TNAG-0480-FCO40-545-Strength-of-garrison-in-Hong-Kong-1974 — Page 39

SECRET

You asked me to devise a method of dealing with inflation in the context of the Defence Review.

2.

I assume that an agreement on cost- sharing will be reached for the period 1976-80: an agreement which will include:

3.

(i)

(ii)

commitments by the UK and HK Governments to spend x and y million (pounds or HK dollars) respectively at the price and pay levels of, say, September 1975; and

an agreement by the Hong Kong Government to increase its contribution in line with increases in costs from the base date, according to some defined formula.

From Hong Kong's point of view, any such formula should observe the following rules:

(i) be as simple as possible to calculate;

(ii) be as clear as possible (i.e. not to offer

scope for year-by-year interpretation and hence negotiation);

4.

(iii) be based, as far as possible, on actual and

ascertainable costs and not on notional costs;

(iv)

(v)

be related to published and up-to-date statistics not subject to substantial revision;

not be related to actual, year-by-year costs. The latter could involve argument over justification of individual items and standards.

In order to consider the various inflationary factors operating, it is necessary to split the cost of the garrison into the following components:

(a)

pay, whose level is determined by reference to UK wage levels;

(b) pay (including local allowances), whose level

is determined by reference to Hong Kong wage levels;

(c) materials, equipment, etc., bought in the UK;

(d) materials, equipment, etc., bought locally;

(e) pay (e.g. that of the Gurkhas) determined by

factors other than YK and Hong Kong wage levels;