It was not so long ago that finance officials were left red-faced when they handed in the SAR's balance sheet. Not because of a failure to balance the books, but because of their poor record in forecasting large surpluses. Those days are gone. Once proud of Hong Kong's fiscal strength, finance officials have now come a long way in confessing a loss of discipline and control over the management of public finances. Secretary for Treasury Denise Yue has now confirmed that Hong Kong suffers from structural deficits, and such a diagnosis will set alarm bells ringing among civil servants who know that cutting public expenditure is the most viable short-term solution for the Government. The belated official verdict of chronic deficits came weeks after Financial Secretary Antony Leung Kam-chung said publicly that the budget deficit problem was structural, not cyclical. Both he and Chief Executive Tung Chee-hwa have indicated the immediate solution is to reduce expenditure. They maintain they are confident of solving the deficit problem in the next few years. Speaking on Tuesday, Mr Tung pledged that government plans to spend $600 billion on infrastructure projects in the next decade would go ahead despite the enormous fiscal pressure. The $369 billion fiscal reserves estimated to be held by the end of next month will be used up by 2008-09 if there is no change in the Government's fiscal policies. This is even with an average growth rate of five per cent factored into the Government's forecast model. With no signs of any drastic increase in revenue in the immediate future, it appears that the confidence of Mr Tung and Mr Leung was based on a positive assessment of room for major cuts in government spending. It will probably take at least four or five years to introduce a sales tax, which could significantly boost revenue. Additional revenue from a land departure tax will be small. Realistically, the Tung team will only be able to lobby for public support for major new taxes as a medium-term measure after they have trimmed the civil service through sackings and/or pay cuts. There is no other immediate or viable alternative option open to Mr Tung and his top aides. Rather than paving the way for new taxes, the report on deficits published yesterday may set the stage for a major drive to re-engineer the public sector through an overhaul of its size, pay and benefits.