenditure ought to be possible. The other difficulty that the Governor brings up is the uncertainty regarding the outlook for world trade in 1978 and, in particular, the effect on Hong Kong of the proposal to renegotiate the Multi-Fibre Arrangement (MFA) which is due to expire at the end of this year. It is generally accepted that the world trade outlook for next year is a little uncertain but it is important that the Hong Kong Government should not continue to adopt an attitude of mind in which mini-recessions automatically imply cut-backs in public expenditure. It seems that this is still the Hong Kong Government's way of looking at things. As regards the future of the MFA, about which the Hong Kong Government have already approached us, Mr Murray is writing to the Governor to let him know that we cannot accept that such restrictions on
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