Hong Kong has weathered some tough times since the Asian financial crisis, and the Chief Executive made no bones about the challenges the city still faces in the months ahead. If the speech was a little short on specifics, nevertheless it did spell out a general approach which I hope the legislature and the public can support.

We all realise there are no easy answers to our present problems, but there was enough in what Mr Tung Chee-hwa said to show that the opportunities are out there, and the Government has set its course with direction and firmness of purpose. Reinforcing Hong Kong's internationally acknowledged strengths - its philosophy of "big market, small government", its financial expertise and its value-added service industry - and looking toward ever-closer integration with our neighbours in the Pearl River Delta, will help us win through eventually. The long-term prospects are very promising. But it involves some hard decisions and further sacrifice from people before the situation improves.

However, the most pressing task is to deal with the financial deficit. If, as is likely, it exceeds $70 billion this year, the immediate situation is very serious. The Government aims to reduce spending in its operating accounts by $20 billion in 2006, and in the near term it simply must increase revenue by means of modest tax increases and higher fees and charges, regrettable though that may be.

No doubt there will be protests at the move to increase salary tax and profit tax and impose a departure tax on passengers leaving by land or sea. And we will have to ensure that spending cuts do not impose undue hardship on the underprivileged and those in real need. But Mr Tung is leading by example with a voluntary 10 per cent pay cut for himself and his team. Encouragingly, civil servants have said they will accept a pay cut if necessary, and this is a welcome and positive approach. The Government must try to introduce the cuts by April, but it must do so sensitively, through the consultation process. If everyone can accept a little less in the coming year, the prospects for recovery will be all the brighter.

I and my Liberal Party colleagues are encouraged by moves to slim down the bureaucracy and increase administrative efficiency. Business can forge ahead when it is not hampered by red tape, and if the business sector is well represented in its ranks, the new Task Force to be formed as suggested in the Policy Address will be able to draw on real experience at the sharp end, in helping to determine its policy proposals.

Just as encouraging are the positive steps to encourage mainland professionals to come and settle in Hong Kong. Aspiring talent and enthusiasm from the mainland allied to Hong Kong expertise is the perfect mix - as well as a timeless tradition here.

When we can persuade Central Government to allow mainland investors to live here as well, we will work our way out of our difficulties all the faster. We need more outside investors, and plans to encourage thousands of small and medium enterprises to set up here will also help to create jobs. We have attracted them in the past thanks to Hong Kong's internationally celebrated financial sector, its sophisticated infrastructure, clean government and free flow of information. These are attributes we must safeguard in order to retain our position as a magnet for venture capital and a preferred South East Asian base for entrepreneurs and multinationals.

Restructuring our economy to meet the challenges of global trading and the constantly evolving nature of information technology will not be achieved overnight. But it can be done, and we must press ahead with changes to make sure we are equipped to stay in the race.

As long as the people of Hong Kong keep in mind that this city is still one of the strongest economies around, with all the attributes which Mr Tung listed in his speech, it will help to boost confidence - something which has been unjustifiably low over the last three or four years.

We are still number 1 in the world for container throughput and we will re-inforce that position when Container Terminal 9 comes on stream. We have an unrivalled position as the region's financial centre with every opportunity to become the major finance centre for China.

Hong Kong has a head start in the logistics industry in Asia - another area where the prospects for growth and employment are excellent.

Tourism is another of our strengths, and there, too, there is discernable growth not just with the opening of the Disney theme park, but with 20 new hotels in the pipeline in the next three years to profit from the World Tourism Organisation's forecast that China will be number one magnet for visitors in 2020, with Hong Kong in fifth place.

China's potential is stupendous, and we cannot fail to benefit from this in the coming years. I hope the State Development Planning Commission will quickly finish its feasibility study on the Hong Kong-Macau-Western PRD bridge, so that work can begin, and that closer cooperation with the mainland will forge ahead. Those are the issues to concentrate on, rather than becoming bogged down in gloom because of our present economic woes.

We are all in the same boat, as Mr Tung pointed out. But we have steered our course toward a safe harbour, and with calm and strength of purpose we can ride out the storm.

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