Through submissions, lobbying and comments here and in other media, your Chamber has taken a firm position on the need to rebalance our public accounts. During the SARS crisis, we recognised the need to act quickly to confront an immediate threat to our economy, and advocated measures to address highly unusual circumstances, realising that in the short term this would exacerbate the deficit situation. Now, with the necessary relief measures in place and economic prospects brighter, it is time to return to our top priority: rebalancing our public accounts.

In the next few months, government will again be drafting the budget, and I believe it is time to get serious about bringing our spending in line with our revenues. Over the past decade, our recurrent revenues increased an average of 1.3 percent a year, while spending grew 9 percent per annum. In the first half of this year, the shortfall on the operating account is likely to be nearly as large as that for all of last year, which at more than 5 percent of GDP, over $60 billion, may well affect our international credit rating. At this rate, our fiscal reserves will vanish in 2006.

The anticipated switch to accrual accounting, while long over-due, will make the overall deficit look smaller, but doesn't change the pressing need to get serious about bringing spending into line with income. Many people have suggested the use of government bonds to improve the fiscal position, which may be acceptable for the funding of infrastructure projects, but not to cover the operating deficit.

As with any corporate balance sheet, governments have to consider both spending and revenues. In Hong Kong both columns need major surgery. However, unlike companies that can close down unprofitable operations relatively easily, governments are constrained in their cost-cutting actions. Aside from public expectations that services provided in the past will continue to be available (at little or no cost), civil servants are employed on "permanent and pensionable" terms, and cannot easily be laid off.

Our recurrent revenues have been declining for five straight years, while our spending has increased without pause. In this year's five-year forecast, a 7.7 percent average annual rise in operating revenues from government taxes, fees and other sources is projected, nearly three times as fast as the estimated growth in nominal GDP. This is optimistic.

Our shortfall in revenues is closely tied to economic performance, so it should be no surprise that more than 40 percent of the decline in operating revenues in the 2002-03 fiscal year was due to lower profits taxes. If companies are less profitable, higher tax rates will not solve the problem. And, when companies are struggling to recover, taking a larger share of their earnings in taxes slows job creation. We must find another way. It is the spending side that causes the most concern. After five consecutive deficits we have yet to see a major effort to reduce the cost of government. Operating expenses, which are slated to rise 5.4 percent this year, are already up 20 percent, with no relief in sight. It is time to set lower spending limits, not higher targets.

What can be done? First, we need to trim the size of government through significant head count reduction and far greater use of public-private partnerships. We therefore welcome moves to attract private investors to redevelop the Central Police Station, build an ice-sports centre and town park in Tseung Kwan O and create a leisure and cultural centre in Kwun Tong. More such projects need to be added to the list, and quickly. But there are examples of government entities moving in the opposite direction, for example the Housing Authority is now planning to "in-source" certain maintenance projects previously let to the private sector.

Trimming head count is more difficult, but needs to be done. One area is water and sewage, which have been successfully privatised in other communities. Another is highway maintenance, and a third is care for the elderly. These are services paid for by the government, either directly or through subvention that may well be handled by the private commercial sector. While government would still fund the work, private contractors have been proven time and again to be far more economical service providers.

Take it a step further. The trading funds were set up in 1993 to improve public services by putting functions such as land registration on a more business-like footing. They were a neat step to move toward privatisation without having to face the political problems of selling off state assets prior to 1997. With that concern behind us, we are now free to move toward full privatisation, and in doing so, reduce the cost of government services. This is an important point: the objective need not be full cost recovery, but merely cost reduction.

At the same time, the tax base is much too narrow to support even a reduced spending program. Sixty percent of all salaries taxes received are paid by just 10 percent of taxpayers, and less than one-third of all employed people even pay a salaries tax. We need to broaden the tax base. The quickest way to do this is to reduce personal allowances, which are among the highest in the world. Over the medium term, we also need to ensure that our revenues are more robust in the face of economic uncertainty. When times are tough, profits and incomes fall, and so do revenues. It is therefore time to undertake a serious discussion of the overall tax regime, and to start the process of education and consultation on the nature and level of a broad-based consumption tax.