TNAG-0761-FCO40-965-Budget-of-Hong-Kong--1978-1979-1978 — Page 56

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27 FEB 1978

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Mr J Stewart (Hong Kong and General Department)

HONG KONG BUDGET 1978/79

1. I am sorry that due to unexpectedly protracted absence abroad I am responding so belatedly to the various papers I have recently received on this.

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2. In general, I agree with your minute of 14 February to Mr Murray, and with the draft letter to the Governor. In particular, I would certainly support your proposal that the section on expenditure should come first, to be followed by the passages dealing with the raising of revenue. As you say, this would help to focus attention on the economically rational way of determining the balance between public and private expenditure, rather than treating public expenditure as a kind of residual, dependent on the revenue which a particular tax structure happens to yield.

3. I also agree with the emphasis placed on the possibility that expenditure in 1978/79 may fall considerably below the estimate; indeed I note that the Financial Secretary himself, in paragraph 7 of his minute, admits that there could be significant short-fall, particularly in the case of transfer payments for housing. Of course, this point cuts both ways: if one agrees that there is likely to be significant short-fall when very large increases in expenditure are planned to take place over a short period of time, one can hardly be seen to be asking for even bigger increases. But I think the moral is that one has to plan for a significant but steady increase in public expenditure over a period of years, and get away from the idea that next year's expenditure will be determined by what one expects next year's revenue to be.

4. This brings me to a more fundamental point, which it would probably not be appropriate to raise in your letter to the Governor, but which seems to me to need thinking about. Every time I look at anything to do with the Hong Kong budget, I am struck by the prevalence of concepts which seem quite inappropriate when managing an economy, as opposed perhaps to a domestic household. This applies to the idea that there should be free reserves at the beginning of a financial year equivalent to 15% of estimated expenditure in the ensuing year; to the idea that there should be certain percentage relationships between particular revenue and expenditure flows; and indeed to the idea that there is a hard and fast distinction between capital and current expenditures, and capital and current revenues. These concepts may be of some validity if one is concerned with the rational allocation of a particular fixed quantity of resources, such as the spending by a household of a weekly income which is fixed by circumstances outside its control. But the concept is much less relevant to the management of an economy, both the total resources available can be varied by policy which

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