TNAG-0622-FCO40-770-Budget-of-Hong-Kong-1977 — Page 63

Mr Stewart (HKGD)

CONFIDENTIAL

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HONG KONG : IMPACT OF BUDGETARY POLICIES ON INCOME DISTRIBUTION

1.

Para 3 of the Financial Secretary's reply to you of 10 May 1977 provides a clear response to our query. Because of high thresholds and low direct tax rates, the redistributionary impact of their Budgets are consequently limited. It is noteworthy that some elements of expenditure, particularly those of a welfare nature, are highly redistributive. But we know these are fairly small in total at present. The draft IBRD Report recommends (at para 3.56) increased reliance on direct taxation for the funding of future expenditure and for increasing the equity of taxation. If this recommendation were fully adopted it could go some considerable way towards increasing equity, including income redistribution.

2. But at the back of my mind remains the Financial Secretary's stated view that "the proper role of the tax system is to appropriate a suitable proportion of the community's resources for public expenditure and not to pursue social justice or to manipulate the rate and pattern of economic growth" (para 19 of his speech concluding the Second Reading of the Appropriation Bill, 1976). An interpretation of this is that tax policy is to be neutral with regard to equity and redistribution. If we are to push in this direction perhaps a modification to philosophies may be called for.

18 May 1977

REOVED ** REGISTRY No

Adrian Smith

Senior Economic Adviser

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CONFIDENTIAL

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