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less; the Governor of the Colony proposes to substitute, for the revenue limit to the amount of the Colony's military contribution, a 12 per cent. levy on the rateable value. At the same time particulars have been received of various claims for the modification of the present system which the Governor would propose to put forward if the new proposal were not accepted.
2. The Council have had their provisional comments on these questions embodied in a memorandum, a copy of which is enclosed herewith. The position as it presents itself to the Council and as set forth in the memorandum may be summarised as follows:-
(a) The existing system of assessing Colonial military contributions is sub- stantially that proposed by the Eastern Colonies themselves and adopted in 1895 on the recommendations of the Haliburton Committee. It has not been shown that it fails to answer the original purpose of graduating the Colonies' payments towards their general defence as part of the Empire according to their capacity to pay. It has worked for 35 years, and Lord Peel's Committee, which recently reviewed Colonial military contri- butions, suggested no alternative system. (Paragraph 1.)
(b) The main criticism made against the existing system by the Governor of Hong Kong is that it offers scope for points of controversy; few such points, however, appear to have raised any difficulty between Hong Kong and the War Office for many years past. Only in the comparatively minor matter of making estimating easier does it appear that the proposed system would be an improvement on the present so far as the War Office is con- cerned. (Paragraph 2-5.)
3.
(c) The Ordinance No. 6 of 1901 which governs the valuation of Hong Kong leaves open for decision from time to time by the Colonial Authorities both the area of valuation and the minimum of rateability. Further the new proposal would deprive the Colonial Authorities of almost all financial interest in maintaining the rates. (Paragraphs 6-7.)
(d) The comparison of the amounts of contribution under the present system and those which the new system would have yielded for past years suffers from the disturbing factors of the war and rent restrictions, but it is not clear that a levy on ratcable value would be as good a criterion of Colony's capacity to pay as is a percentage of gross revenue.
Valuation by an appointed assessor introduces elements of individual judgment. (Paragraphs 8-9.)
(e) The claims for the amendment of the present system, reserved by the Governor in the event of the new proposal being rejected, are not fully stated, but they comprise claims for the assessment of net instead of gross receipts and for exemption from assessment of certain revenues bitherto assessed in gross. These claims, which are far-reaching in their financial effects, raise questions of the treatment of municipal revenues which were fully considered and decided against the Colony in 1895. More particularly the claims ignore the principle on which the War Office has always taken its stand, that modifications of the scope of the revenue assessable under the 1895 settlement can only be made if they are accompanied by a revision of the percentage limit on gross revenue. If, however, any individual clains for assessment of net instead of gross receipts are based on sound principles, the War Office is prepared to examine thein. (Paragraphs 10-22.) (f) The claim for concessions on hospital and education revenues calls for notice owing to the departure from the 1895 settlement made in 1909 in this matter by the Straits Settlements under protest from the War Office and the Treasury. (Paragraphs 23-24.)
(g) It does not appear that Army Funds are likely to gain from the proposed change in system; on the other hand there seems some reason to apprehend that in future years the yield from the new system might be smaller than that under the present system of 20 per cent. of revenue. (Paragraphs 25 and 26.)
The Army Council would not necessarily resist any proposal for the substitu- tion of an entirely new system for the 1895 settlement if it were clear that the new system would avoid any important disadvantages without sacrificing the advan- tages of the old system and that Army Funds would not suffer in consequence of the change. The Council are not at present satisfied that these conditions are fulfilled by the proposed levy on rateable value. In any case the issues raised by the Colony's
reserved claims under the existing system are so direct a challenge to the principles of the 1895 settlement that the Army Council are unable to agree that they constitute
a genuine alternative to the proposed change of system.
4. I am to submit these provisional comments for Their Lordship's consideration in the first instance. Meanwhile, copies of this letter and enclosure have not been sent to the Colonial Office.
The Secretary,
The Treasury.
I am, &c.,
H. J. CREEDY.
HONG KONG'S MILITARY CONTRIBUTION. Memorandum regarding the Method of Assessment.
The Present Situation.
1. It is an accepted principle that a Colony should pay in proportion to its means towards the general defence afforded it as part of the Empire. Urigmally, tiong Kong paid a fixed contribution in sterling, it was calculated on an estimate of the amount of surplus revenue that the Colony might pay, having regard to the cost of its garrison, without undue strain on its own capital requirements (to which surpluses were customarily devoted).* The disadvantages to the Colony of this procedure were ᏓᎳᏅ ----
(i) The contribution being fixed, it had to be paid without regard to fluctuations
in the prosperity of the Colony.
(ii) The contributions being fixed in sterling, the Colony had to meet losses (and they were considerable) caused by the depreciation of silver currency. The proposal to overcome these dificulties by levying a percentage on local revenue assessed in local currency was discussed by the Haliburton Committee with reference to Hong Kong in 1894 (Section 10 of their Report), but not until the proposal was also put forward by the Straits Settlements did they seriously examine it (Section XI, 1895), and it was then adopted as a principle generally applicable. This principle has continued ever since, and it has not been essentially modified by various minor questions about the classes of revenue on which the percentage should be levied.
At present,
the military contribution of Hong Kong is based, in accordance with the above principles, on the cost of the garrison or 20 per cent. of the assessable revenue,† whichever is less. The Colony has almost invariably paid on the latter basis.. The Peel Committee (1927) did not recommend any change.
2.
The New Proposal.
A new proposal has been put forward by the Governor of Hong Kong in despatches dated 24th June, 1926 (No. 298), and 28th July, 1928 (two), and supported by the Colonial Office, in letter of 12th October, 1928, to the effect that the Colony should pay 12 per cent. of the annual valuation made for rateable purposes during the year previous to that in which the contribution is to be paid. In form, this system would supersede that introduced in 1894-95 at the instance of the Colonies themselves, but that would not necessarily be a final objection to it if it were shown that it would yield the required amounts.
3.
The main grounds on which the new proposal is put forward are three. In the first place, the Colony argues that if the new proposal were carried out it would then be possible to budget exactly for the military contribution, since the amount of contribution due in any particular year would be known before the Estimates of that year were prepared. It might be added that this knowledge would also be of some assistance to the War Office, since, under the proposed system, the War Office would know before each year's Estimates were prepared, what the exact dollar contribution from Hong Kong would be. As things are, both the Colony and the War Office have to work on Estimates, but the outcome of the revenue is always different and accounting adjustments have to be made every year. The new proposal would simplify accounting and, if it were adopted, the only element of uncertainty then affecting the War Office would be the rates of exchange at which the monthly payments of the con- tribution would be adjusted.
*Haliburton Committee Report, Section 4, Appendix B, duted 1888.
See paragraph 10.
Actually the Colony's first despatch of 28th July, 1928, proposed 12 per cent. of rateable value the second despatch suggested an additional per cent. if by that means a permanent settlement could be obtained." The Colonial Office's letter of 12th October, 1928, formally offered 123 per cent.
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