TNAG-0446-FCO40-511-Discussions-with-Sir-Murray-MacLehose--Governor-of-Hong-Kong-1975 — Page 83

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be necessary; he hoped to obtain the bulk of economies from recurrent expenditure. The tax increase already envisaged was unprecedented in Hong Kong. Taxability was limited by the need to take account of the peculiar political uncertainties.

It was

necessary to retain and attract sufficient investment to maintain industry and exports and thus employment and revenue. For this it was necessary to maintain a margin of profitability compared to other parts of South-East Asia. The need for such a margin was the greater because of Hong Kong's uncertain political future.

4.

Taxation in Hong Kong was currently divided as follows: direct, 35%; indirect, 23%; and other revenue (including land sales), 42%. Lord Goronwy-Roberts hoped that a fair part of the

increase would fall on direct taxation. Sir Murray MacLehose

indicated that the purpose would be to keep taxation neutral so far as the economy was concerned. The pattern of taxation might change in this direction but it was observed that Hong Kong's direct and indirect taxes already also tended to bear relatively heavily on the rich, whereas the poor were both subsidised and untaxed.

5.

Lord Goronwy-Roberts acknowledged that Hong Kong was unique. It had no indigenous resources and investment had to be

attracted from outside. He appreciated why Sir Murray believed that investors should not be too severely squeezed.

II

6.

Possible Constitutional Changes

In reply to a question from Mr Ennals, who acknowledged that Hong Kong could not proceed to full independence, Sir Murray MacLehose explained why it was also difficult for Hong Kong to progress towards internal self-government. Historically, internal self-government elsewhere had been followed fairly quickly by full independence. However it was presented to the Chinese, any move towards internal self-government might therefore be misinterpreted. Moreover, any elections in Hong Kong would highlight the division between Nationalists and those favouring Peking. A victory for the Nationalists would be an intolerable affront to the Communists, while a Communist victory would also create obvious problems. Chinese Government had made it clear that they wished to negotiate

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