The Legislative Council (LegCo) carried a non-binding amended motion yesterday, asking the government to increase its share in the Exchange Fund income from investments to strengthen the treasury.

Financial Secretary Henry Tang responded that any transfer from the Exchange Fund to general revenue was governed by law, but still the fiscal reserves had to be kept at a "decent level" for the stability of the Hong Kong dollar and to prevent external attacks on the economy.

Tang was present for part of the debate in LegCo, and said the Exchange Fund was not a revenue-raising instrument. Instead, Hong Kong should look towards broad-based taxation for sustainable finance that would meet public needs.

"Reviewing the arrangement for sharing of revenue between the Exchange Fund and fiscal reserves is one thing, but the use of the Exchange Fund to subsidize general revenue is an entirely different matter," he said.

"I'm not opposed to exploring how we may improve the balance between the desire for higher returns and stability of income, subject to the overriding need to ensure monetary and financial stability."

The existing sharing arrangement, decided upon in 1998, has served the government well, Tang said. But since Hong Kong is an "external economy", it's highly vulnerable to external attacks such as the Asian financial crisis. Hence, Hong Kong must maintain a considerable level of reserves.

Liberal Party legislator Howard Young moved the original motion, saying he didn't want part of the Exchange Fund capital to be taken away. But since the Exchange Fund has risen to tens of billions of dollars from yearly interest incomes, there's no reason for the government to endlessly add them to the cumulative surplus.

"I hope the government would change the ratio of the investment income," Young said. "Over the past eight years, the government has annually received about HK$20 billion from investment income. If the government increases the ratio, it will have more money to improve people's livelihood and the business environment."

Young was referring to the almost HK$900 billion of the Exchange Fund being kept by the Hong Kong Monetary Authority, plus the HK$300-billion fiscal reserves.

The Democratic Alliance for the Betterment and Progress of Hong Kong's Chan Kam-lam moved a mild amendment, asking the government to strive for fiscal balance commensurate with the GDP besides increasing the investment income ratio.

Liberal Party Chairman James Tien said that if an increase in the investment income ratio yielded more income, it would achieve a balanced budget, together with such other incomes as salaries tax and profits tax.

"That would enable the government (to have) enough financial resources to tackle poverty and support education and medical services. The government should not be overly cautious with its finances... I think we have answered the question: Where does the money come from?"

The government gets about HK$30 billion each year from the Exchange Fund investment income, accounting constituency legislator Mandy Tam said. That is equal to a 3 per cent rate of return, which can be achieved very easily, for it's normal for fund management investment profiles to achieve a 5 per cent return.