SECRET
5.
As to economic questions, it was agreed that fiscal reform was urgently necessary and that the last budget had been extremely regressive. Our advice to the Secretary of State should be that conservatism a financial policy was not as necessary as Hong Kong officials commonly stated it to be. The main possibilities consisted of an increased direct taxation, and a divergence from the free port policy. The tax basis should be expanded, and public expenditure increased to about 25% of GDP. The question of borrowing, and central government control, should be considered.
6.
Lord Goronwy-Roberts made the point that we must restrict the enlargement of the tax base to the comparatively well off, and not allow the authorities in Hong Kong to suggest that everyone should contribute to greater taxation.
7. It was agreed that if excessively conservative policy in Hong Kong were to be avoided in future, it might well be necessary to change some of the senior appointments there. This should be taken into account in the briefs for the Secretary of State's visit.
8. Finally, Lord Goronwy-Roberts alluded to the need to maintain the UK/Hong Kong link in good health and not to provoke any kind of UDI Movement in Hong Kong from any quarter.
16 March 1976
copies to: Mr Male Economists Dept Mr Bentley FED Mr Masefield
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A C Galsworthy
Private Secretary to Lord Goronwy-Roberts
Mr O'Keeffe
Overseas Labour Adviser
Mr McNally
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