Hong Kong 'must economise'

Mr Tung insists Hong Kong will remain business-friendly

Hong Kong Chief Executive Tung Chee-hwa has warned that taxes will rise and government spending will be cut, as the territory struggles to ride out an economic slump.

We are all in the same boat and should, therefore, support and care for one another

Tung Chee-hwa

In his annual policy speech, Mr Tung said Hong Kong's budget deficit was threatening to damage its economy, and that mending it was his "top priority".

"The economic situation we are facing is severe and unprecedented in decades," Mr Tung said, adding that he saw no indication of an end to more than four years of debilitating deflation.

The territory's budget deficit could exceed 70bn Hong Kong dollars (£5.6bn; $9bn) this year, Mr Tung said - mainly because public expenditure has been rising steadily.

"This is beginning to affect our credit ratings. If not dealt with properly, the stability of our financial system could be jeopardised."

Trimming the fat

Mr Tung now plans sweeping cuts to Hong Kong government spending.

Once-booming Hong Kong is feeling the pinch

He said the 178,000-strong civil service would be trimmed by 10% by 2006/07, mainly through natural attrition - a programme that should help cut government spending by HK$20bn.

He also announced that he and 16 of his ministers and aides would take pay cuts of 10%.

"We are all in the same boat and should, therefore, support and care for one another," said Mr Tung,

Paying up

Somewhat more controversially, Mr Tung hinted that Hong Kong's traditionally low taxes might have to rise.

"We... intend to introduce appropriate tax increases and adjust government fees and charges upwards to help eliminate the fiscal deficit," he said.

Investors hope taxes will remain low

He said details would be given in the next budget, due in March.

By way of compensation, Mr Tung promised that he would strive to liberalise Hong Kong's business climate still further.

"To overcome our economic difficulties, we must strive to attract foreign investment, retain domestic investment and boost local economic activities, with a view to broadening our production capacity, creating employment, and expanding our tax base," he said.

"We have to reduce business costs by cutting red tape, embarking on deregulation, streamlining procedures and enhancing administrative efficiency.

"We believe we can do better."

Building bridges

Hong Kong's economy, once one of the most dynamic in the world, has slowed sharply in recent months.

In 2001, it grew by just 0.1%, and although 2002 should have brought improvement, the government is still predicting no more than 2% growth for the year.

Unemployment, not traditionally one of Hong Kong's headaches, has flared up as major economies such as the US and the eurozone spend less on the territory's exports.

As a result, Mr Tung pledged to bind Hong Kong closer to the still-booming southern Chinese economy, possibly by means of a formal pact later this year.

In addition, Mr Tung confirmed that a long-planned bridge linking Hong Kong to Macau and Zhuhai on the Chinese mainland would be built soon, despite the government's financial hardships.