The government's forecast of HK70 billion for the year now seems unattainable, although the second half normally sees stronger tax inflows. However, Financial Secretary Antony Leung Kam-chung said the government was confident it could deal with the growing deficit: "We will try to tackle it in three ways: to revive the economy, to raise revenue and cut expenditure." The Basic Law requires the government to keep spending within the limits of revenue to avoid deficits.

The government has been publicly worrying about how to control the deficit for months, and has floated various proposals for increasing taxes, all of which have been met with strong disapproval by business interests and economists. Better control of expenses seems the preferable route, but the government would have a fight on its hands if it tried to cut public sector wages, even though they are widely thought to be too high.

Speaking on Tuesday, Executive Councillor, James Tien announced plans to lobby the civil service unions for further salary reductions of between 6% and 7%, but back came the response: 'Another paycut? No way,' from Leung Chau-ting, the Chairman of the Federation of Civil Service Unions. 'The huge deficit is not caused by us, and it's unreasonable to ask staff to bear the brunt. One may argue it is failed governance that caused the deficit problem.'

There was a sharp rise in Hong Kong dollar forward rates yesterday, reflecting investors' fears have about the currency. Although the government has firmly ruled out any change to the SAR's dollar peg, there has been persistent speculation that it will have to go, and many economists areopenly in favour of its demise. Ratings agency Standard & Poor's lowered its outlook for the Hong Kong dollar last week, raising the likelihood of a rating downgrade in the next two to three years.

Hong Kong doesn't face a cash crisis, however: it has financial reserves of HK$301.7 billion, down from HK$316.5 billion in August.