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Not the time for wealth fund

27 September 2011 941 views No Comment

RECENTLY we have heard from a chorus of people all singing from the same economic song sheet: Australia needs a sovereign wealth fund.

It’s claimed that a sovereign wealth fund could provide the answer to a number of our country’s economic challenges. Its proponents argue that it can lock away the gains of the current mining boom for a rainy day; increase national savings; facilitate investment in offshore assets; put downward pressure on the Australian dollar; provide a source of foreign income; and reduce our current account deficit.

Those in favour of a new sovereign wealth fund in Australia say that we are missing the opportunity to lock away boom-time savings for a rainy day, while those against argue that this is not the right time and that Australia already has a sovereign wealth fund. This the later argue is the Future Fund (set up by the former Howard Government to pay for Australia’s public sector superannuation bills).

Globally, a number of nations have gone down the sovereign wealth fund path. For example, China has the SAFE Investment Company to stabilise its currency. Kuwait’s Investment Authority invests in the future for when oil reserves run out. The Government of Singapore Investment Corporation manages their investments to provide for necessary savings to meet powers strikes, budget deficits, rising oil prices and currency volatility, while Norway has its Government Pension Fund to finance its country’s growing retirement costs.

The Treasurer seems lukewarm to the notion of a sovereign wealth fund. Earlier this year Wayne Swan said, “That’s a fine idea, but we have a better one…Instead of investing in one sovereign wealth fund, why not invest in millions of them? Why not invest in everyone’s superannuation accounts?

Swan argues that the Government’s plan to lift superannuation contributions from 9 , 12% is in effect a de facto sovereign wealth fund.

His opposite number has a much stronger point of view. Shadow Treasurer Joe Hockey rightly asserts the merits of saving for the future, but argues that timing is the issue.

Hockey maintains that the priority of today is to return the budget to surplus and start paying off Australia’s $110 billion debt bill.

“A Sovereign Wealth Fund is indeed not without merit, but let’s be realistic, it’s the Maserati of public policy. Most of us may aspire to having one, but it’s a case of whether we can afford it. So by no means has the door been closed on a new sovereign wealth fund by Hockey and the Coalition.

But before this debate goes any further, it seems to me that there are two basic questions which need to be answered.

First, what is the purpose of the fund?

And second, where will the money come from?

On the first of these questions, a recent report by the International Forum of Sovereign Wealth funds concluded that there is no such thing as a typical sovereign wealth fund. They have different objectives and different performance yardsticks. In Australia we already have a number of government-mandated investment funds.

Will the purpose of a new sovereign wealth fund be to pay for the superannuation owed to public servants? No, that’s called the Future Fund.

Will a new sovereign wealth fund provide infrastructure to our education sector? No, the Coalition set up a fund for that too – in 2007. It’s called the “Higher Education Endowment Fund.

Or perhaps a new sovereign wealth fund could be to fund new medical facilities like surgical theatres and high-tech medical equipment in the health sector? No, the Coalition announced that also in 2007 under the banner the “Health and Medical Infrastructure Fund worth $2.5 billion.

So first, supporters of a new fund must explain what the proposed purpose of this new fund will be. Before any decisions are taken on whether to proceed with any such model, Australians must be told for what their hard-earned money will be put to use.

Building new sovereign wealth assets requires a national government that is committed to responsible fiscal management. At the current time, a number of economists and commentators doubt that we have a government that knows how to live within its means.

And so to the second question: show me the money.

Since coming to power in December 2007, Labor has managed to smoke the nation’s credit card to the tune of $110 billion and delivered four consecutive budget deficits totalling $154 billion.

This Labor government is yet to deliver a budget surplus to the Australian people. In fact the last time Labor ran a budget surplus was in 1989-90. While the federal government claimed that next year would be the year of the budget surplus, they seem to have significantly backed down from this commitment. Recently the Government’s language has evolved from an “objective, to an “expectation, then it became a “plan and now a “determination.

Even if Labor did achieve surpluses as outlined in the forward estimates, repaying Labor’s net debt by the end of this decade would require 8 consecutive surpluses of around $20bn each and every year. If, as seems highly likely, that this will not occur, it would require a series of outstanding returns on the future fund and other financial assets.

Australia’s priority at the moment should be to return the budget to surplus and pay off the debt. And that is why now is indeed not the right time for a Sovereign Wealth Fund.

Ross Fitzgerald, Emeritus Professor of History and Politics at Griffith University is the author of 35 books, including the co-authored biographies ALAN (“THE RED FOX) REID and AUSTEN TAYSHUS: MERCHANT OF MENACE; and his memoir MY NAME IS ROSS: AN ALCOHOLIC’S JOURNEY.

THE CANBERRA TIMES, September 27, 2011, p 9.