TNAG-2515-FCO40-3669-Future-of-Hong-Kong-International-Rights-and-Obligations-Sub-1992 — Page 15

CONFIDENTIAL

Infrastructure, creating the risk of addicional pressures on spending. On

the revenue side, the last and current fiscal years have seen a surge in

stamp duties related to the brisk activity in the equity and property

markets. A cooling of transactions in these markets could result in revenue

growth that is lower than that foreseen in the medium-range forecast.

Thus, a significant decline in net public savings appears likely on the

basis of policies currently in place. While such a development would not

necessarily be a concern for the sustainability of public finances over the

longer term, it would imply significant positive impulses to aggregate

demand and a heightening of inflationary pressures already in the system.

In our view, the minimum ain of fiscal policy should be to avoid a

significant narrowing of the budgetary surplus so long as the economy

continues to operate at full capacity. In this context, we underscore the

need to economize on operational expenditures, and to smooth, to the extent

possible, capital expenditures. Consideration could be given to raising

additional revenues. Possible measures include: bringing in line the top

tax rates on personal and corporate incomes; restricting the deductibility

of housing expenses from business taxes; taxing consumption of electricity,

gas, and water; introducing environmental taxes and user fees on publicly-

provided services; bringing forward reassessment of property values; and

imposing a Lemporary surcharge on direct taxes, if necessary,

In addition to action to contain pressures on the demand side, measures

on the supply side of the equation can play an important role in alleviating

the Inflation problem. During the last two years, the Government has

adopted increased flexibility in its labor import policies. The rise in

Page 15Page 16