TNAG-0381-FCO40-427-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 47

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Fiscal Policy

25.

As regards fiscal policy, it is certainly the

Government's intention to persevere with a policy of a

narrow tax base and low rates in order to encourage ›

investment and expansion on the part of local firms,

as an incentive to even greater effort by the work force

and to attract to Hong Kong internationally mobile capital.

26. Yet, in Hong Kong's case, higher tax rates

could have very serious implications for the economy,

quite apart from disincentive effects: for, if public

expenditure were allowed to grow for any length of time

at a significantly faster rate than that of the gross

domestic product, the result could be a competitive

demand for available resources leading to higher internal

costs and prices and balance of payments disequilibrium.

This might just as readily occur even if tax rates were

not raised, but instead the increased expenditure was

financed by borrowing from the private sector. The

Government, therefore, needs to take great care to ensure

that in its natural desire to make further provision for

the ever increasing population it does not jeopardise longer

term growth prospects by diverting resources away from the

private sector on an excessive scale. As it is, with the

existing tax structure and the current and expected future

growth rate of the economy, our view is that public revenue

will be sufficient over the coming years to finance a

quite spectacular increase in public expenditure, even

assuming that the real rate of growth achieved is somewhat

less than 7%.

Over the next decade, some two thirds

/of.....