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railways and similar productive undertakings. The exemption is not an absolute one but the principle is recognized. The rule is that the charges for working expenses and maintenance, and for the service of the loan, are deducted from the gross receipts and the military contribution percentage is struck only on the resultant net receipts, if any. I suppose that one ground of this exemption is that the construction of, e.g., a railway, increases the earning capacity of the Colony, in a particular way, and that accordingly it enables an increased contribution to be paid to His Majesty's Govern- ment. If harbour works were such that they produced a revenue in excess of working expenses, maintenance, and loan service, the case would be fully met by the existing exemption; but it is quite possible that harbour works might be practically unpro- ductive of revenue directly, and the revenue from water does not even approach the relative outgoings. Yet such works undoubtedly tend to increase the general earning power of the Colony and thus lead to an increased military contribution. If such works were not constructed, or had for financial reasons to be delayed, the develop- ment of the Colony would be checked and the general revenue would suffer.
8. One example of a possible future dispute has been given. It is obviously impossible to foresee what differences of opinion on the incidence of the contribution may emerge hereafter, but the past history of the subject scarcely encourages the hope that all sources of friction have been smoothed over. Twenty-five years have not sufficed for this task.
9. In view of these frequent discussions, of which I have given a few examples, it seems highly desirable to endeavour to find some system of assessment which will be clear and definite. If such a system can be found, and if, while eliminating discussion and difference of opinion, it at the same times clears away some of the existing anomalies of, and objections to, the present system, without depriving His Majesty's Government of the assistance that may reasonably be expected from the Colonial Government on the basis of past contributions, the adoption of the new system would seem to be a foregone conclusion.
10. One great objection to the present system is its uncertainty. It is impossible for either the Colonial Government or the Military Authorities to estimate at the begin- ning of the year with any degree of certainty what the amount of the contribution for that year will ultimately be. The Secretary of State's despatch of the 24th October, 1900, C.O.D. No 337,* shows that one of the objects of the present system was to introduce greater certainty in this respect, but it has largely failed in that purpose, as it has also failed in its other aim, which was to close a constant source of dispute and to avoid the serious delays which had taken place under the former system owing to discussions as to the incidence of the contribution.
11. An anomaly of the present system is that in some cases the Colony pays military contribution on revenue which it collects for other administrations. One instance of this is postage. An example will illustrate this. The minimum rate of postage for a parcel from Hong Kong to the United Kingdom is 90 cents. The military contribution paid on this is 18 cents 70 cents of the 90 cents, however, has to be credited to the United Kingdom, Hong Kong retaining only 20 cents. The net result, therefore, is that Hong Kong receives a net revenue of 2 cents and the military con- tribution is nine times the amount.
12. Another anomaly is that, if this Government undertakes the maintenance of a service outside its territory, the cost of which is paid by a foreign administration, the only way in which the Colony could avoid loss would be to add to that cost so paid a sufficient amount to cover the military contribution payable. This would be inde- fensible in principle because the foreign administration would then in effect be required to contribute to the upkeep of His Majesty's Forces. An instance of this is the Gap Rock lighthouse.
13. The instances given in paragraphs 10 to 12 above are merely auxiliary to the main point of this despatch and are mentioned only as illustrations of incidental advan- tages which would follow the adoption of the system of assessment which I now propose. 14. My proposal is that the military contribution for the whole of any given year should be a certain percentage of the annual valuation made during the previous year under the Rating Ordinance, No. 6 of 1901. As this valuation extends to the whole of the island of Hong Kong, Kowloon, and New Kowloon, it covers all the most important districts, and it thus furnishes an index of the prosperity and expansion of the Colony. The obvious advantages of this system would be that the military con- tribution would increase with the prosperity of the Colony, that its amount would be known beforehand with exactness for a whole year at a time, and above all, that the
* No. 20764/00.
present constant discussion on points of detail would be avoided. A print of the Rating Ordinance* is enclosed for convenience of reference. This proposal would of course be subject to the proviso, which at present exists, that the military contribution for any given year should not exceed the cost of the garrison for that year.
15. The question of the percentage to be taken requires some consideration. I enclose a tablet which may be of assistance in coming to a conclusion on this matter. The aim which I have set before me is to arrive at a percentage which will be fair alike to the Colony and to His Majesty's Government.
16. As is so frequently the case with statistics, the annual valuation figures require supplementary explanation. The main point to be noted is that since 1921 the valuation has been artificially depressed by the operation of the various Rents (Restriction) Ordinances, and it will at once increase when the rent restriction legislation ceases to operate. The present intention is to allow this legislation to expire on the 30th June, 1926. It is difficult to say what the increase in the annual valuation will be, but a conservative estimate would be an increase of 10 per cent. This explains the appearance of an extra set of figures for the years 1922 to 1925 in the enclosed table.
17. A further point to bear in mind is that from 1921 to 1925 the demand for houses was much in excess of the supply, and that the annual valuations for 1925-1926 and 1926-1927, though still depressed by the Rents Ordinance, indicate much more nearly the normal demand up to date.
18. Another possible source of error is the fact that the years 1923, 1924, and 1925 were abnormally high gross-receipt years, so that an average based on those years, or on a period of which those years formed a substantial part, would be a mis- leading average. The chief causes for the abnormally high revenue in the years in question were exceptional trade prosperity, a land boom, and high yield of estate duties and opium revenue. Opium revenue is now rapidly decreasing and may ulti- mately disappear altogether.
19. It may seem strange that the military contribution figures for 1925 and 1926 are so high in view of the fact that 1925 included six months of boycott and that there have already been five months of boycott in 1926. The explanation is simple. Apart from adjustments in respect of the previous year, the military contribution shown in the enclosed table for any given year represents the contribution for that year as calculated on the estimated revenue. An addition or deduction is made in each year according as the actual revenue for the previous year was more or less than the esti- mated revenue for that year. This explains why the figure for 1925 is high in spite of the fall in revenue during the latter half of that year. This fall in revenue during the latter half of 1925 might have been expected to show itself in the 1926 figures by reason of the deduction made on account of the revenue for 1925 having fallen below the estimate. As it happened, the fall in other heads of revenue was nearly balanced by a very exceptional yield in death duties, a purely fortuitous cause. The figures for 1926 are, as explained above, based on the estimated revenue for that year, and in framing the estimate of revenue for 1926 Sir Edward Stubbs assumed, as stated in his budget speech, that during at least the greater part of the year conditions would be normal (1925 Hansard, page 72). This expectation has not been fulfilled. It has been esti- inated that the military contribution for the year 1927, if calculated on the present basis, and allowing for an adjustment in respect of the year 1926, would only be about $3,600,000
20. The average of the military contribution, as shown in the enclosed table, for the eight years since the Armistice is $3,566,796. If, as is estimated, the annual valuation goes up 10 per cent. next year, 12 per cent. on that annual valuation would amount to $3,695,767. I have, therefore, come to the conclusion that 12 per cent. would be a fair percentage to take. It would not be ungenerous to His Majesty's Government, as it would probably produce an amount greater than the average of the military contribution for the last eight years, a period which includes three years of unusually high gross receipts. Indeed, it is only on account of my anxiety to get rid of the friction which the present system has always developed that I propose so high
a percentage.
21. It will always be in the mutual interest both of the Colony and of His Majesty's Government that the annual valuation should be as high as possible. It is true that. speaking generally, the rates are at present only 13 per cent., so that if my proposal be adopted the Colonial Government will be financially interested in only 1 per cent. of the revenue from rates, but it is probable that the rate will have to be increased before
* Not reprinted.
† Not printed.
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