TNAG-0761-FCO40-965-Budget-of-Hong-Kong--1978-1979-1978 — Page 66

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if 1978-9 conforms to the pattern of the last three years the surplus could turn out to be something of the order of HK$1,800m., with surpluses of the same orders of magnitude in 1979-81, although there is some hope that this year's estimates will prove more accurate. So there is clearly no financial restraint on a further moderate increase in public expenditure.

5. All that being said, we should give credit for a really significant increase in public spending (26%); and particularly in spending on social services (35%) which now amounts to 42% of all public sector expenditure. For tactical reasons I suggest that we should congratulate the Governor for his efforts in a telegram which will be seen by several officials and tell him of our criticisms in a letter which will only be seen by himself and

Mr Haddon-Cave.

6.

I had considered proposing the introduction in the budget of some socially desirable measure which would be practicable at such short notice. But while this idea has attractions, on balance I believe that to do it would simply be to act in the very way for which we have criticized the Hong Kong Government in the past, namely to adjust policies to the money that happens to be available, rather than agree the policies first then set about raising the money to pay for them.

7. The only improvement I suggest at this time is the cosmetic

This would help one that expenditure should be dealt with first. to demonstrate publicly the Hong Kong Government's acceptance that expenditure needs are not determined by revenue policy.

8. I, therefore, recommend, provided no fundamental and unaccept- able alteration in the current plans emerge, that a short telegram be sent accepting the budget as it stands, followed by a letter from me expressing some disappointment that it is not more progressive.

9.

I attach drafts. The Economic Adviser concurs.

14 February 1978

Cc:

Mr Cortazzi, Mr M Stewart Mr Hurst, Mr Smith (SEA)

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A B Stewart Hong Kong & General Dept