N
CODE 18-77
SS 10/76
HKK.100/2
SECRET
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HONG KONG : 1978 BUDGET N
Cowe'> 1. My initial reaction to Hong Kong telegram no 119 of 30 January (and prior to receipt of Haddon-Cave's note) is that in general there is little to quarrel with on major issues. Expenditure should increase by about 19% in real terms and provided this is achieved we should have no serious complaints.
2. However, the forecast budget deficit of HK$320m should be treated with some caution. In the past seven years Hong Kong has consistently underestimated revenue, but by widely ranging amounts (from 0.5% of total predicted revenue in 1974/75 to 31.4% in 1972/73). Last year they seem to have underpredicted revenue by about 8.2% of the prediction, and averaged over the last three years the underprediction is 7%. So their revenue in 1978/79 could well be HK$10,620*m(giving a budget surplus of HK$370m rather than a deficit of HK$320m).
3.
But this assumes actual expenditure equals planned expenditure and although they have had years in the past (in the early 1970s) when actual was greater than planned, in the last three years they seem to have been underspending by something of the order of 10% of planned expenditure. This year (1977/78) they appear to be underspending by more than a billion Hong Kong dollars. So even if they succeed in meeting the planned target of HK$10,250m, growth from what was planned to occur in 1977/78 is only 8.4% in money terms or 1.4% in real terms. The amazing growth figure of 26% will only occur because they underspent this year by nearly 14% (according to the figures in telno 119), ie, government expenditure has been deferred from this year to next. As the attached table shows growth in government expenditure over the two years 1976/77 to 1978/79 will, if next year's plans are met, have resulted in an average growth rate of 15.3% pa. Given that (prior to receipt of any estimates of GDP) the economy seems to have grown by about 15% this year (8% in real terms) and should grow by as much next year (if the trend real growth rate is kept up and allowing 7% pa, for inflation which is the current estimate for world inflation) we can see that government expenditure is just about keeping its share of GDP.
Any hopes that the government is increasing its share in national expenditure must rest either on declining world inflation or a deepening world recession.
3 February 1978
Mark Hall
Mark Hull
Economists Department
* [Footnote]: HK$ 9930m+ 7%.
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