TNAG-0309-FCO40-345-Contributions-of-Hong-Kong-for-costs-of-maintaining-military-1971 — Page 94

RC VED IN

REGISTRY No.51

Treasury Chambers

106

2771

Great George Street, London S.W.1

Telephone: 01-930 1234, ext.

555

HKKIG

2DM 415/01

Our reference:

SECRET

28 June 1971

HKK 10/9

Your reference:

E O Laird Esq CMG MBE

Hong Kong Department

Foreign and Commonwealth Office

London SW 1

Dear Laird.

HONG KONG DEFENCE CONTRIBUTION

Ma

LAST

REF.

10X

REXI

You asked for my comments on the point covered in paragraph 2 of your letter of 24 June to Thorp ie the percentage figure for "UK price increases" over 5 years above which the 7-year scheme proposed by the Governor would be open to review at the end of the fifth year.

2 I agree that 7% is too low a figure for this purpose but I also think 50% is too high. I would not accept that in the Governor's scheme the increase from £2m to £3m in the cash contribution is intended to reflect solely the costs of inflation; I should like to think (ie assuming inflation over the 5 years can be kept below 50%) that it allows for a real increase in the proportion of the recurrent costs of the garrison (other than works costs) to which Hong Kong contributes. (If one does relate the increase from £2m to £3m to inflation what about calculating the inflation since the first year that £1.5m was used would not this give a starting figure far higher than £2m?)

3

Under the Governor's scheme we have reached the position that, at the £7m level, Hong Kong contributes less than 10% of the annual recurrent costs excluding works; (these were given as £21.85m in the Annex to the paper prepared for Ministers). In the last year of the 1967-71 agreement the corresponding proportion was more like 20% (taking the cash component as £3.9m and the equivalent garrison cost at 1970 prices as being around £20m). In our opinion we should be trying to work the cash figure up again as time goes on. Also I see no reason why the figure need be the same as that appertaining to the capital works programme. The works figure has some regard to the position of the construction industry in Hong Kong and it is not related to any particular timescale.

4 The percentage increase to be chosen could be related to the rise in the cost of living in the UK, but I imagine you would prefer to avoid this since it would point directly at UK inflation which you fear the Unofficials might find objectionable. Another possibility is to make the criterion the pay and price increases which are incurred in the defence field alone. Indices for these are constructed year by year and the figures can be demonstrated in successive Defence White Papers. But this index does of course cover all types of defence expenditure including activities not reflected in the Hong Kong garrison. A third basis could be the increase in costs of military pay and Hong Kong local overseas allowance alone.

5

Subject to MOD's views I would prefer the last of these choices.

1