TNAG-0569-FCO40-702-Planning-paper-on-Hong-Kong-1976 — Page 33

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CONFIDENTIAL

12. In all, an additional HK$2100 million at 1976 prices would be spent over the period 1978/79 to 1979/80. Surely this would be highly inflationary. Would not the export sector on which Hong Kong is dependent be bound to suffer?

The increase in public expenditure would not be financed by

borrowing from the local banks but by increased revenue (speci-

fic proposals for raising the HK$1800 million falling on the General Revenue Account are described in questions 6, 8 and 9). There would thus be no question of 'printing money'. This appears to be recognised in Hong Kong (see aparagraph 31 of the Financial Secretary's winding-up speech in the Budget debate). Admittedly,

the increased expenditure even when financed by higher taxation could lead to undue pressure on resources, particularly labour,

thereby bidding up wages and other costs and reducing export

competitiveness. But this would depend on whether resources

were already fully utilised and on precisely how the HK$2100 millim was to be spent. The Budget papers (for example paragraph 37 of

the Budget speech, paragraph 82 of the Economic Background and paragraph 34 of the winding-up speech) suggest that the economy

could be working at less than full employment for some time to

come, and that there may not be a capacity constraint in the

construction industry. Furthermore, the bulk of the HK$2100

million could in any case be in the form of transfer payments (for example, social welfare benefits) which would involve no

diversion of resources from exports at all.

CONFIDENTIAL