TNAG-0522-FCO40-617-Discussions-with-Sir-Murray-MacLehose--Governor-of-Hong-Kong-1975 — Page 123

CONFIDENTIAL

1.

BUDGETARY AND ECONOMIC SITUATION

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1.

Because of the recession in the world economy, the outlook for Hong Kong has changed radically in the past year. The Governor devoted most of his 1974 Annual Review (which he postponed sending to us until after the introduction of the 1975/76 Budget) to discussing its likely social and political effects in the Colony.

2.

The Department's comments on the 1975/76 Budget were submitted on 6 March. It is very disappointing that Hong Kong should be facing such tight constraints, at a time when the Governor is making progress in so many important fields. The Governor is concerned that an over-bold fiscal policy could easily be self-defeating. Nevertheless, the recent Budget marked a considerable change in Hong Kong fiscal policy; and the new Inland Revenue Ordinance Review Committee besides considering the introduction of a more progressive form of income tax will also examine fur ther ways of earning additional revenue. In the meantime, although substantial rephasing of projected expenditure has been unavoidable, the Governor has reaffirmed his commitment to the on-going social programmes as well as to improvement of law and order and to the campaigns against corruption and drug addiction.

3. In political terms, the Governor is more concerned

with the reaction of the population to a lower standard of living, rising unemployment, and fears about the future. It is encouraging that the Chinese Government have not sought to exploit his difficulties. But in the Governor's opinion the situation is fraught with uncertainty and potentially explosive; and the affairs of Hong Kong will require particularly sensitive handling both by the Colonial

Administration and in our own dealings with the Colony during

1975.

Hong Kong and Indian Ocean Department

7 April 1975

CONFIDENTIAL