TNAG-1725-FCO40-2438-Minutes-and-Hansards-of-the-Legislative-Council-of-Hong-Kong-1988 — Page 35

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meet.

First, it should produce a stable and worthwhile revenue

yield at a low tax rate; secondly, it should cause minimal distortion to the economy; and thirdly, it should be simple and

cheap to administer.

50.

Whilst our researches are far from complete, they

have tended to confirm my belief that a measure of tax

S diversification, together with some rationalization of existing

indirect taxes, is a practical proposition. What we have done

so far suggests that a form of sales tax, though probably not at

the retail level, best meets the criteria I have described. But

this is a complex area and many factors remain to be

considered. There is, therefore, much more to be done before I am able to present any proposals for public debate.

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The Government's reserves

51.

The impact of the strategy I have outlined on the level of the government's consolidated reserves results in the

forecast balances of $40.5 billion at the end of 1987-88 rising

to about $460 billion by the end of 1988-89 after allowing for the taxation proposals that I shall be making this afternoon.

The Medium Range Forecast shows that maintenance of these

reserves in real terms will be achieved over the forecast period

up to 1991-92. However, over this period the reserve balances

per cent will fall as a percentage of annual spending from about 77% to

For anx 65 (20). In this respect, our reserves have been higher only briefly in the early years of this decade when we experienced

Sir, substantial windfall receipts from land sales. There can be no

absolute guideline as to a satisfactory level of reserves. Nevertheless, the present position not only provides essential cover for our contingent liabilities and for fluctuations in our short-term cash flow but also assists us in maintaining fiscal

stability over the longer term (21).

(20) Appendix A, paragraph 15.

(21) Contingent liabilities as at 31 March 1987 are listed in Appendix C.

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/DRAFT

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