ENG-1972 — Page 58

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Financial Structure

ALTHOUGH the approval of the Secretary of State for Foreign and Commonwealth Affairs is required before decisions are made on certain major matters including currency and banking, in other respects Hong Kong has complete autonomy in financial affairs and the ultimate financial authority is the Legislative Council.

Hong Kong is financially self-supporting, apart from the cost of its external defence, and towards this it makes a substantial contribution. Under an agreement covering the five years from April 1, 1971, to March 31, 1976, Hong Kong is making a contribution in kind and in cash amounting to £40 million. About £28 million of this contribution will be spent in Hong Kong on capital works and on the maintenance of buildings which will revert to Hong Kong if no longer required by the Armed Forces. The work is undertaken by the Public Works Department on behalf of HBM Department of the Environment in Hong Kong.

Apart from the Housing Authority, which has a certain measure of autonomy, there are no financially independent subordinate bodies similar to the local govern- ment authorities in the United Kingdom and other Commonwealth territories. The revenue and expenditure figures thus represent all the public income and public expenditure of Hong Kong other than 'below the line' operations of various official funds.

A small deficit was returned in the first financial year after World War II. Since then, with the exception of 1959-60 and 1965-6, when there were deficits of some $45 million and $137 million respectively, a series of surpluses, some of them sub- stantial, have been accumulated. The accumulation of these surpluses in the varying economic conditions which Hong Kong has had to face since the war is a considerable achievement, particularly since it has taken place after charging annually against current revenue all capital expenditure other than a comparatively small amount financed by borrowing. These annual capital spendings have been increasing in recent years and in 1971-2 they totalled some $755 million.

The principal reason for these results, which appear so favourable, was that during the earlier years exceptionally rapid increases in population generated economic activity which raised the yield from taxation and other sources of revenue without appreciable increases in the rates of tax. Revenue expanded 111⁄2 times from $309 million in 1951-2 to $3,541 million in 1971-2. The rate of increase was affected by variations in such factors as the economic situation and inflows of capital, but the upward trend has been strong and continuous. In expenditure there was inevitably a time-lag before the government could develop community and social services necessary for an increasing population and made possible by economic growth itself. But as