When an economy faces the dramatic drop in revenues that is currently looming over Hong Kong, we have to accept that every person in the community must prepare for a prolonged period of belt-tightening.

That is, admittedly, grim news coming after some four years of relative austerity, but not so grim as recent predictions about the possible size of this year's fiscal deficit. In his March budget, the Financial Secretary Antony Leung set the total at just over $45 billion. Two weeks ago he told legislators that the figure had already reached $56 billion in the first five months of the financial year, and that it might soar to $60 billion if the sale of the second tranche of MTR shares is postponed.

Researchers at HSBC present an even bleaker picture. They believe the deficit will soar to $68.3 billion, because of an expected drop of $30 billion in government income.

Despite cutting the number of civil servants from 198,000 to 180,000 over the last few years, and capping estimated expenditure for 2003-4 to $253.3 billion to try to balance the books by 2006-7, it already looks as if these measures fall far short of their target.

Revenue from land sales, once a major source of Hong Kong's prosperity, has plummeted due to the collapse of the property market. So far, land sales have brought in just HK$6 billion out of a target of HK$25 billion.

A proposed 4.75 per cent pay cut for civil servants was trimmed back earlier and the year, and now we learn that the Government has to find increased pension payments, and therefore is likely to exceed its own spending limits.

It goes without saying that it will be disastrous for the HKSAR if we cannot get the economy back on track. Extremely difficult and painful decisions have to be taken by the Government: it must perform a very delicate balancing act in order to increase revenue without inflicting more harm on an already wounded economy, or further damaging public confidence in the city's ability to recover.

Many of the contributory factors to our present financial plight are not of Hong Kong's making. No-one could have foreseen recent developments such as a possible United States attack on Iraq, or the prolonged strike of dockworkers in the US, which is threatening to cripple the entire South Asian economy.

Here at home, the worst-case scenario is that the huge deficit will attract the attention of international speculators who could launch an all out assault on the pegged Hong Kong currency. Add to that the danger on our own doorstep, if financial reserves fall to $200 billion (still a considerable sum to have in hand) and our citizens lose confidence in the peg and start to exchange Hong Kong dollars for foreign currencies.

But if the problems are not of our own making - the remedy is certainly in our hands. We must do everything in our power to restore Hong Kong to prosperity. It can be done. But only if everyone - rich or poor -is prepared to make sacrifices.

Much of Hong Kong's financial success evolved because of its low tax base, so introducing higher taxes is not something to be done lightly. Nevertheless, it is one of the options the Government has to consider and if that means workers and employers have to dig deeper into their pockets because of decreased personal income allowance, or asking the business sector to accept a small increase in profit tax - then so be it.

One levy which most fair-minded people will accept as reasonable, would be an $18 departure tax on travel to the mainland. The attraction of cut-price shopping over the border draws tens of thousands of visitors every day, at considerable cost to the city's own retail industry, and even if cross-border trips are liable to tax, the majority of shoppers will still find bargain prices, so there would be little cause for complaint at such a move.

A sales tax, however, would in my opinion have a purely negative effect on the economy, putting an extra strain on families who are already struggling to make ends meet, and hitting business equally hard by a subsequent drop in sales.

The FS indicated in his speech that he is thinking of further cuts in the civil service, and that is something that should be done as a matter of priority. Pain would be kept to a minimum if it was initiated through a voluntary redundancy scheme.

More controversially perhaps - but in my view crucially - the authorities should look again at adjusting salary levels. The pay level survey of civil servants should be carried out without delay, and its findings promptly translated into action. Civil servants need have no worry that there will be swingeing cuts - their salary levels are protected by the Basic Law, but working within those parameters, there is still room for a 6-7 per cent salary decrease.

Bearing in mind the 12 per cent deflation the economy has undergone during the time that civil servant pay scales have actually increased, the effect can hardly be considered drastic. Civil servants continue to enjoy the kind of job security that the rest of the workforce can only dream about. Moreover, 70 per cent of Government expenditure is swallowed up in staff costs, and this figure must be reduced, if we are to weather the storm.

By far the worst problems are faced by those who have already lost jobs as the recession drags on. Unemployment figures have soared over recent years. The jobless receiving Comprehensive Social Security Assistance (CSSA) payments now total 38270 - representing a year-on-year growth of 51.9 per cent, while at the end of August there were 260,717 Comprehensive Social Security Assistance cases - representing a year-on-year growth of 11.3 per cent.

Harsh as it may sound, in these straitened times the Government should also consider a speedy review to reduce payment of the CSSA system. In a deflationary period, living costs are lower, yet standard payments have remained frozen for several years. In effect, CSSA rates have been over-adjusted by well over 12 per cent, and it is important to ensure that welfare payments do not become a disincentive to work. For a family of four, CSSA pays $10,010 per month, well above what many jobs offer.

None of us relish the idea of budgeting for higher taxes or lower incomes. Nor is it pleasant to hear that some long-promised infrastructure projects have to go into cold storage for the time being. On a happier note, the Government will press ahead with the Western Corridor linking Hong Kong and Shenzhen. The more closely we work with the mainland, the brighter our future will be. The FS stressed again the importance of studying ways of mutual co-operation - the optimistic and energetic entrepreneurial spirit so apparent in workers across the border is an echo of the determination that built Hong Kong.

Sometimes it seems as if we have lost that enterprise and enthusiasm - but it can be revived once we accept that we have as much to learn from the mainland, as people there can learn from us.

Perhaps Hong Kong people have had it too easy in past years - making the challenges of the present time hard to accept. But anyone who takes the long term view will recognise that it is far better to accept harsh measures today than to pay an infinitely heavier price in the future. That is the prospect we face - maintain a healthy fiscal reserve, or stand by as one of the world's most envied financial centres falls ever deeper into crisis. As the saying has it - no pain, no gain. The choice is ours.

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