TNAG-1762-FCO40-2516-Economic-situation-in-Hong-Kong-1988 — Page 74

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is often a good thing. In the case of HK two specific questions are

raised.

16.

First, we need some idea of at what level of output growth fiscal policy should be 'neutral'. A starting point would be the 5% used in the Medium Range Forecast; an accompanying measure would be a "Trend Growth Rate Budget Surplus" which projects the budget on the assumption of 5% growth. Such a measure would have to be used

with great care however, and not necessarily as a guide to policy, especially in the short term after large divergences away from trend. (Such considerations may justify Mr Jacob's implicit view that while the simple budget figures may well indicate that more could be given away. The short term risks of overheating are too

great.)

17.

Second, and, in fact, more fundamentally, is whether fiscal

stabilization is important for Hong Kong. In an important sense the answer is no: given the openness of the HK economy the government's

fiscal stance will have little impact on the aggregate level of

economic activity or its growth rate. However, at the margin the

effect is still important: the surplus is not a negligible part of

GDP. In particular if the overheating argument is taken seriously

then as Mr Jacobs argues a fiscal stimulus will only add to

inflation (and imports) rather than real growth.

18.

Finally, note that the budget, sensibly, points to dangers in

the medium term of its proposals. Specifically both spending and ÷

manpower requirements are set to grow above trend in the coming

year. The latter is seen as more serious: a 4% increase in manpower when the labour force is only growing at 11%. The recognition that

this must imply a lower growth in the future is welcome.

Comment

19. In its own terms the budget seems to be fairly well judged.

The major question mark is the accuracy of the forecast. The fiscal

is mildly inflationary and is not required to take up excess

capacity in the economy even if growth does fall to 5%. But, in the

context of Hong Kong, demand management is not a major consideration