Mr Henry Tang, the new Financial Secretary, has taken on one of the most difficult tasks facing the Government. It is not overstating the case to say that on his shoulders rests the economic fate of Hong Kong for decades to come.

The job calls for very tough decisions. Rather tougher, in my opinion and the opinion of my Liberal Party colleagues, than he showed last month when he announced plans to delay producing a balanced budget until 2008-9.

The implications of this decision are extremely worrying. It runs the risk of depleting our already shrinking fiscal reserves by two thirds. Over the next five years, today's HK$310 billion would dwindle to little over HK$100 billion; a sum that would support the government for no more than half a year.

Liberal Party's view, shared by many economists, is that the funds should be equivalent to at least a year of government spending - some HK$200 billion.

If Mr Tang's plan is to work, the government must cut its recurrent expenditure from HK$218 billion for 2003-4 to HK$200 billion by 2008-9. It must also raise recurrent revenues from HK$155 billion to HK$200 billion.

This would mean the accumulated operating account deficit will soar to nearly HK$200 billion over the next five years. If that happens, it could place the third term SAR Government in a gravely weakened position, because when the new administration takes over in 2007 the budget will almost certainly still be in deficit.

The next logical step would see international rating agencies lowering Hong Kong's credit rating, thus dealing a severe blow to our investment market. Once confidence begins to weaken in the Hong Kong dollar, overseas speculators will be waiting like vultures, to swoop down and profit from our vulnerability.

It is a grim prospect. A deficit of that magnitude carries potentially huge risks and cannot help but create an adverse business environment. Nor will it alleviate the problems to issue government bonds to finance excessive recurrent expenditure. It is a sound idea to issue bonds for funding infrastructure projects that provide economic benefits, but not to cover recurrent spending that would be similar to spending on a credit card without the earning power to repay the debt.

No doubt the decision to put back the date for balancing the budget was taken for the best of motives - I understand the government wants to give the community and the economy more time to recover from the SARS outbreak - but at such a critical time there is no room for laxity. We have to hold our nerve and face the surgery that will help us to recover.

In other words, the government must cut where it is most necessary. It can rid itself of an oppressive financial burden very simply by getting rid of redundant staff from the civil service and by restructuring the system.

Current public spending accounts for 23 per cent of our GDP - and that from a city which does not have to pay for national defence or foreign diplomacy.

In the 1980's and 90's public spending amounted to only 16 per cent of the GDP. Somewhere along the way the administrative structure has swollen to unacceptable levels, and must be brought back into line. There is great reluctance in the government to take this action, but until it does, there can be no real progress toward economic recovery.

Mr Tang proposes reducing the operating expenditure by 11 per cent - in my view a figure that falls well short of what is needed - but even then I worry that the target will not be met. The Chief Executive and all the present principal officials will leave office in four years time and any proposed cuts may be postponed until 2008-9.

These concerns were made known to Mr Tung Chee-hwa when I and several other Liberal Party legislators met with him recently. I will repeat them later when I meet with the Financial Secretary to discuss the 2004-5 budget.

Cutting expenditure back to pre-90's levels is imperative if we are to get back on track, and it must be done now. Prevaricating will only delay the inevitable, and increase the pain.

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