The HK government yesterday revised its economic growth forecast for this year up to 3 per cent, but postponed its target for balancing its budget by two years to 2008/09 from the original target of 2006/07 set by former financial secretary Antony Leung.

The revision came after the government raised its forecast from 1.5 per cent to 2 per cent in August.

"With the current pace of the upturn, I reckon that the economy could attain a somewhat better performance for this year," Financial Secretary Henry Tang told the Legislative Council. He cited improvements in tourist arrivals, retail, labour market, deflation and property transactions.

Medium-term outlook of the economy has turned more positive, underpinned by further reform and opening-up of the mainland market and growing signs of a global recovery, Tang said.

The government therefore lifted the economic growth forecast for the next five years to 3.5 per cent.

Despite the brighter prospects, the government decided to delay its target for balancing the budget to 2008/09 fiscal year.

"The discussion I have had with various groups and sectors over the past two and a half months has led me to believe that the community also favours giving the economy some more room to breathe in the next year or two," Tang said.

He said the budget deficit this financial year was expected to go up to about HK$78 billion, from the previous forecast of HK$68 billion, with the HK$12.6 billion allocated for the economic relief package after the SARS epidemic.

The new forecast had taken into account the adverse impact of SARS on the government's fiscal position and more positive economic outlook over the next few months.

Tang reiterated the three-pronged approach to solving the budget deficit as outlined in the Chief Executive's Policy Address in January, namely to boost economic growth, to cut public expenditure and to raise revenue.

On the expense side, the government plans to cut operating expenditure by 11 per cent, or an average of less than 2.5 per cent every year, in the next five years.

Tang described the plan as moderate. However, the cut would not be uniform across all government agencies to address special needs.

The government, for example, will continue to invest heavily in education and training to cater to a transformation into a knowledge-based economy.

The government-operating expenditure would come down to HK$200 billion by 2008/09 - a two-year delay.

The government remained committed to the goal of bringing public expenditure down to 20 per cent of the gross-domestic product (GDP) from the current 23 per cent, Tang said.

Despite the need to cut expenditure, the government would increase its capital expenditure to HK$29 billion per year in the next few years from the average HK$27 billion per year since 1998/99 to improve Hong Kong's infrastructure.

To raise the funds necessary for the capital works, the government will, as planned earlier, dispose of some of its assets and possibly issue bonds.

On the revenue side, Tang said the government needs a broader and steady source of income to cover the fiscal deficit in the long run and a consumption tax, such as goods and services tax (GST) is a reasonable and equitable approach to the issue.

However, the government would not introduce GST in a deflationary environment and would only levy it in a "healthy and growing economy".

The government would not proceed with its intention to levy Boundary Facilities Improvement Tax since ''the public was not ready to accept the tax yet'', Tang said.

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