After Hong Kong-based bank HSBC warned last week that the SAR's economic recovery may lag behind its regional rivals due to weaknesses in corporate balance sheets and the government's shaky fiscal situation, PricewaterhouseCoopers has now added its voice to the chorus of Jeremiahs talking down Hong Kong's fiscal outlook.

Speaking two days after meeting Financial Secretary Antony Leung, PricewaterhouseCoopers partner Tim Lui warned yesterday that the government must balance its books within the next five years or risk a foreign investment backlash. "Foreign investors are getting concerned about the fiscal situation. If we can't convey the message that Hong Kong has the ability to deal with the situation, it could erode the confidence of foreign investors and cause damage to investment activities,'' Lui said.

Chief Executive Tung Chee-hwa said earlier yesterday the government would achieve a fiscal balance in five years, and Lui expressed confidence in the government's ability to meet its five-year target. "I believe the government can do it and it must do it,'' Lui said.

Tung estimated a deficit of at least $60 billion this year for the SAR, and PricewaterhouseCoopers estimated a $50 billion deficit. The company also predicted up to a $30 billion deficit in 2003. The core solution to the SAR's fiscal hardship, Lui said, was slashing government expenditure. This would, he added, remain a budget priority. The Financial Secretary has promised not to raise taxes or broaden the tax base to prevent putting further pressure on the crippled economy.

Lui stressed that the government should start looking into introducing means of generating higher revenue should the deficit remain sizeable. Lui, also member of the advisory committee on new broad-based taxes, said one of the feasible options would be the imposition of a 3 per cent consumption tax, which would raise an extra $18 billion. However, the Chief Executive has ruled out the possibility of new broad-based taxes such as sales taxes being introduced this year, deeming the idea to be a 'non-starter' while the economy is still weak.