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Debate over Australia's need for a Sovereign Wealth Fund (19 August 2011)

News: CEDA forum overview: The commodity boom is delivering huge revenue windfalls and debate is escalating around whether the government should save some tax revenue in a Sovereign Wealth Fund (SWF). Law makers, policy makers and others have increased calls for the Government to follow the examples of other resources-rich countries and invest the proceeds of the boom. The International Monetary Fund (IMF) also wants revenue from the current Australian resources boom to be saved “to ensure a more equal distribution of its benefits across generations and reduce long-term fiscal vulnerabilities from an ageing population and rising health care costs”.

In front of a diverse range of industry representatives, experts analysed and debated the topical issues of SWFs, opportunities for revenue stabilisation and wealth/risk return optimisation for future generations.

Key discussion points from the forum:

• There was unanimous agreement that Australia would benefit in the long-run from having a SWF.
• Two schools of thought emerged concerning the source of funds: (a) revenues from substantial budget surpluses (e.g. 4-5% of GDP), and/or (b) revenues tied to specific purposes (such as a tax on mining).
• Should it be capital preserved? Saul Eslake (Grattan Institute) believes it should not be, while Neil Gibbs (Marchment Hill Consulting) believes it should be when the assets are derived from source (b) above.
• The general view regarding appropriate investment and governance policies and protocol is to have designated accounts (e.g. education, innovation, science etc) within an overall fund, and an absolute separation of fund management from the ‘government of the day’.
• Primary reasons for having a second Sovereign Wealth Fund are to support inter-generational wealth distribution, and as an economic management device (e.g. to protect against strong swings in the performance of the economy).
• Do Australia’s compulsory superannuation rules obviate the need for a second fund? General consensus was “no” – compulsory superannuation has seen a shift of savings into superannuation, but little net increase in domestic saving.
• Australia’s place in the global economy:
  • A second Sovereign Fund “would offset the temporary – but totally disruptive – effect on the Australian economy of the resources boom”. Every other boom in Australia’s history has been succeeded by a collapse in Australia’s terms of trade.
  • Panel members believe Australia’s dominant position in global commodities markets will be eroded or reversed in due course. This will be caused by a (downward) shift in the price for our commodities, rather than a collapse in volumes.

Speakers included Saul Eslake (Program Director – Productivity, Grattan Institute) and Prof Stephen Martin (CEO, CEDA), with Patricia Pascuzzo (Principal, Sovereign Consulting) facilitating the event. Neil Gibbs (Founder and Managing Principal, Marchment Hill Consulting) provided a summary of the discussion and vote of thanks on behalf of CEDA.
 

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