He started his speech in the Legislative Council chamber by saying he would focus on three areas: education, poverty and governance.

Education reform was hailed as vital if Hong Kong were to enter the Internet age. Mr Tung pledged that all parts of society should be able to access and benefit from schooling.

The recovering economy - aided by Hong Kong's links to the mainland and the latter's impending accession to the World Trade Organisation - was helping many people and there was a rosy future ahead, he pronounced in the speech entitled ''Serving the Community, Sharing Common Goals''.

As for governance, the current system might need changing, perhaps to make senior officials more responsible for their policies, but in general it was all working smoothly, he claimed.

The central government in Beijing had not interfered in the running of Hong Kong and there should no longer be any doubts over Hong Kong's autonomy, according to Mr Tung. It was up to Hong Kong people how the SAR would progress in the 21st century.

Ending his speech, which was a few minutes shorter than in previous years, Mr Tung issued a warning and then a rallying cry.

''I have noticed in recent times a change in community attitudes. People are more inclined to adopt a mood of scepticism, and criticism - even belittling the capabilities of our own people,'' he said.

''I am also aware that many of our citizens are tired of this. Most want a society with greater harmony, less hostility, less unnecessary quarrelling but more rational discussion.

''Looking ahead, we still have quite a few problems to address as we pursue Hong Kong's development. We are also facing keener competition as a result of globalisation.

''Instead of indulging in negativism, let us join hands and direct our efforts at making Hong Kong the world city in Asia.''

Earlier he said the economic outlook was good. ''The momentum of our economic growth will persist and the employment situation will further improve, with increasing job opportunities and a decreasing chance of layoffs,'' he said.

''In recent months, we have heard the encouraging news that many companies have started to give their employees a pay rise. This should soon show up as a trend.

''For salaried workers, next year will be a better year. The outlook is certainly optimistic!''

He said spending on education had risen throughout his tenure but conceded: ''the education system of old can no longer meet the challenges of the new age''.

''Following our reunification, the need to groom a new generation of leaders has become even more pressing. Therefore, without sweeping reforms of our education system, the quality of our education would not be able to meet the requirements for social development and the community's expectations,'' Mr Tung said.

He promised that:

• Resources will be more abundant;

• All children can have good quality nursery schooling followed by nine years' free education. Those who want to continue will be given the opportunity;

• A diverse system of tertiary education accessible to all will be developed;

Entry qualifications for kindergarten teachers are to be raised while class sizes will be cut;

More subsidised places will be available for capable children after Secondary Three while more resources will be provided to help schools reform their curricula and improve teaching methods.

Public awareness had changed greatly in the areas of the environment and information technology, Mr Tung said.

Many steps had been taken in both areas and progress would continue.

Measures such as those encouraging taxi drivers to switch from diesel to cleaner LPG fuel have been enacted, but could be negated if the number of vehicles on the road continued to rise, Mr Tung said.

To counter that, the Government will again look at the controversial idea of Electronic Road Pricing - charging drivers to enter certain zones at certain times of day - not to raise revenue, but to cut pollution.

He said society was evolving along with rapid economic and social progress in many areas, but took a swipe at the pre-handover British administration.

''Some of the problems we have encountered did not happen overnight. In the decade or so before reunification, there were problems which could have been addressed, but were shelved because they might have been too controversial or involved arrangements that straddled 1997.

''At the same time, other major cities in the region such as Singapore, Beijing and Shanghai were embarking on their own significant reform programmes,'' Mr Tung told a packed Legislative Council chamber.

''Hong Kong could not stand still, we had to reform in order to keep pace with the changing global circumstances.''

He admitted later that communication might have been inadequate and that preparation for the reforms may have been lacking, resulting in opposition from people in the sectors that required change. He promised this would be addressed in future.

Areas where reforms will continue are:

• Finance - Hong Kong's position as an international financial centre will be enhanced;

• Housing policy - average waiting time for public rental flats will be cut to three years by 2003, an advance on the earlier target;
• Elderly - there will be more residential places in elderly homes and a Healthy Ageing Campaign will be promoted;

• Civil Service - reforms will continue to provide a better, more efficient service to the public;

• Health Care - with the current health care system becoming unsustainable, more studies need to be made and a report setting out future policy will be published, though no time frame was given.