TNAG-1160-FCO40-1440-Visit-by-Margaret-Thatcher--UK-Prime-Minister--to-Hong-Kong--1982 — Page 94

restrict trade in its most important exports, namely, clothing and textiles). The policy implications of this external

dependence are self-evident: the economy must be allowed to deflate whenever the growth rate of world trade in goods and services eases off, or whenever the growth rate of domestic demand inflates the cost/price structure and reduces the external balance.

17. On the supply side, Hong Kong is almost totally lacking in natural resources and, relative to its population, is very short of usable land. The manufacturing sector is completely dependent on imported raw materials, semi-manufactures and capital goods. Other sectors of the economy are almost

equally dependent on imported inputs. The bulk of Hong Kong's requirements of foodstuffs and consumer goods is also imported. Thus the total value of Hong Kong's visible trading transactions (HK$ 261 bn in 1981) is just on twice the value of the G.D.P., and much more than twice if invisible imports and exports are added in.

18. Whereas Hong Kong's emergence as a major international financial centre in a world of floating exchange rates, moreover diversified the economy, it is just as vulnerable to external influences as before and it is now much more exposed to very large volatile money flows across the exchanges.

(6)

Public Finances

19. The principle underlying the management of the public finances is that the growth rate of expenditure should have regard to the growth rate of the economy (and, whilst the relative size of the public sector may expand as the economy enlarges, the public sector is not allowed to crowd out the private sector).

20. To this end, budgetary policy requires that, taking one year with another, a balance is achieved between revenue and

expenditure, having regard to the need to accumulate fiscal reserves in line with the growth of expenditure. Fiscal policy requires that the tax system is neutral in economic terms and, because it is narrowly based with low rates of charge, it cannot afford costly overheads. The system, therefore is kept simple and easy to administer.

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