8.
3.
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If, over the period of the agreement, defence costs rise at the same rates as overall costs in the two economies, application of these formulae would produce a full compensation for inflation: the "real" burden of the Hong Kong garrison would be shared, over the period of the agreement, in the same way as in the base period.
9.
In order to operate the system proposed here, it would be necessary to obtain the split of costs detailed in paragraph 4. I have asked HQBF to provide what they can: they have telegrammed to London asking MOD for details. Once that split is available, it would be a relatively simple matter to use the indices in paragraph 5 to calculate the amount of escalation for each financial year. (The necessary data would become available about four months after the end of each financial year).
10.
A final complication is the UK tax payable on pay of those forces stationed in Hong Kong. The 'support' cost of the garrison here covers, amongst other things, the provision of standard welfare state services to families of defence personnel. For Hong Kong to meet these support costs, as well as the taxes levied in the UK to finance these services, amounts to an element of double counting.
25.11.74
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