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It should, in our view, be possible, within the parameters set by e Hong Kong Government as to the acceptable rate of increase in public expenditure (12-14% per annum which would have the effect of raising the level of public expenditure to about 25% of the GDP) to finance expanded programmes on the lines suggested. Increased public expenditure to this level by 1981/82 would, we calculate, absorb some 37% of the expected increase in domestic product-ie much the same rate as over the last four years.
23. However, it will be necessary to implement a policy of expanding public expenditure with some care. With its uncertain political future, commercial confidence in Hong Kong is both fragile and prone to over- reaction, and influential opinion there has, over many years, been conditioned to regard increases in public expenditure, small by UK standards, as potentially dangerous to the competitiveness of her exports and thus to her economic prosperity. Abrupt fiscal action could thus discourage the retention or attraction of the capital on which employment depends far more directly than the mere figures involved might suggest.
24. While it is constitutionally possible for the Governor with the use of the official majority to impose taxation or introduce legislation, this power has not been used since 1947. Implementation of this policy will therefore require the support of the unofficial members of the Executive and Legislative Councils. There is some
reason to suppose that support for the necessary degree of taxation will be forthcoming as it has been for the substantial social advances in the last few years. As in the past, taxes and charges of all kinds will need to be steadily and unobtrusively increased, in such a way as to lessen opposition.
25. It would clearly be impossible to prescribe detailed fiscal measures to the Hong Kong Government from London; but Ministers will need to be satisfied that the broad lines of fiscal policy are defensible here in London, ie that the burden of taxation increases should fall more heavily on those better able to bear it. It is common ground both in London and Hong Kong that the present taxation system is regressive; but among the tasks of the committee referred to in paragraph 22 above is the requirement to recommend ways of making the system both fairer as between groups of tax payers and more progressive in incidence.
/26.
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