CONFIDENTIAL
XCCI(92)17
our measures to increase the supply of land and labour, which are the principal supply constraints. It called for a continued flexible and liberal approach for the importation of labour, particularly with regard to inflows of skilled labour.
Linked exchange rate system
6
The Board agreed that the linked exchange rate system had buttressed financial confidence and served Hong Kong well since its adoption in 1983. It also noted that with sensitive political changes on the horizon and in view of the need for continued external confidence in the Hong Kong currency, the system was of critical importance to the future stability and long-term prosperity of the Hong Kong economy. The Board noted, at the same time, that the system constrained the use of monetary policy to contain inflation and that real interest rates had now become substantially negative, thereby aggravating the tendency toward an over-investment of resources in the property sector as well as having potentially undesirable consequences in distribution. While most Directors supported our view to maintain the system, a few Directors saw merit in a change in the exchange rate and a rise in interest rates to reduce inflationary pressures.
Fiscal Policy
7
The Board expressed concern that the construction of the airport core projects was likely to give rise to fiscal deficits which would in turn impart a large expansionary impetus to aggregate demand. It believed that a more restrictive fiscal policy would be needed to bring down inflation and supported our efforts to rationalize spending priorities. Some support was expressed for the staff's suggestion of a review of the tax system to broaden the tax base but it was noted that significant tax increases in Hong Kong could negatively affect confidence and economic activity.
Financial sector
8
The Board welcomed our examination of further steps to strengthen financial confidence and stability. While some Directors encouraged us to consider deposit insurance, others encouraged us to take into account the moral hazard risks associated with deposit insurance.
Executive Council