How convenient for Financial Secretary Donald Tsang Yam-kuen that the Government's calculations - announced in his recent Budget - should fortuitously conclude Hong Kong needs to hold fiscal reserves of between $300 and $500 billion in order for the administration to function properly, guard against unforeseen contingencies, and protect the currency. Funnily enough, the present level of the reserves - $446 billion - just so happens to fall within that range, so neatly answering all those critics who doubt whether Hong Kong really needs to hoard such huge reserves. No doubt Mr Tsang and his colleagues will argue this is coincidence. They may even find someone who believes them, although experience so far suggests this will be an uphill struggle. Provisional legislators were certainly suspicious. Democratic Alliance for the Betterment of Hong Kong chairman Tsang Yok-sing questioned how the basis for the Government's calculations could be believed when its conclusions were so politically convenient. Even the Financial Secretary later admitted the $300-$500 billion range might not be the right one and could be reduced if necessary. 'This is something that is open to debate and open to adjustment if people say we have too much reserves,' he said. Mr Donald Tsang's caution is understandable. No previous Financial Secretary has ever set out to give such a detailed justification of how much reserves Hong Kong should hold. And it is easy to see why. For it is doubtful his arguments in favour of retaining such huge amounts indefinitely will stand up to much scrutiny. As outlined in the Budget, this requires the administration to hold an operational reserve equivalent to three months' government expenditure, to tide it over those months every year when tax receipts and other income slow to a trickle. In addition, Mr Tsang claimed a contingency reserve of nine months' government expenditure was needed to protect spending programmes against any unforeseen change in the economic climate. This much sounds quasi-reasonable. But it is not new. Arguments about the need for reserves totalling a year's worth of government spending have been heard before, notably in 1992 when then-financial secretary Sir Hamish Macleod faced similar criticism for hoarding large reserves. But since total government expenditure for the past year is estimated at $198 billion, this only justifies less than half of the $446 billion now in the reserves. Rather than admit the remainder ought to be returned to the public, Mr Tsang managed to come up with an excuse for keeping it. He claimed a further monetary reserve was needed to underpin the Hong Kong dollar and chose the M1 measure of the money supply as its benchmark. Conveniently this amounts to a further $202 billion, so boosting the total necessary level of reserves to $400 billion, or a range of $300-$500 billion. This was a smart move on Mr Tsang's part since, after the recent speculative attacks, it is difficult to question anything justified as necessary to protect the peg. So few are likely to point out how these extra reserves merely duplicate the role of the $569 billion Exchange Fund, which is specifically tasked with protecting the peg. Nor has it been widely noted that, while M1 is the right size to suit the Government's purpose, it is one of the least useful measures of money supply. But the fatal flaw in Mr Tsang's reasoning is much simpler. In his 1996 Budget he predicted reserves of $150 billion at the time of the handover. Sir Hamish earlier estimated the amount would be $71.6 billion. Neither financial secretary ever suggested either figure would be inadequate. Instead Sir Hamish hinted it was more than enough. Since then the reserves have soared far higher. Mr Tsang deserves some praise for setting out in more detail than his predecessors what he considers the proper level for the reserves. But the debate he has begun is likely to lead to the conclusion that the reserves are far higher than needed and that it is time to devise a long-term strategy to return more of the SAR's excess wealth to its people.