CONFIDENTIAL
COVERING SECRET
FISCAL (paras 22-25 and Annex C paras 7-9)
1. We accept the need for Hong Kong to have flexibility in deciding on methods of taxation but taxation should be higher and more progressive in incidence.
2. In the Financial Secretary's recent budget speeches before the Legislative Council he referred to 20% of the GDP as being the limit, in his view, to public expenditure; to his expectation that this percentage will drop as the economy expands; to his intention to return to a balanced budget (at least) by 1978/79; and to the undesirability of using the fiscal system to pursue social justice. It is necessary to prepare the tax-paying public for a change in these assumptions.
3. We believed there was to be a general rise in direct taxation this year.
There may be good reasons for not having done so but we need to be kept more fully informed of budget strategy in
advance so that we can comment as appropriate.
4. While we agree there is scope for greater public borrowing, the main burden of extra revenue should fall on the tax-payer. A step by step raising of the limit of direct taxation to, say, 20% is an important adjunct of the strategy as a whole.
SOCIAL SECURITY (para 26, Annex C para 12 and Annex D paras 2-5)
1. We are glad there is general agreement on the desirability of formulating proposals for transfer payments. We appear to be agreed that the first priority is to extend present public assistance arrangements to able-bodied males between 15 and 55 (in practice a form of unemployment benefit).
2. We believe, however, that urgent consideration should also be given to an appropriate unemployment benefit scheme perhaps, though not necessarily, with a contributory element and which would be an entitlement. We assume the Governor agrees that this should form part of the proposed expansion of Hong Kong's social security
arrangements.
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CONFIDENTIAL
COVERING SECRET
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