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Mr JAB Stewart
HEK 100/2
GOTRY
SECRET
INDEX
T.
(HKGD)
Jees
No lat
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HONG KONG: 1978 BUDGET
1. You asked for my initial reaction to the Governor's telegram no 119 of 30 January 1978; these are provisional prior to receipt of Haddon-Cave's note.
2. In general terms there does not appear to be anything to seriously quarrel with in this year's proposals as outlined in TUR and the planned increase in public expenditure (+26% in money terms, +19% in real terms) is to be welcomed on the assumption it is achieved. In particular the proposals to raise both corporation profits tax by 1% to 17% and luxury car registration fees deserve approval, though the increase in water rates might well hit the poorer members of the community hard.
3. One word of warning might be sounded here regarding the forecast Budgetary deficit for 1978/9 of HK$ million 320; this should be treated with some caution. Hong Kong have persistently underestimated their Government revenue by an average of over
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7% pa over the past three years and overestimated Government expenditure by 10% pa over the same period. An average repetition in 1978/9 would lead to a surplus of HK$ million 1400 rather than a deficit of HK$ million 320, calculated as follows:
Adjustment for past trend error
1978/9 HK$m
Budget Forecast
Total Expenditure
10250
Total Revenue
9930
Surplus +/deficit-
-320
9220 (-10%)
10620 (+7%)
+1400
4. This would tend to confirm that no financial constraint exists even now for a further moderate increase in public expenditure; OLA (Mr Hurst) has in the past suggested gaps in the labour field (factory and labour inspectorate) and in education (high pupil/teacher ratio) which could benefit from additional expenditure.
5. I would appreciate the opportunity of commenting further once Haddon-Cave's notes is to hand.
3 February 1978
tören Sunk
Adrian Smith
Senior Economic Adviser
SECRET