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3. Finance Department and the Treasury have recently evolved certain principles governing the allocation of expenditure in Treasury controlled Colonies as between revenue and C.D. & W. funds. These principles have been drawn up with specific reference to the West Indian Colonies, and the question of their application to Hong Kong still remains to be considered. The Treasury have, nevertheless, been pressing recently for the Hong Kong Development Secretariat to be charged either in whole or in part to C.D. & W. funds, in accordance with these principles. I think it most probable therefore that the Treasury will again press for some of the expenditure items in the present estimates to be charged not to revenue but to C.D. & W. funds: I have in mind especially the Development Secretariat (see paragraph 19) and some at least of the increase on the Educational Vote (see paragraph 21), and possibly even those items included in the loan schedule which, according to the opening sentence of paragraph 29, are stated to be in the nature of development rather than rehabilitation work. We shall have to consider very carefully whether the general principles evolved by Finance Department in consultation with the Treasury are suitable to the circumstances of Hong Kong; and to forestall any attempt by the Treasury to hasten us into a decision on this question in relation to the estimates,
I think that in asking the Treasury to approve the estimates we should take the line that the question of the general principle governing the allocation of expenditure as between revenue and C.D. & W. funds still remains to be considered in relation to Hong Kong, but that we do not wish to hold up approval of the estimates whilst this question is being sorted out, and therefore propose to approve the estimates on the understanding that our approval would be without prejudice to the ultimate decision on this particular question.
4. As regards the token votes for the Municipal Council and the additional provision that will be required to meet the Salaries Commission's recommendations, I do not think that it is really necessary to withhold approval of these two items. I think it would be sufficient if we were simply to approve these two items on the understanding that the votes will not be taken up letou until the expenditure actually becomes necessary.
5. As regards the indeterminate liabilities referred to in paragraphs 31 and 35 of No.5 (e.g. Volunteer pensions and demobilisation benefits, repatriation passages, relief payments), the position is that in our despatch to Hong Kong at No.7, we have asked for an appreciation of Hong Kong's liabilities and its financial position over the next 5 years including these and other possible liabilities in the light of which we propose to consider further both (a) the incidence of these liabilities and (b) the possibility of an outright grant to Hong Kong on the Malta precedent. We have, however, made an exception in regard to repatriation passages, and in our letters to the Treasury at No. 34 on 55081/18/46 and No.16 on 55081/18/47 we have asked the Treasury
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