6.
CONFIDENTIAL
In assessing Hong Kong's ability to bear the increased defence contribution we propose, future prospects are more important than the immediate past. While substantial recovery must await the emergence of the world economy from the current recession - and the timing of this is uncertain - there have recently been signs of some improvement in trading prospects. Exports are now moving up back to the 1974 levels and may surpass them in the fourth quarter this year.
7.
In their budget projections, the Hong Kong Government assumed for purposes of budgetary planning that the growth of GDP would be 5% in 1976 and that thereafter a rate of 7% would be attained. These
assumptions may now be somewhat over-optimistic. Nevertheless, the Hong Kong economy seems well-placed to take advantage of the upturn when it occurs. There is plenty of slack in the economy, inflation is down to around 5% and Hong Kong's exports should maintain a competitive edge abroad. Thus Hong Kong should be able to resume reasonably rapid growth once the world economy recovers. Certainly her short-term and medium-term prospects are better than the UK's.
8. On the budgetary front, in the course of this year's Budget Speech their Financial Secretary indicated that expenditure reductions equal to about 5% of GDP would have to be made in 1976-77 and
somewhat smaller reductions in the following two years in order to keep the Government's borrowing requirement down to about $500m a year (about 1% of current GDP). Nevertheless the projected expenditure plans for these years (at April 1975 prices) show programmes rising by 7% in 1976-77, by over 11% in 1977-78 and over 10% in 1978-79, and in absolute terms by nearly HK 8500m in 1976-77, and HK 800m in the second two years.
9. Moreover, the expenditure projections referred to above already provide for HK 6205m (£19.5m at the current exchange rate) for a
defence contribution. To reach the full 75% level claimed would therefore require a further increase of only HK $112m an addition of less than 1% to currently projected public expenditures.
Putting
our total claim in the context of the Hong Kong economic situation, the present contribution of HK 110m represents about 11% of Government expenditure. The UK claim for an increase to HK 8317m would still be no more than 41% of total Government expenditures projected for 1976-77 and barely 1% of GDP.
10.
The Hong Kong Government may argue that an increased budget
/deficit
CONFIDENTIAL
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