TNAG-0622-FCO40-770-Budget-of-Hong-Kong-1977 — Page 26

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Fir Stewart

(HAGD)

CONFIDELIS

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RECVED IN REGIRY No. 51

21 JUL1977

MKK026/1

VISIT TO HONG KONG BY SENIOR ECONOMIC ADVISER, JULY 1977

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14/7.

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1.

I discussed four subjects in this visit, namely:

(a) 1977 Budget

(b)

1977 Economy

(c)

IBRD Report

(d)

IKORC Report

until I Auport, Bu.

then to miss Bailey to fix a tiringpl.

What follows is a brief resume of my talks, on which I shall be pleased to enlarge.

1977 Budget Policy

2.

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The basis for my talks was your letter to the Governor of 16 June 1977. Because its distribution locally had been restricted to the Governor and Chief Secretary, I discussed this only with them. I stressed our view to them, namely that the budget is to be seen as an instrument to achieve basic economic and social objectives, emphasizing the Secretary of State's position, and that more evident long term economic and financial planning (with alternative revenue estimates) was in our view desirable. On public expenditure I reiterated our position as indicated by the Secretary of State in Mr Michael Stewart's minute to him of 30 May 1977, namely that he attached particular importance to a rising level in real and proportionate terms of public expenditure. I understood that the Governor had already replied to you. Their economic adviser highlighted some aspects of the Budget speech which they saw containing changes of emphasis as compared with previous years on such aspects as public expenditure and deficits and monetary policy. of course, already read this speech and noted these points.

1977 Economy

3.

We had,

The economy (GDP) is now expected to grow at a lower rate than previously envisaged (5% vice 7%); exports are similarly expected to grow slower (6% vice 8%) with much depending on the outcome of the EEC/HFA negotiations. Unemployment is forecast to remain at 42% and wage rates to rise by about 4% pa, with prices at 6% pa. The Hong Kong is now expected to stay relatively strong at around a 13% appreciation of the Smithsonian (December 1971) levels. Un public expenditure there is a danger of underspending in real terms, because of the load in the construction industry caused by the Mass Transit and housing building programmes. However, every effort was being made to avoid the underspending of 1976/77, especially in PWD. ilowever, in view of the expected surplus in 1977/78 there would still be scope for increased expenditure, probably on areas not concerning the construction industry, e.g. welfare payments.

CONFIDENTIAL

4. IBRD Report