TNAG-0542-FCO40-637-Strength-of-garrison-in-Hong-Kong-1975 — Page 39

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demand is now likely to be delayed; and thirdly in the wake of the oil crisis, it is unlikely that world demand will increase over the next few years as rapidly as in the past. It is probable that the government is becoming increasing aware of these factors and of the need therefore to revise s growth rate projections downwards. This is of considerable importance because it focusses attention on the fact that (given the reserves are not to be drawn down further and that there is now little scope for improving the efficiency of the revenue collection machinery) v.. govornment is now having to consider either actually raising taxes and not simply, as in the case of the dividend-withholding charge, introducing new forms of taxation, and/or lengthening the time-scale of its borrowing operations and increasing the size of the public debt.

34. However, the government is unlikely to wish to pursue either option. In the case of taxation the argument seems to be that on the one hand, the scope for widening the tax base is limited since it is important to tax only income arising from activities within Hong Kong if enterprises are not to move abroad and also to preserve Hong Kong's free-port status (partly on the ground that indirect taxes would not only distort prices and burden manufacturers with levion that could not be recouped in export proceeds but also lead to a reduction in the supply of effort since they are economically less efficient than direct taxes). On the other hand, it is argued that increases in existing taxes, particularly salaries and profits (corporation) tnx, would eventually lead to demands for higher wages (thereby generating internal inflation), undermine business confidence (thereby leading to an exodus of firms), and encourage widespread tax evasion (an area where it is felt the Chinese could make the French look like amateurs). On the borrowing side, the government appears willing to consider raising loans for projects which are directly self-liquidating, that is, those which generate an identifiable cash flow (such as the Mass Transit Railway or the Lion Rock Tunnel) but otherwise sees medium- to long-term borrowing as likely unduly to strain the balance of payments and/or to involve heavy debt service charges. (The charges on the loans envisaged for 1975/76 are being kept below the interest

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