HONG KONG BUDGET 1988
RESTRICTED
1. This note comments on the Hong Kong Budget for FY 1988-89, presented c 2 March. In particular, it examines the economic context, including the forecast for 1988 and the mild fiscal relaxation that the Budget may imply.
Current economic situation and forecast for 1988
2. The economy is estimated to have grown by 13.5% in real terms in 1987. This is not only very rapid even for HK but also far above the initial forecast of 6.2%. The main reason for this has been buoyant export demand, but domestic demand also grew, fuelled by rising real wages, profits and low interest rates.
3.
The most important policy question facing the Financial SEcretary is whether the economy has been overheating, and, if so, what should be done about it. Interestingly in his Budget address Mr Jacobs partially accepted that there was overheating. He also argued that HK was quite prepared to accept any inflationary implications of an adjustment process which maintained the exchange rate Link. He reaffirmed commitment to the Link.
4.
The visible trade account for 1987 was almost exactly in balance. He uses this to argue against charges of external imbalance. Performance on visible trade makes HK "free traders in
the full sense of the term" according to Mr Jacobs. The real net growth in service exports of 29.4% is not given such prominence.
5. The forecast for 1988 is one of dramatic slowdown to 5% real
growth. It will be a year of 'consolidation'. The breakdown of this forecast compared with the outturn for 1987 is shown below:
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