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2.
Growth for 1993/94 forecast to be 5.5%. Growth in trade with China (up 25%) China a major factor in Hong Kong's performance.
Most important economic risks - continuing inflation in Hong Kong and non-renewal of US MFN status for China.
Hong Kong's financial strategy continues to be prudent with growth in spending tied to growth of the economy. The HKG has an embarrassment of riches; revenues are, as usual, higher than expected and expenditure lower than planned especially for infrastructure projects. The HKG has opted for what should be a popular package of increased expenditure in social sectors and reduced personal taxation. However, switching from budget surplus to deficit at a time of full employment risks boosting inflation. In the longer term this could undermine Hong Kong's competitiveness as a gateway to China, but the only real alternative would be to break the exchange rate peg and increase the value of the Hong Kong Dollar. But it would lose the stability and confidence associated with the fixed exchange rate.
3. Reaction to the Budget within Hong Kong has been generally favourable. Some LegCo members have described it as the best for ten years.
However, others criticised it for being too conservative, calling for more expenditure on social welfare and for personal tax allowances to be increased further. Media criticism focused on the Financial Secretary's decision to inject more than 40% of public works spending into airport projects before a final agreement on airport financing has been reached with China. Left-wing newspapers highlighted the HKG's intention to "squander" reserves before 1997 pointing out that four years of deficit is not consistent with HKG's traditional practice of budgeting for a surplus. Ironically, Lu Ping is likely to be irritated that the projected reserves for 1997 are now even higher than previously expected. There has been evidence in the past that he feels that he was tricked into accepting a figure of HK$25 billion in the Airport MOU as representing what the HKG firmly planned to leave in the reserves in 1977. HKG always intended to keep a substantial cushion above that in case of adverse developments, but the contrast between that figure and current projections is now embarrassingly large.
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