An Australian Sovereign Wealth Fund

An Australian Sovereign Wealth Fund

Norway and Chile have them, so does China, and the OECD has recommended that Australia develop one – so why doesn’t Australia have a Sovereign Wealth Fund (SWF)?

The double edged sword of a minerals boom is shaping up as the Gillard government’s most pressing policy issue. There is a need to future-proof revenues on the one hand but also to assist industries struggling under the strong dollar on the other. An SWF has been loudly pushed as the text-book instrument to achieve this but opinion is surprisingly divided, The Prime Minister has rejected the need for an SWF and put all her bets on beefed-up superannuation.

Malcolm Turnbull’s 2011 essay on the subject discusses how an SWF could fit into the Australian economy, “A national savings fund of this kind would become a matter of real national pride, evidence that we have the discipline and vision to recognise that good times don’t last forever, that demographic changes will place greater demands on future budgets and that thrift is both virtuous and prudent.” says Turnbull.

As the Australian mining boom reaches a zenith, debate has shifted from the benefits of the boom to the ill effects of a two-speed economy. We are being forced to look at the true costs of dependence on one industry and to consider the potential impacts of a shock to either supply or demand.

The WA Premier this month proved his support for the SWF concept by announcing that WA will develop it’s own stand-along SWF. “The Liberal-National Government is committed to ensuring future generations of West Australians have a legacy from this historic period of development, built predominantly on the significant but finite resources available to us at present.” says Colin Barnett. According to TD Securities, WA accounts for 46% of Australian exports and it’s average annual wage stands at $108,000, far above the national average of $66,500.

Depending on its architecture an SWF can achieve any number of goals. The Chilean and Norwegian models offer useful examples for Australia and are both more transparent than the Chinese and Korean models, plus their natural resource endowments match that of Australia. Chile’s stabilisation fund aims to smooth the erratic fluctuations in the price of copper on which their economy is heavily dependent; it receives all surpluses above 1% of GDP. A separate pension fund receives the initial surplus that is less than 1% of GDP.

The Norwegian fund takes a longer-term perspective and receives the net earnings from the Government owned North Sea oil reserves. Strict rules are enforced which allow only 4% pa of the kitty to be withdrawn for government expenditure. A key strategy here is that all investments are made offshore in an attempt to balance the inflationary impacts of a historic spike in revenue. While there is debate about the effectiveness of this deflationary strategy, Australia should take note.

Australia already has the Future Fund, while it’s not an SWF it demonstrates that with clearly defined aims and transparent management a centrally run fund can build strong returns. This fund was implemented in 2006 by the Howard government with a mandate to meet unfunded pension liabilities for former public servants after 2020. It currently manages funds totaling more than $73 billion. The outgoing Chairman of the fund, David Murray, supports the inter-generational equity that could be delivered by an SWF. “During the past 20 years, Australia has enjoyed an average of 3.3 per cent in real gross domestic product growth annually. Yet Australia has surprisingly little to show for this lengthy uninterrupted expansion in key policy areas. Despite the Future Fund and the modest nation-building funds, Australia remains a savings-short nation and suffers a considerable infrastructure investment gap.” says Murray.

So why has a broad SWF not been tabled by the current government? It seems like a sensible, left-leaning policy, as Angela Cummine put it, “a model of egalitarian wealth distribution compatible with a capitalist economic system.” Equally perplexing is that most of the pro-SWF commentary is coming from the conservative press of The Australian and News Limited. We are seeing a centralised model of government intervention being touted by those on the right, as Liberal member Josh Frydenburgh suggests “A sovereign wealth fund can perform several functions; it can be the source of long-term wealth creation, otherwise known as inter-generational equity, or have a shorter-term objective to stabilise revenue cycles.”

In 2000 Australia’s annual resource and energy exports were $45 billion, a decade later this figure stands at $176 billion. The country’s terms of trade and the dollar have never been so strong. These good fortunes helped Australia to navigate the rough seas of the GFC, but it would be folly not to look to the horizon and prepare for the possibility of rough seas ahead. Whether the aim is to achieve short-term revenue stability or to ensure inter-generational equality an SWF, which is managed with appropriate transparency and accountability, can smooth the ripples.

The Minerals Resource Rent Tax will play a big part in this. It has the potential, however grudgingly, to redistribute some of the spoils of Australia’s natural endowments but its efficacy depends entirely on how it is managed by the Government.

An Australian SWF has found a number of influential supporters including Fairfax chairman Roger Corbett, Economist Professor Warwick McKibbin, the Commonwealth Bank’s Ralph Norris, Mike Smith at ANZ, and Tabcorp’s Elmer Funke Kupper.

Doubters, such as John Roskam at the IPA, propound the notion that it is inefficient to take capital out of the hands of individuals and corporations, and that it is these private interests who can best invest for the future – laissez-faire economics in its purest form.

A further rejection comes from a monograph by Robert Carling and Stephen Kirchner in which they argue, “that the existing Future Fund is unnecessary and that a greater use of a SWF will harm Australia’s current and future prosperity. The investment returns on the Future Fund’s assets are inadequate compensation for the foregone alternative uses of these funds. The assets in the Future Fund may also undermine rather than strengthen incentives for long-run fiscal discipline. Greater use of a SWF would only compound these problems and create additional economic risks…. Many of the desirable objectives of a SWF could be achieved through binding fiscal responsibility legislation. Foreign SWFs are typically backed by such legislation, but Australia’s Future Fund operates outside any broad fiscal policy framework.”

The Prime Minister is adamant that an SWF is not the way to go about ensuring the country’s future prosperity. The government’s hopes are instead pegged to the existing model of superannuation payments. With mandatory super payments creeping up to 12 per cent by 2019 the Prime Minister claims that we will all be fund managers, “I believe that superannuation is already our trillion-dollar sovereign wealth fund – but with market benefits. That’s because it’s privately managed by thousands of trustees instead of a sovereign wealth fund managed centrally by a Canberra-appointed manager”, says Julia Gillard. This begs the question of how qualified these thousands of trustees are to ensure the ongoing capital growth of the country’s savings. As Angel Cummine suggests, “Gillard’s statement amounts to a shirking of government responsibility for long-term savings by shifting risk to individuals.”

The Deputy Treasurer Bill Shorten agrees that boosted superannuation is the way forward, as he said in The Australian, “Increasing superannuation savings substantially displaces arguments for a sovereign wealth fund.” Shorten has been careful with his words here and it is worth noting that he hasn’t said that superannuation can replace the aims of an SWF, but rather that it “displaces arguments”.

The two instruments are so vastly different in their architecture, their outcomes and their timelines – it is naive to think that one can replace the other.

Superannuation funds have the sole function of maximising returns for their members, the investment decisions are relatively short-term and made within narrow bounds. This is prudent money management, but it won’t address the unique situation Australia faces in dealing with an unprecedented boom. An SWF could be designed to achieve some clearly defined goals, whether they be to ensure inter-generational equity or the development of a centralised fund to finance large infrastructure projects, the national interest would be at the heart of it.

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