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inflation and falling money values, the real cost to Hong Kong would be about the same.
8. The third possibility is that Hong Kong might be induced or forced to increase its contribution to cover the gap. The Governor does not believe that this would be possible, at least without a substantial constitutional crisis. In theory, there it on Official majority in Hong Kong's Legislative Council, and Executive Council is only advisory to the Governor. But to force a £30 m. contribution through might very well involve something like a reversion to direct rule. Not only would this put the whole political and constitutional future of Hong Kong at risk, it could also lead to a collapse of economic and social confidence. If this happened, we could be faced at very short notice with unpleasant choices between a rapid deal with China over Hong Kong and subventions on a massive scale to keep the Colony going. For example, if we had to provide each inhabitant of Hong Kong with the sort of emergency aid that is necessary in Gibraltar, it could cost us over £200 m. a year. A further problem which could arise in an acute form as a result of a collapse of confidence in Hong Kong is the approximately two million British nationals in the Colony.
9.
A major purpose of the Governor's visit is to seek a way round these problems. He is likely to stress the difficult budgetary and economic situation facing Hong Kong. The £10 m. gop could be closed, for example by an increase of about 1% in the standard rate of tax in the Colony. But the Governor may well advise that this is impossible, or would lead to an actual decline in revenue, in current circumstances.
10.
On the Governor's advice we have hitherto recommended to Ministers that negotiations with Hong Kong should not be formally completed until about May 1975, after the Hong Kong budget for 1975/76 is out of the way. Since the new agreement would not enter into force until April 1976, this timetable is possible for the UK, though the Treasury have urged that formal negotiations
/should not be
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