EVEN before he handed over the reins to Donald Tsang Yam-kuen, the then Financial Secretary Sir Hamish Macleod had warned the first local Chinese financial chief he would face a more difficult task than his predecessor. Unfortunately, he was right. In his first six months in the hot seat, Mr Tsang has faced challenges from legislators and community leaders representing diverse interests as well as from the future sovereign. While grass-roots leaders put pressure on him to spend more on welfare and widen the tax exemption net, the business sector has been more cautious on excessive social spending and wants more to be spent on stimulating the economy, such as a cut in corporate tax. The death of more than 40 elderly people during the cold snap over the Lunar New Year has given ammunition for legislators to use when asking for more immediate funding for welfare. Some angry lawmakers have vowed to veto the Budget given the slower-than-expected growth in social welfare spending. China, however, thought otherwise and has kept warning that excessive spending could be disastrous. Chen Zuo'er, head of the Chinese expert team on the budget, expressed their fears in the much-publicised analogy of a racing car at full speed. The result: a fatal crash killing all the passengers on board. Obsessed with the conspiracy theory that the British Government would empty the pockets of the territory before it departs, Beijing has been on constant alert over any government spending plans. Doubt cast by mainland officials on the surge in the estimated cost of the multi-billion-dollar rail link in the northwestern New Territories is just the latest case in point. Caught between these conflicting demands and constraints, Mr Tsang's room for manoeuvre in his maiden Budget is limited, say officials and analysts. Even though the upcoming Budget remains the sole business of the colonial administration, Beijing has been adamant that this year's financial arrangements have an impact on the 1997/98 Budget. With three quarters of the 1997/98 Budget falling after the change-over date, the Chinese Government argues it has a legitimate say in the deliberations on behalf of the Special Administrative Region. It will be the SAR who suffers, it claims, if the Government does not manage its finances well. Such warnings by Beijing cannot be taken lightly. Friction between the two sides on the fiscal blueprint will create more uncertainty and deal a blow to confidence. Any major concessions by the Government to the legislators will be greeted with scepticism in Beijing, which is worried that the mandarins are quietly handing over the decision-making power to elected legislators under the disguise of a more accountable government. The price to pay, however, for stone-walling the demands of the politicians could be even higher. Any failure by the Government to do something, or at least, to be seen as doing something, will fortify claims that it has become a lame-duck with its hands tied, leaving Beijing to call the shots. As the voting results in Legco since it was formed in October show, there is a real possibility that the Government's Budget could face its first defeat in the legislature's history if it fails to secure enough votes. It will have serious implications for political and economic confidence as well as the authority of the administration. Political pressures aside, the challenge for Mr Tsang to inject fresh impetus in the lacklustre economy is equally severe. After years of rapid economic growth, the territory's economy has shown signs of a downturn, beginning last year. Unemployment figures reached an 11-year high of 3.6 per cent late last year. Although they went down to 3.3 per cent in the November to January period, they remain at historically high levels for Hong Kong. Government figures also showed a slow-down in economic growth. The gross domestic product saw a sluggish 4.2 per cent annual rate in the third quarter of last year, compared to 5.4 per cent for all of 1994. The growth rate for the full-year 1995 is expected to barely reach the government forecast of five per cent. Analysts believe 1996 will not see a major increase in that rate. Taking the political and economic scenario together, it is believed that Mr Tsang will stick to the trademark of prudence of his predecessor Sir Hamish in the Budget on Wednesday. In his first speech to business leaders on his fiscal policy in September shortly after taking office, Mr Tsang sought to allay fears that his new leadership would bring about new policy. 'I want to make it plain to you today that there will be no sharp break with the past, no major changes of policy and absolutely no gimmicks.' On Tuesday, he reiterated that 'we in Hong Kong for a generation have been doing basically the right thing'. 'We do not have to focus on the choice between spending reductions and tax increases precisely because we have already kept our spending under careful control.' Mr Tsang could justify any decision not to introduce drastic reforms by citing the positive economic data released in the past few weeks such as unemployment and inflation as well as renewed interest in the property market. There are good reasons for him to argue that it is better to stick to the conservative approach and not to tinker with what he has described as a perfect computer - the territory's fiscal policy. Making clear that he wants to keep his job over the next five years, he might tend to be more modest in his ambitions in his first fiscal blueprint. And being the first ethnic Chinese to become the Financial Secretary, the last thing he wants is a financial crisis and any threat to the territory's fiscal strength. Moreover, there is no room for complacency for the Government in not taking innovation and leadership to maintain the dynamism of the economy in view of the rapid changes in the region and worldwide. If there has been any magic formula for Hong Kong's economic miracle in the past decades, it might simply no longer work in the new era. The development of the service industry is undoubtedly an important component of the future economy. None should believe, however, that there are magical solutions and quick results. The problems facing the Financial Secretary are many-fold: political and economical, short and long-term. The first step towards finding a solution is to clearly identify the problems and work out practical and effective measures. The community should not merely look for measures to solve immediate problems such as welfare of the elderly and improvements in the environment in the upcoming Budget. What Hong Kong needs most is a blueprint that tackles immediate problems and equips the territory for challenges ahead.