SECRET
quite!!
Manpower is the major element in the recurrent costs. Also, if one were to bring Local Overseas Allowance into the calculation as well, local inflation could be reflected also. There might be a complication in that a significant proportion of the personnel in Hong Kong are Gurkhas whose pay increases may move different ly from increases for UK Servicemen. But no doubt a formula weighted appropriately to take account of Gurkhas could be devised - eg if Gurkhas constitute 30% of the garrison, the increases in pay and LOA could be calculated on the basis of 7: 3 UK: Gurkha weighting. For the actual figure to be used (whichever basis is adopted) I would suggest 5% a year and I would not mind whether this was expressed as 25% over 5 years (a suitably round figure) or compounded to 27%. Alternatively, following the argumentation in the second sentence of your second paragraph - ie to make a calculation which allows for 6 years I would not object to a 6-year figure of 33%. I have no clearly defensible basis for this suggestion. One cannot be expected to forecast inflation or wage increases several years ahead;
and, insofar as it could, the last thing a Government would do would be to make such forecasts public! But given that it is the Government's policy to reduce the present high rates of inflation (currently well above 5%) the figure I have suggested seems to me a reasonable one to put forward for the purposes we have in mind.
6 I observe that my suggested figure is close to that of 28% which Thorp suggested in the third paragraph of his letter of 22 June might be applied to a 5 year break point in the form of arrangement which starts at £7m and rises by £1⁄21⁄2m a year. However, subject again to MOD's views, for our part we would not wish to insist on a "UK inflation review provision" in a 7-year scheme of this nature.
As you know we would prefer to see any scheme stop at 5 years but, if this particular option were endorsed by Ministers and pursued on a 7-year basis, we should be quite content with the continued progression of £m steps without review.
7
I am copying this letter to Thorp and to Smith.
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Yous sucerety.
У
Terence Brack
T J BRACK
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