TNAG-0761-FCO40-965-Budget-of-Hong-Kong--1978-1979-1978 — Page 57

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determines the level of output and employment in the economy, and the resources available to the Government, whether or not the economy is at full employment, can be varied by decisions on the nature and level of taxation. Thus the sort of guide-lines and requirements with which budget speeches in Hong Kong tend to be obsessed are likely to make it difficult or impossible to manage the economy in an optimal way. In short, the improvements one can make in the Hong Kong budget are rather limited

as you point out in paragraph 3 of your minute as long as the budget is constructed within the present framework. What is needed is the building of a new framework which sees the budget as a crucial instrument of macro-economic policy for the economy as a whole, and not just a matter of balancing Government expenditure and Government revenue.

5.

All this, however, is for the longer term. For the moment, I am quite content with the draft letter as it stands.

24 February 1978

Copies to:

Mr Murray

PS/Lord Goronwy-Roberts

Mr Cortazzi

Mr Hurst

Mr A Smith

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Cult.

Michael Stewart