foreign reserves can be made impossible if the Government does not control the supply of HK's).
5.
R.
(i) Keep the float of the HK managed, to avoid excessive short-term fluctuations.
(ii) Adopt a long term policy eg of not allowing
the exchange rate to appreciate faster than productivity growth or eg of keeping labour costs, measured in foreign exchange competitive.
Fiscal Policy C. This is the second most effective macroeconomic variable. While welcoming the abandonment of the traditional procyclical expenditure policy, the corresponding procyclical revenue policy (necessary in order to maintain a balanced budget) "has yet to be adjusted". The latter undoes the benefits to a stabilisation policy that the former provides; the Financial Secretary announced his adherence to this in the 1976 Budget speech. The existing tax system is regressive in places and if expanded could easily produce more revenue and have a greater smoothing influence. The existing system of financing deficits is unnecessarily deflationary (in order to have a big enough fiscal reserve to cover temporary deficits the long run level of expenditure is kept too low).
6. R. (i) Reversal of existing way of planning public
finance; taxes (and revenues) should not be
regarded as immutable - "given this what can we afford in each area of public expenditure?" Expenditure should be determined first, then tax rates adjusted to suit this.
(ii) 'Public expenditure' should include all public
guaranteed debt (eg the Mass Transit Railway) as public capital expenditure, so that planning for them is "part of the budget process".
(iii)
Abandonment of procyclical (and adoption of a countercyclical) revenue policy.
(iv)
(Long and medium term) increase total public expenditure (inc. MTR) to 22-23% of GDP by 1980.
(v) Adopt a countercyclical policy (difficulties here are recognised, and it can be squared with (iv) by accelerating the real increase in depressions
and slowing the real increase in boom years).
(vi) The earnings and profits tax system should be reformed, separating personal from corporate income. In particular income received in Hong Kong should be taxed so as to reduce tax evasion
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