TNAG-0544-FCO40-639-Strength-of-garrison-in-Hong-Kong-1975 — Page 11

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likely to arise, at least in the first year of the Agreement.

has

In

This

4. LOA adjustments are not usually made between reviews which normally occur every three years. fact inflation normally increased at about the same rat in the different countries where we have personnel. (It is perhaps worth pointing out that during part of the period covered by the recent LOA review, HK- inflation rates were higher than those in the UK.) MOD accept, however, that thes generaattern applied before the present high rates of inflation in the UK. 5. The next Services pay rise will not take place until April 1976 and as part of HMG's counter inflation policy will be limited to £6 per week. would increase the overall bill for pay and allowances by only about 5% between now and March 1977, and increases in pay rates rather than inflation as a whole are relevant. What will happen beyond the next pay

rise is unclear but curbs on wages are unlikely to be relaxed sufficiently to require MOD to revise the terms of LOA, between the three-yearly reviews, to allow for downward adjustments. This is, however, only informed speculation. If, nonetheless, differential rates continue, MOD suggest we review the situation early in 1977/78 to examine means of reducing the Hong Kong liability. If it would be presentationally helpful, MOD would accept something on these lines in the MOU, but reciprocally i.e. that if Hong Kong inflation rates should rise above those in the UK, ways would be sought

to limit the cost to UK.

6. MOD therefore believe that the only part of garrison costs directly subject to UK inflation is equipment supplied from the UK. MOD representatives on the financial working group suggested applying the Hong Kong manufacturing index to the Dollar equivalent of equipment costs. Whether this would produce a smaller increase is arguable while the value of sterling continues to fall. Your officials agreed to consider

this suggestion. Should you conclude that this is unsatisfactory presentationally, MOD must ask you to suggest some other ideas.

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