TNAG-0622-FCO40-770-Budget-of-Hong-Kong-1977 — Page 46

CONFIDENTIAL

HKK 100/2

Sir lurray MacLehose

16 June 1977

by the budget. We are also aware from other evidence that Philip is much more concerned with the social effects of his budget than his budget speech indicates.

3.

Everybody acknowledges the great economic success story of Hong Kong which could not have been achieved without the sound policies formed by Philip and his predecessors, but these policies were developed during a period of rapid economic growth. The period of steadily rising world demand would now appear to be over, at least for the time being, and for the next few years at least the Hong Kong economy, dependent as it is on exports, will inevitably be subject to fluctuation. This will be at a time when you are increasing expenditure on the social account. We think it follows that the budget speech should contain an indication of long-term economic and financial planning related to your economic and social objectives.

4. The main threat to your plan for social development is a recession. There was concern here in 1974 when relative cuts in public expenditure were imposed at the same time as the private sector was cutting back. The result seemed to be that resources were left idle when they could have been used to further your social programme, e.g. by an increase in the rate of house building. The Secretary of State has indicated that he attaches importance to a rising level in real and proportionate terms of public expenditure, and I think you will agree that it will be essential to avoid a repetition of this situation in the future.

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We welcome the concessions on personal tax allowances and on stamp duty for lower value properties in this year's budget. Those on estate duty levels, on the other hand, appear to favour higher income groups, or so it seems to us. The general thought here is that future tax concessions should be distributed equitably, and I imagine Philip will bear this in mind.

6. In making these points I would stress that we do not wish to interfere with the details of budgetary planning. Our main concerns are that the budget should provide for the funding of an improved social programme and that the programme should be funded in the most socially equitable manner (see, in this connection, paragraph 6 of the relevant section of the record of your meeting with Lord Goronwy-Roberts last December). We fully appreciate that budgetary policy must serve to maintain confidence.

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CONFIDENTIAL