CONFIDENTIAL # 3
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BUDGET DISCUSSIONS
4.
PAS(ES)D suggested that a more detailed account of these discussions would help any further dialogue that might take place on the budget. It was emphasised to Mr. Smith that no one was asking him to commit the FCO in any way; everyone understood that this was something that could not be done and furthermore would not necessarily be a desirable outcome. But it would help if it Could be established that there was some agreement on technical economic issues between Mr. Smith and economists in Hong Kong. Such an agreement would not be seen as a final commitment to either the Hong Kong Government and in particular the Financial Secretary nor the FCO. Mr. Smith reiterated that at this stage he would not wish to pursue policy aspects.
(a) Monetary Policy
5.
PAS(ES)D said that he had highlighted one section in the budget speech which attempted to clarify previous areas of ambiguity in discussions between London and Hong Kong. In the 1977/78 budget speech it was explained that in an open economy monetary policy was the corollary of exchange rate policy. He asked Mr. Smith whether as an economist he could from a professional viewpoint only state whether this was a view he would support. Mr. Smith said that he was grateful for the clarification and did not think it was a particularly contentious issue. He declined to give his professional opinion because he thought his personal views were irrelevant. He added that his remit was to note the points in the budget speech which PAS(ES)D had drawn his attention to and he would in turn reiterate these points within FCO.
(b) The Role of the Public Sector in the Economy
6.
PAS(ES)D said that he had discussed with Mr. Smith those sections of the budget where there had been an evolution and where further emphasis had been placed concerning the role of the public sector. These sections of the budget speech explained that the ideal aim would be to achieve a steady rate of growth such that on an economic down-swing the public sector would rise relative to the economy as a whole and on the up-swing as a matter of pure logic the public sector would decline relative to the economy as a whole. He explained that he had pointed out the section in the budget where the Financial Secretary had explained that short term unexpected deficits were best met by a call on reserves. Mr. Smith was asked whether these aspects of the budget were in his opinion technically defensible on economic grounds. He explained that he was not in a position to accept or reject anything to do with this issue although he did say that there was an opinion that the guidelines could be self-imposed constraint in Hong Kong.
7.
SMA asked whether it was necessarily true that self-imposed restraints were bad. He suggested that very many organisations, both public and private, operated with self-imposed constraints and it was always recognised as part of good management. Mr. Smith said that the self-imposed constraints, useful as they sometimes were, could at times be in conflict with general policy objectives and as a result, may lead
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