TNAG-1483-FCO40-2037-Economic-situation-in-Hong-Kong-1986 — Page 294

CONFIDENTIAL

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medium term plans with rollover from annual amounts to following years;

- an operating surplus/deficit figure derived from recurrent

income and expenditure (which will point up the type of reliance on capital receipts which led to difficulties during the period of high revenue from land sales). The "fees and charges" element of tax revenue would rise over time.

8. It was noted that it was important that the recurrent implications of new policies be worked into the medium term framework as soon as they were brought in (an assumption of 4-5% pa real GDP growth is being used for this framework). Certain rules of thumb were still being used to set the fiscal stance: the growth of government expenditure should be less than the growth in GDP, and the operating surplus should cover at least 50% of capital expenditure.

9.

There is presently little latitude for expansion of spending in new areas. For 1986 for example, once finance for existing policies and inevitable increases is spent, only about HK$ 100 mn remains. For the main areas of capital expenditure (housing, waterworks, transport ...) shifts to new areas of activity comes only when projects end. There is increasing involvment of the private sector, particularly in transport

tunnel for example.

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the KCRC and the new cross-harbour

10. Despite less than expected revenue from site development over MTR stations and the need for government capital to be put into the system, it was likely to repay costs by the 1990s (it is currently generating revenue above recurrent operating costs. There is an element of subsidy in that interest is not paid on the government capital employed).

STEVART

DEPUTY SECRETARY FOR TRADE AND INDUSTRY: MR PETER WEBB-JOHNSON

11. The most important question to be resolved in the Territory's trading future was autonomy within GATT. A satisfactory agreement with the PRC on the status of the SAR was essential.

12.

Industrial policy remains essentially "hands off" with no protection or subsidy. Certain recommendations of an earlier "diversification" study had been carried out, but these were broadly neutral between industrial sectors. They include:

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cheap provision for industrial land, where new technology is introduced;

assistance in the area of technical standards, laboratory certification, etc;

active promotion of inward investment.

CONFIDENTIAL