TNAG-0570-FCO40-703-Planning-paper-on-Hong-Kong-1976 — Page 111

CONFIDENTIAL

Mr Hayes

Mr O'Keeffe (HKIOD K246)

RELIVED IN

REGISTRY NO. 51 10 JUN1976

NACKCO13/548/1

MMF 393/3

69

•

HONG KONG: PUBLIC EXPENDITURE

1. The Question and Answer Brief under cover of Adrian Smith's minute of 27 May refers. I understand Sir Denys Roberts is not entirely happy with the idea of public expenditure increasing as rapidly in 1978/79 and 1979/80 (14%) as is suggested in the reply to Question 5. Presumably, he has doubts as to whether the Civil Service in Hong Kong could cope over such a relatively short period of time, though Hong Kong's past performance suggests otherwise. There is also the point, not as far as I know raised by the Colonial Secretary, that the expenditure proposals in the Brief could (though I am far from convinced) dampen the incentive to invest unless the time. scale is lengthened.

2. In order to accommodate both these points of view, I have re-worked the calculations in the Brief and attach a summary of the principal results. The main conclusion to be drawn is that a scheme of income supplementation on the scale envisaged in Question 14 could be introduced in 1980/81, rather than 1979/80. There would also be a year's postponement (to 1980/81) in increasing existing indirect taxes and introducing the new 'luxuries'tax. Earnings and Profits Tax would still be increased in 1978/79. Public expenditure would rise to 25% of the gross domestic product by 1981/82 instead of 1979/80, with the annual rate of increase, in real terms, over the period 1977/78 to 1981/82 being only 11% (or even less).

9 June 1976

cc Mr Smith o/r

CONFIDENTIAL

A

G H Dart

Economists Department (G71B/G 4502)