CONFIDENTIAL
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towns, 14% for roads, 9% for water development and 24% for other
public works (there is no explanation covering the remaining 16%).
Mr Haddon-Cave estimates that revenue to meet this capital
expenditure will be HK$18,000 million, ie HK$7,000 million less
than the estimated cost. Over the next three years the defécit
is estimated at HK$1,960 million. Mr Haddon-Cave announced a
comprehensive study to look into such questions as to whether such
expenditure will lead to inflationary pressures and diversion of
essential resources away from export orientated manufacturing
industries. He also indicated various means by which the extra
money could be found. These included raising fees and charges,
water charges, general rates, the ambit of profits tax and finally
to raise the standard rate of income tax by "as much as 21%" to
172%.
6. In a covering telegram (number 257) the Governor has suggested
that the presentation of these large figures of capital
expenditure and the gap between them and available revenue may
cause a shock and shake confidence in the soundness of Hong Kong's
economy or of her determination to see the social programmes
through. In view of the importance in respect of attracting
overseas investment, of world confidence in Hong Kong's stability
there are grounds for the Governor's disquiet. It also, I think,
reflects the ever present resistance in the Hong Kong Government's
Finance Branch to "social" expenditure. Mr Haddon-Cave would
prefer to run fiscal policy on Hong Kong's traditional lines
without having to take account of politically and socially
necessary expenditure of the magnitude implied in the Governor's
programme. This telegram probably reflects rear-guard action by the
CONFIDENTIAL
/Financial Secretary
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