PUBLISHED IN ‘THE PARTY ROOM’ VOL 9, Winter 2012: Despite gaining support in influential circles as a mechanism for capturing today’s wealth for future generations, a sovereign wealth fund should be firmly rejected.
That such a fund involves government purchasing billions of company shares should, in itself, be sufficient to sway most liberals and conservatives. An examination of the evidence should put it beyond doubt.
To start, in order to build a sovereign wealth fund, the federal budget should be in surplus with debt paid off. With national net debt of $132 billion and a tiny surplus forecast in the forward estimates, it could be decades before we are in this position. Of course, the government could borrow more in order to finance a share portfolio, but few would seriously consider this a sensible option.
Second, even if no national debt existed, putting budget surpluses into a sovereign fund is a sub-optimal way of catering for future government expenditures.
As former Treasury Secretary Ted Evans points out, the best thing we can do to support the living standards of future generations is to ensure today’s policies are geared towards maximising GDP.
This means lowering taxes or building good economic infrastructure (such as port expansions or completing the Melbourne ring-road), rather than keeping taxes higher to accumulate shares in Procter & Gamble and Mobil.
Of course, there are times when some economists will argue the need to increase national savings (or reduce consumption) in order to maximise growth. A sovereign wealth fund, being a form of national savings, would support such an objective.
But private savings, where thousands of companies and individuals invest in the full diversity of investable assets, is better than public savings. It is better in principle, because it leaves decisions in the hands of individuals, rather than government. And it is better economically because the allocation of public savings is inevitably influenced by political imperatives, even if the allocating body is at arms length. Further, government can quickly own a sizeable proportion of a particular company, creating conflicts of interests for regulators.
Consequently if we want to increase national savings and reduce consumption, then we should create better incentives for individual savings (such as further tax concessions on superannuation) rather than increase government savings.
At any rate, our national savings rate has been at or above comparable countries for the last decade. The case has not been made that our savings rate is impeding our growth.
It is rare for advocates of a sovereign wealth fund to not mention Norway’s huge fund, created through the revenues from North Sea Oil. It is an impressive fund, but it also demonstrates clearly the opportunity cost of a SWF. For example, CIS economist, Oliver Hartwich, calculates that instead of putting all its natural resource revenue into the SWF, Norway could have cut every national tax (except the VAT) to zero while maintaining existing services. (It is presently one of the highest taxing OECD countries). Imagine what this would have done to inward investment and economic growth. It could have turned Norway into the Hong Kong of Europe – with natural resources and less poverty.
More recently, a sovereign wealth fund has been suggested to help stabilise our currency (presumably by exclusively purchasing US dollar assets or currency). But with the Aussie being the world’s 5th highest traded currency in a $4 trillion per day market, how much impact would this have? Further, the RBA already has this capacity.
The final objection to a sovereign wealth fund is political. Any fund established today would inevitably be raided well before its set objective. Labor has form in this. The Rudd/Gillard Government has already squandered much of the Building Australia Fund and the Higher Education Endowment Fund – funds explicitly established as long term assets.
It is superficially attractive to have a big pot of money owned by the Government, sitting there for a rainy day. But nothing comes without tradeoffs. Keeping taxes high so that a government can purchase shares on our behalf is wrong in principle and less attractive economically versus other options.
The best we can do for future generations is hand over a strong, growing economy. That means paying back our debt, and then using surpluses to reduce taxes, build economic infrastructure and, when necessary, increase private savings.
