The Reserve Bank Governor, Glenn Stevens, has described the boom in prices for Australia’s commodity exports as the biggest gift to this nation since the 1850s gold rush. But lately, more Australians seem inclined to look this particular gift horse in the mouth.
A higher dollar, once welcomed for the prospect of cheap holidays, is now regarded as a curse given its harmful impact on manufacturing and other non-mining, trade-exposed industries. People ponder ways to slow the fast lane of the economy, through a bigger tax on mining profits or stricter mine approval processes, or to speed up the slower lane, by providing assistance to suffering industries.
But a better question is: how can policy assist workers and resources to switch between the lanes, from slow to fast, so that they may enjoy the higher incomes and living standards that follow? Far from being the problem, the higher Australian dollar is simply the signpost, or the relative price signal, to point us to higher value activities.
There is much governments could do to make it easier to move to the faster growing parts of the economy, such as abolishing stamp duty on housing – essentially a tax on moving – or nationalising separate state-based trades qualifications, motor-licensing and the school curriculum.
An even bigger question for government is what to do with the revenue from the mining boom: spend or save? The answer is, a little of both.
Spending on public infrastructure, transport, skills and education boosts the economy’s long-term productive capacity, raising living standards. However, too much government spending when the private sector is trying to invest would create inflation pressure. So saving some portion of the boom revenue would be wise, while also capturing for future generations the benefit of the sale today of non-renewable resources they cannot use tomorrow.
The problem is, politicians much prefer spending over saving. That said, the federal government does have in place an admirable set of fiscal rules committed to banking any upward revenue surprises and using them to retire debt. It has also committed to cap annual growth in government spending to 2 per cent plus inflation until the budget returns to a surplus of at least 1 per cent of annual economic output.
But such promises, indeed such governments, often prove fleeting. Which is why a truly far-sighted government would put in place a more explicit mechanism to ensure some of the proceeds of the boom are banked in a sovereign wealth fund.
By setting aside some portion of mining boom revenues in the good times, such a fund may be used to “stabilise” the macro-economy with spending during the bad times. The most exciting prospect would be the behavioural effect it could have on politicians. If, as cabinet ministers sat around the table the week before the budget deciding how to spend taxpayers’ money, there were a jar in the middle of the table labelled “future generations”, they might be more inclined to tip money into that jar than into the one labelled “pre-election spendathon”.
But a number of issues need to be addressed before a sovereign wealth fund could be established.
First is the relative importance the government should assign to paying off debt versus tipping money into a fund. On present forecasts, the government won’t achieve a zero net debt balance – debts the same as assets – until financial year 2019-20. That would be a long time, indeed, to wait for a sovereign wealth fund.
However, this problem is more apparent than real. Because the revenue in a sovereign wealth fund would be used to buy assets, this would have the same impact in reducing net debt – the balance between government debt and assets. Arguably there would also be some benefit in keeping open a bigger supply of government debt because, despite what the opposition may claim, investors actually like having a stock of Australian government bonds to invest in safely.
There is also a question over asset allocation. A sovereign wealth fund could easily be managed by the pre-existing managers of the government’s Future Fund. But it would require a different investment mix. Because the funds could need to be drawn upon quite quickly, if growth took a turn for the worse, it would be unwise to invest much in shares. The value of share investments would likely be depressed just at the moment the government was looking to liquidate them to spend. Clearly, a sovereign wealth fund would have to invest in lower-risk, lower-return assets, such as US government bonds.
It would also be important to design proper mechanisms to determine the circumstances in which politicians could access the fund’s reserves. The prospect of losing an election could not qualify as a sufficient trigger to break open the piggy bank.
Many economists and business-people have given support for the broad idea of a sovereign wealth fund. It’s time to start thinking about the details.