HONG KONG: Chief Executive Tung Chee-hwa said yesterday that the Hong Kong government will not be able to balance its budget by 2006-07 because of the SARS epidemic.

Tung made the prediction yesterday at a tea gathering with Hong Kong media in Bangkok where he will attend the 11th APEC Economic Leaders Meetings today and tomorrow.

While admitting the government's inability to balance the books by 2006-07, as scheduled by former financial secretary Antony Leung, Tung did not say when he expected the fiscal balance could be restored. But he stressed that for the sake of safeguarding the Hong Kong dollar peg, it is very important to eliminate the budget deficit.

To that end, Tung pointed out that the government must consider several options, including spending cuts and tax increases. However, the latter would lead to deflation and how much of it could society shoulder has to be assessed. Now might not be the right moment to do it, he warned.

Tung also pointed out that the economic climate has recently taken a turn for the better and growth figures have been better than expected. Jobless rates are falling and property prices rising steadily. Figures are indicating the start of economic recovery.

He had confidence that the budget deficit could be diminished.

The chief executive will give an update on recent developments in Hong Kong to President Hu Jintao at a breakfast meeting this morning.

On Wednesday Financial Secretary Henry Tang Ying-yen will provide more details on the timetable of deficit elimination.

(HK Edition 10/20/2003 page1)