RESTRICTED
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g.
This would not result in rapid growth if supply constraint meant that HK simply could not deliver the goods. The Budget speech gives this some weight, especially regarding the import forecast. But while uch constraints should not be ignored it is not clear why they should bite in 1988 more than in 1987. It is true that some of the productivity increases, based for instance on shift working, are "one off" gains, but others notably labour saving investment and greater use of PRC production facilities are not. The HKG forecast seems to assume that these will have less of an impact in
the future.
Budget proposals
10. The Budget deals solely with fiscal policy: that is matters affecting public expenditure and revenue. The emphasis is, sensibly, very much on the medium term. This approach is formalised in the Medium Range Forecast for which a trend rate of real growth of 5% is assumed. Since HKG is very wary of crowding out of private activity by the public sector, this gives a projection for public spending. Revenue is raised to cover this rather than for purposes of demand management. Short term demand managmeent is given a subordinate role though can at times be important.
11. This strategy combined with two years of very high growth, which have greatly boosted revenues, means that surpluses are above target: that is, revenue is greater than required to both cover spending and maintain the real level of reserves. The Budget suggests that with no tax changes surpluses are running, for the period to 1991-92, HK$3.9 bn pa more than required.
12. Table 2 summarises the projected fiscal impact together with some yardstick for comparison. The projected surplus for 1988-89 is lower than the revised estimate for 1987-88. This is the result of increased spending and lower direct taxes which together more than offset an inflation based increase in duties and charges, combined with the drastically lower growth assumption. Adjusting for inflation would make the real reduction in surplus appear even greater. The effect of adjusting taxes and duties is to reduce revenue in 1988-89 by HK$1.8 bn. This still leaves a large surplus
DROMO TOMED
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