Of all the bad ideas going around, the suggestion that Australia should have a sovereign wealth fund isn't the worst. It's the third worst. It's behind the carbon tax and the mining tax. It's the possible third leg in a trifecta of policies designed to have the government squeeze every last cent from the resources boom.
At least the Gillard government hasn't yet said we're going to have a sovereign wealth fund. But based on current form it is only a matter of time before we are told the government is a better custodian of taxpayers' own money than taxpayers themselves and that is why it should collect more in taxes than it spends and why that money should be squirrelled away until the government decides to spend it (or waste it). That, in simple terms, is the rationale of a sovereign wealth fund.
Norway is always the example of a supposedly effective sovereign wealth fund. It's vast North Sea oil revenues are deposited in government owned investment funds to cushion potential exchange rate shocks and provide a source of revenue when the oil runs out. There's no problem urging Australia to follow Norway's lead as long as it is acknowledged that Norway is a semi-socialist country.
The tax collected by government in Norway as a share of the country's economy at 42 per cent is among the highest in the developed world. The comparable figure for Australia is 31 per cent. The average for advanced countries is 36 per cent. Operating a sovereign wealth fund is exactly the sort of thing that socialist and semi-socialist regimes like doing. That's why the biggest funds are from the Middle East, China and Norway.
In the Australian context the main rationale for a sovereign wealth fund is that our windfall gains from resources exports should be invested in productive assets providing long-term returns, instead of being given back to the population as tax cuts.
Following from this, the question to ask is: who is more likely to make the better investment decisions, individual and corporate taxpayers investing their own money, or the government?
The advocates for an Australian sovereign wealth fund ignore the fact that one of the best incentives to improve productivity is to cut taxes so people can keep more of the fruits of their labour.
Any government really committed to improving productivity could start by recognising there are 349,000 Australians who have been unemployed for more than a year. That is 3.5 per cent of the workforce. And 800,000 Australians are receiving the disability support pension, of whom less than 5 per cent get work each year. Cutting taxes and reducing the disincentive for people to find a job will do more for Australia's productivity than installing roof insulation.
There are two other points about sovereign wealth funds. The first is that the investment decisions of such funds inevitably end up politicised. Efforts to maximise investment returns are compromised by political imperatives. Look at the rollout of the national broadband network. Armidale, in the middle of the electorate of one of the independents on whom the Gillard government is relying to stay in power, was chosen by the government owned company responsible for the network as one of the very first places to get fast broadband. Norway's sovereign wealth fund doesn't invest in Wal-Mart because of the company's alleged breaches of labour standards.
Individuals are free to invest their money according to whatever ethical guidelines they decide -- but governments don't necessarily have that luxury. Whether a sovereign wealth fund should forgo an investment in a Libyan oil refinery returning 15 per cent in favour of New Zealand returning 3 per cent is debatable.
The second point is that Australian governments are unable to keep their hands off a bucket of money for more than five minutes. In 2008 Kevin Rudd established the Building Australia Fund to finance long-term infrastructure spending. Within a year the government had spent $10 billion of the $11 billion endowment. It's the same story for the Rudd government's health and education funds.
A few days ago Greens leader Bob Brown said, ''This nation should have a sovereign fund -- like Norway's''. It's no surprise the Greens want a sovereign wealth fund. Sovereign wealth funds allow governments to avoid giving back to taxpayers the taxpayers' own money, and they're a vehicle for governments to accumulate even more economic and financial power than they already have.
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