TNAG-0747-FCO40-951-Visits-of-Foreign-and-Commonwealth-officials-to-Hong-Kong-1978 — Page 51

policy of budget deficits which

d

however justified on orthodox macro- economic grounds led to a loss of confidence in the Government's handling of Hong Kong's affairs could lead to a very damaging run on the currency, and a more general loss of confidence in Hong Kong as a financial centre. Two other considerations are relevant to fiscal policy in Hong Kong. One is the apparent traditional Chinese dislike "(of which I was assured many times) of governments which run deficits; and indeed the perverse (by Keynesian standards) belief that at a time of recession, when individuals are having to tighten their belts, the Government should do the same by cutting its expenditure! The other is that unless people were willing to hold Government debt that did not mature until after 1997, any Government borrowing to finance budget deficits would not only have to become increasingly short-term as 1997 approaches, but would imply that any budget deficits incurred between now and 1997 would have to be offset by equal budget surpluses Thus quite unlike the situation in Britain, for example

Band

one can

at least argue that budget deficits should only be incurred in so far as they are already covered by past budget surpluses. In other words, there is some justification for the stress continually being put by the Financial Secretary on Hong Kong's famous "fiscal reserves".

5.

M

Nevertheless, all that said, I would judge that there is still room for fiscal policy to be less cautious in the future than it has been in the past. I think many people in the Hong Kong Government would now accept that not only in the late 1960s, but also in 1974-75, inappropriate policies notably a cut-back in the growth of public investment - were deployed in the face of a recession. Thus the same reactions might not occur in future. Even so, there is a belief that any Government action to offset the effects of a recession would have to be very limited in time and scope because the domestic Multiplier is very small. For example, it is firmly believed that extra Government expenditure on construction would be accompanied by a large rise in imports, which could not be accommodated for long without a corresponding rise, in exports to pay for them; and that there is some danger that such a rise in exports would be inhibited by the

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CONFIDENTIAL