TNAG-0542-FCO40-637-Strength-of-garrison-in-Hong-Kong-1975 — Page 19

CONFIDENTIAL

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(b)

There seems to be no overwhelming economic need

for Hong Kong to retain its special free port status. Even if import duties on raw materials and semi-manufactures are unacceptable in an export-oriented economy, they could still be imposed on a range of consumer goods without necessarily affecting the supply of effort or generating demands for higher wages (paragraph 34), especially as the pressure of demand for labour is now much less intense than a few years ago and as wages re determined largely by supply and (overseas) demand (paragraph 9).

(c) The likelihood of widespread and large scale bax evasion if the basic rate of Profits and Salaries Tax

were raised may be fairly remote, given that the scale

of possible increases in the next few years is likely to be modest and given also that the need for private savings con! E dependent on the nature of the government's increased expenditure, be reduced (paragraph 36).

(d) Athough the Government argues (paragraph 33) that the scope for widening the tax base is severely limited il not have yet fully explored all the possibilities (eg,în taxing gambling profits).

(e) At present, as much as 30% of the government's capital expenditure is financed by the surplus on recurrent account (paragraph 36); there seems no economic reason why the government should not resort to long-term loan finance for much of its expenditure on social projects (rather than simply those which are directly self-liquidativ (paragraph 34), and if the funds were raised externally, il would be possible, in the short term, to avoid burdening the balance of payments (paragraphs 34 and 36).

/(f)

CONFIDENTIAL