Chief Executive Tung Chee-hwa told British business leaders yesterday that Hong Kong had started to recover from the economic downturn. He added that foreign investors should share opportunities brought by closer ties between the city and the mainland. But Mr Tung also admitted that the government was 'not very smart' in the past over addressing the staggering budget deficit, acknowledging that unpopular cost-cutting and tax-rising policies had led to public discontent. Speaking in a luncheon organised by the Hong Kong Association in London, Mr Tung said economic recovery started after the Sars outbreak. The implementation of the Closer Economic Partnership Arrangement meant ample opportunities for professionals, services and production industries to flourish in the mainland market. But he said tough challenges remained on how to sustain economic growth, address deflation, solve structural unemployment and - most difficult of all - balance the books without hurting society. He said he was confident of meeting the revised target of solving the deficit by 2008-09, but said it would take 'political will and lots of sacrifices'. 'The whole [of] Hong Kong was not happy with us because [measures implemented earlier] included tax increases for the middle-class people. We did what we did and the lesson was that politically you cannot just look at the budget. You have to look at the politics also. 'We need the political will to get things done, but we also have to be politically smart as to how to do it. I wasn't sure we were very smart last time,' Mr Tung said. He also said the government should take up the issue of constitutional reform by launching a public consultation. Mr Tung met Chinese ambassador to Britain Zha Peixin earlier in the day. He was due to meet British Prime Minister Tony Blair today.