TNAG-0788-FCO40-992-Development-of-social-policy-in-Hong-Kong-proposed-contribut-1978 — Page 213

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Mr Thompson

THE BUDGET

Ir kichent Stewul w Hull (economists)

Reference

No Stewart

12a

I hope Michael

Stewart will see Dr Chen in H.K. Dhu 13

1.

The commonest reaction in Hong Kong to the budget seems to have been relief that things will be allowed to go on much as before, and pride at the handsome surplus that had again been achieved! There was some surprise at the encouraging forecasts for economic activity in the coming year, despite all the dire predictions about the harm that would be done by the new restraints on textile exports.

2. But not all comments were as smug as this suggests. Writing in the Hong Kong Standard, Dr Edward K Y Chen, Lecturer in Economics at the University of Hong Kong, found the budget to be "as unimaginative and as unstimulating as all the budgets in the past". However, he praised the move in emphasis in the fiscal guidelines for the ratio of direct to indirect taxation from 45:55 to 55:45, and the increase in the proportion of tax revenue to total revenue from 65% to 70%: both these moves will have the effect of making the system more progressive.

3.

Dr Chen was also critical of the "amazing margin of error" in the Government's forecasting which led to a predicted surplus of $167m turning into an actual surplus of $1,100m. But he believed the forecast for this year to be more plausible.

4. He also regretted the continuing neglect of income redistribution, pointing out that the increase in expenditure on social services is mostly accounted for by increased spending on the subsidised home ownership scheme, which scarcely benefits the most underprivileged. He advocated a modest increase in the standard tax rate, of perhaps 1-2% to be used to finance improved social services.

5. Dr Chen also recommended a more active role for the Government in stabilizing the level of macro-economic activities, by increasing public sector activity in times of slow overall growth. I questioned Dr Alan McLean (PAS, Economic Services) and Mr Joseph Lam (Senior Economist) about this. They said the Government had to be very cautious about such action: although such measures could have some immediate effect, in an economy as dependent as Hong Kong's is on foreign trade, any increase in government spending is bound to lead to an increase in imports with no corresponding increase in exports and hence will end up by aggravating the very problem it is meant to solve.

6. The other major criticism of the budget came from women's activist groups who were upset because the Financial Secretary had not responded to their campaign to have married women's income taxed separately from that of their husbands. This is, of course, a phony issue: some of them may be concerned over the women's rights aspects. But mostly what they and their husbands - want is to pay less tax. With the high tax thresholds, many married couples now paying tax would probably escape altogether if their incomes were treated separately. The Government have probably not acceded to this

HKK 234/1

RECEIVED IN REGISTRY NO. 51

2 0 APR 1978

DESK OFFICER

INDEX

PA

REGISTRY

Action Taken

RESTRICTED

/basically