Wrong Time for a Sovereign Wealth Fund

I spoke today in parliament on a Greens motion proposing a sovereign wealth fund (curiously, while Malcolm Turnbull and Josh Frydenberg have both publicly argued for one, they didn't come along to support Adam Bandt's motion today).

My speech draws heavily on an opinion piece I had published in the AFR last year.
Private Members' Business: Sovereign Wealth Fund
28 February 2012

It is always a pleasure to follow one of the modest members in this place! Opened in 1880, the Melbourne Royal Exhibition Building is widely considered a national treasure. It was the first building in Australia to achieve World Heritage listing. It was made possible by the discovery of gold in the 19th century. If you want to see the legacy of the first Australian mining boom, you just need to look around central Melbourne. The question we are facing today is effectively this: would Victoria now be better off if the Victorian government of the 19th century had saved the money rather than building infrastructure? That is basically the argument made by those who argue that the right policy response to today's mining boom is a sovereign wealth fund. One of those sovereign wealth funds has various advocates. I have certainly heard the members for Wentworth (Malcolm Turnbull) and Kooyong (Josh Frydenberg) in the popular press making strong arguments in favour of sovereign wealth funds.

There are typically three arguments made by proponents of sovereign wealth funds and it is worth going through those in turn.

First of all, some say that with the Australian dollar at historic highs we ought to amass greenbacks as a form of insurance against a currency slump. It is certainly true that a currency slump would be a shock to the economy, but it is not the only one we have to guard against. Governments have to anticipate and react to natural disasters, fiscal shocks and even unexpected technological change. We have already got substantial foreign holdings. The Future Fund has $75 billion, of which about a quarter is in overseas equities, and Australians have $1.3 trillion in superannuation, of which about a fifth is overseas assets.

The second argument made for a sovereign wealth fund is that it would cure Dutch Disease, which occurs when a mining-induced currency rise hurts other export industries such as manufacturing, tourism or higher education. Most likely it is true that saving a greater share of mining tax revenues would lead to an easing in monetary policy and therefore a lower exchange rate, but the effect would be modest, particularly under current mining tax rates. If your top priority is to cure Dutch Disease, a sovereign wealth fund is more of a bandaid than a vaccine.

The third argument for a sovereign wealth fund is that we need to boost national savings. It has got a virtuous ring about it, but it misses the fact that Australians already save a great deal. In 2010 our gross national savings rate was 25 per cent - higher than Japan's. The current federal government's fiscal consolidation is one of the fastest on record and a significant share of government investment is a down payment on future productivity. That is what we are doing with the National Broadband Network, education and transport. If you believe that Australia needs to save more, you need to say which taxes you would increase or which spending you would cut. A sovereign wealth fund without deposits has all the usefulness of a pub without beer. To put it another way, a sovereign wealth fund is in simple terms a piggy bank that contains foreign currency. It is not much use if it is empty.

At its core the debate over a sovereign wealth fund comes down to intergenerational equity. Most economists and philosophers believe our generation has an obligation to hand on to our children at least as much wealth as we inherited. We do not need to preserve every hill and rock, but if we use up an asset we should replace it with one at least as valuable. That affects how we think about the climate change debate. The Great Barrier Reef has extremely high value, so it merits urgent action by our generation to preserve it. But intergenerational equity also reminds us that future generations will be richer than us and not necessarily any more public spirited, so there is no philosophical obligation to leave our children an overstuffed piggy bank rather than, say, a good education and a well-functioning rail network. Indeed, if we were to slash spending on skills and infrastructure and save the proceeds, future generations might well condemn us as short-sighted scrooges.

This is not to say that there is not a strong case for a sovereign wealth fund sometime in the future. Maybe in the future we might be able to think about a Norwegian-style fund to build a stock of assets to the future or a Chilean-style fund to implement counter-cyclical fiscal policy, which was so sorely missing for much of the Howard years. But in the current economic environment it is hardly a high priority. If you are concerned about future generations, let us focus on the top priorities: a price on carbon pollution, shifting from the outdated mineral royalties scheme to a profits-based mining tax, and investing in skills. These are the sorts of long-term investments that future generations will thank us for. In my view, the notion of a sovereign wealth fund can go in the safety deposit box for now.

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