Financial Secretary Antony Leung Kam-chung looks to be caught between a rock and a hard place. Not enough money is coming in, too much is going out and nobody wants to pay for a deficit that looks decidedly 'structural' in nature. Yesterday's forecast of a full-year financial deficit of $60 billion confirms that Hong Kong is living beyond its means. Given the SAR faces a potential recession, unemployment is rising and the land market is stagnant, in itself that is no cause for alarm. Standard economic management says money hoarded in good times should be drawn down in bad times. The problem is that recurrent spending now outstrips recurrent income, while returns from land sales and lease conversion premiums, which have traditionally funded costly infrastructure works, have dried up. Shrinking income from the reserves, drawn down to fund the deficit, have hit the Treasury with a double whammy. Having narrowed the tax base in the 1990s, it has no source of income without sharply increasing the burden on households. It is easier to increase tax on a population used to paying it than force people to pay who are used to being exempt. This is the root of Hong Kong's financial dilemma that must be addressed. Above all, the SAR's dependence on land as a source of taxation needs reassessment. It is possible that two years hence a buoyant economy and an undersupplied housing market could mean developers are queuing up to buy spare land and sign off on lease conversion premiums. The idea that Hong Kong's property market will never recover and land development rights will never again have huge economic value is silly. The Hong Kong Government has funded itself for 150 years through its monopoly over land and it can no doubt continue in the same vein. The question is what kind of financial regime can manage land resources effectively while creating conditions for a competitive and balanced economy. At the most basic level, it must be accepted that lease premiums represent taxation rather than the pretence that such payments are simply commercial transactions between the Government and developers. From this flows the question of how best to tax land. There are many options but once explicit choices are laid out, the question of how taxation is raised to fund public spending can be addressed legitimately. Until that happens the population will see their Government as a rent-taking landlord rather than an agent of the people funded by the people.