Interesting (if a bit odd) news out this morning that Australia’s Treasurer Wayne Swan (…say that five times fast…) has actually re-opened the door to a SWF that would, in theory, be funded from the country’s new mining tax revenues. In his words, the new SWF remains an “entirely open question.”
Really? Recall that Swan was one of the key figures who came out against the new SWF back in May. At the time, a commodity fund to sequester mining revenues for stabilization and inter-generational saving was under formal consideration (as part of the Henry Tax Review). Swan argued, however, that there were far better ways to spend the rents, such as handing them out to Australia’s pensioners:
“Instead of investing in one sovereign wealth fund, why not invest in millions of them? Why not invest in everyone’s superannuation accounts? The wealth will not be controlled by government, but will be the property of working people…the wealth from the ground will be returned to a different form of national saving – one that is less subject to the vagaries of mining prices; that is not appropriable by government; and that will redress some of our long-term fiscal challenges…And of course, this time the benefits would flow to all Australians, but particularly those on lower incomes, such as women with interrupted work histories.”
It was a laudable position, and I was sympathetic to some of his arguments. But, ultimately, I thought he was making some mistakes:
- I noted that he was making a logical error by comparing an individual’s superannuation account (which has a finite time horizon) to a SWF (which has an infinite time horizon). So, putting the resource revenues into individuals’ superannuation accounts (most of which are defined contribution pensions akin to a US 401k plan) is not a policy that will facilitate inter-generational transfers; it simply gives the mining wealth of the nation to today’s generation. Only a centralized, inter-generational savings fund (i.e. one that lives on after we are all dead and buried) can ensure that future generations are compensated for the depletion of the country’s current natural wealth. And as far as I know, the most pragmatic vehicle that can do this is a SWF (i.e. a fund without explicit liabilities).
- I argued that giving the money over to individuals wouldn’t provide the government with any revenue stabilization, since the assets would be owned by the pensioners (which would mean that re-appropriation would be politically impossible…at least in theory). In other words, the government wouldn’t be building up a buffer that could be used in future (leaner) years.
- While we’d all agree that putting the money in the hands of ‘the people’ should be the ultimate objective, there are other ways to do this that are sustainable and that facilitate stabilization (cf the Alaska Permanent Fund’s dividend policy).
- Finally, I noted with great irony that Australia had just finished providing advice to Papua New Guinea on how to manage the latter’s looming resource rents. And the main policy tool suggested was…well, I’m sure you can guess.
And, for these very reasons and more, public debate over the merits of a new commodity fund has actually been reignited. Policymakers of all stripes are raising the idea of a reserve fund once again as an option for dealing with ‘mining boom mark II’ revenues. For example, in addition to the Swan article, there was another article this morning reporting that:
“Future Fund chairman David Murray has joined the Reserve Bank of Australia (RBA) governor Glenn Stevens in urging the federal government to preserve revenue from the mining boom for future generations.”
Now, while I’d love to take credit for rekindling the SWF debate in Australia (…”Gosh, guys, I’m touched that you read my blog so closely and base your decisions accordingly”…), I’m pretty sure this debate was sparked by a November OECD report urging Australia to reconsider a reserve fund for its mining revenues. (…”Hello? Is anybody out there? Echo?”…)
And, to be fair, Treasurer Swan has been very careful not to actually endorse a new SWF. But, given what he said back in May, ambiguity is the only position that is politically tenable. So, the fact that he has said that he is willing to consider such a fund is a pretty big deal.
My own view is that Australia should first focus on paying down its debt. But once that has been retired, a commodity fund of some sort (one that can stabilize resource rents and facilitate inter-generational savings) is probably worth looking into.