TNAG-0446-FCO40-511-Discussions-with-Sir-Murray-MacLehose--Governor-of-Hong-Kong-1975 — Page 2

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In 1975 he expects a shortfall of revenue of about £200 million. Half of this will be covered by a review of existing programmes, about £60 million by new taxes (about 11% of present recurrent revenue), and the rest by borrowing. This is by far the largest increase that Hong Kong has ever had to meet in a single year.

6. It is this situation of recession and budgetary stringency which gives him problems in meeting our require- ment for an increased defence contribution. The present position is that the Ministry of Defence have calculated the forces that are needed to maintain security in Hong Kong, and have estimated that these will cost about £40 million a year at 1974 prices. We have said that HMG should not pay more than about a quarter of this, (say £10 million). The Governor agrees that the present Hong Kong contribution of £10 million is much too low, and he believes he could get it doubled to about £20 million. But he does not see how he could achieve a threefold increase in one year, particularly when this coincides with Hong Kong's general financial crisis. There is thus an unbridged gap of about £10 million between the three variables of the cost of the forces, what Hong Kong can contribute, and what we can pay.

7. During his visit, Sir Murray has been discussing the first of these variables with Bill Rodgers and Ministry of Defence officials. But their view is that, unless HMG is to shed some of its constitutional responsibility for the colony, the proposed structure and nature of the garrison will have to remain essentially as now planned. However, the Ministry of Defence have agreed to send a team to Hong Kong in January to go through the proposed costings and any possible alternatives. We have also suggested, and the

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