Malcolm Turnbull's flirtation with the idea of a sovereign wealth fund might mean the current commodity boom - the most sustained of this magnitude in our history - isn't the fiscal equivalent of the one that got away.
Three key points have been absent from our embryonic discussion. Addressing these could mean the difference between a short and flashy fling with our commodity wealth or a prosperous, healthy and sustainable long-term relationship.
The first step is to recognise the difference between what Turnbull is proposing and the fund we already have - the Future Fund. According to the International Monetary Fund, the Future Fund is a contingent pension fund. These do not have a defined liability nor are they funded by individual contributions. They provide for ''contingent unspecified pension liabilities on the government's budget sheet''. As the Future Fund will only be drawn upon if there is a shortfall in the cost of Commonwealth public servant superannuation from 2020, it falls within this category. What Turnbull and others propose is a savings fund. This would take finite assets like natural resources and turn them into permanent financial assets to meet long-term fiscal challenges.
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Whereas the Future Fund was set up with a one-off transfer form trade surpluses and Telstra equity, relying on investment returns for growth, the commodity fund being suggested would receive ongoing transfers of resource revenue, offering a permanent mechanism for quarantining and saving this windfall.
An ideal model is the Norwegian Petroleum Fund, which receives all net cash flow from Norway's petroleum activities. After investing this capital for a return, there is an annual transfer back to Treasury equal to the amount of the non-oil deficit in the budget. Since petroleum revenue must cover government expenditure, savings only accumulate in the Petroleum Fund when there is a budget surplus. Otherwise, Norwegians argue, their fund would be built on illusory savings.
Alaska offers a contrast. The Alaskan Permanent Fund requires at least 25 per cent of oil revenue be transferred to it. However, there is no rule stipulating that these transfers be conditional on a budget surplus. The Alaskan fund has continued to grow significantly despite the Alaskan state returning substantial deficits over several years. Accumulation of sovereign wealth in this manner does not constitute actual savings.
Politicians in Australia have argued that a commodity fund should not be considered until the budget returns to surplus in 2012-13. Turnbull acknowledged that a sovereign fund should only become operational after surplus, but he did not rule out setting up the fund beforehand. Again, Norway supplies us with a precedent. It set up its fund in 1990, but the fund did not receive any money until 1996, after a return to surplus in the 1995 fiscal year. So there is no reason to delay establishing a commodity fund, but we should consider a rule that revenue can only be transferred to it in times of surplus to ensure genuine savings.
That said, how much we should care about budget surplus as a condition for saving resource wealth depends on how we characterise this windfall. Is it income or wealth? This is the second point overlooked so far. Insisting on using our current resource income to help get the budget back to surplus assumes this capital is income, a flow of money to be disposed of to meet present needs. Wealth, however, is a stock of capital, saved to provide security for future needs. The money can be used for both if we design a fund that allows limited drawdowns for prescribed present needs while saving for long-term fiscal challenges.
Indeed, a fund that draws its revenue from resources that no one created and that are finite arguably should benefit both present and future generations.
This leads us to the third and most neglected issue in the debate - who owns the resources. When Labor announced its mining tax last year the then prime minister Kevin Rudd pointed out that these resources belonged to the people and the minerals tax was about ensuring "Australians got a fairer share of the resources they own".
Corporate figures such as the Commonwealth Bank head, Ralph Norris, used similar reasoning for supporting an Australian sovereign wealth fund: "Mining companies are recovering resources that are the natural endowment of Australians, and therefore Australia . . . should look to get some return."
If it is all so obvious that the people own these resources, then we had better ensure that our ownership claim is protected. There are several options. One is to follow the Alaskans, who pay an annual dividend to every citizen based on a per capita share of their fund's annual return. Another is to give every Australian equity in the commodity fund or to deposit a share of the fund's returns into individual superannuation accounts. Treasurer Wayne Swan could even get behind this idea, since part of his mining tax proposal involved using new tax receipts to increase individual super.
Whatever we decide, if this commodity fund is to be a keeper, it needs to be part of a coherent budgetary process, clearly defined as wealth or income and owned in a meaningful way by individual citizens.
Source: http://www.smh.com.au
Three key points have been absent from our embryonic discussion. Addressing these could mean the difference between a short and flashy fling with our commodity wealth or a prosperous, healthy and sustainable long-term relationship.
The first step is to recognise the difference between what Turnbull is proposing and the fund we already have - the Future Fund. According to the International Monetary Fund, the Future Fund is a contingent pension fund. These do not have a defined liability nor are they funded by individual contributions. They provide for ''contingent unspecified pension liabilities on the government's budget sheet''. As the Future Fund will only be drawn upon if there is a shortfall in the cost of Commonwealth public servant superannuation from 2020, it falls within this category. What Turnbull and others propose is a savings fund. This would take finite assets like natural resources and turn them into permanent financial assets to meet long-term fiscal challenges.
Advertisement: Story continues below
Whereas the Future Fund was set up with a one-off transfer form trade surpluses and Telstra equity, relying on investment returns for growth, the commodity fund being suggested would receive ongoing transfers of resource revenue, offering a permanent mechanism for quarantining and saving this windfall.
An ideal model is the Norwegian Petroleum Fund, which receives all net cash flow from Norway's petroleum activities. After investing this capital for a return, there is an annual transfer back to Treasury equal to the amount of the non-oil deficit in the budget. Since petroleum revenue must cover government expenditure, savings only accumulate in the Petroleum Fund when there is a budget surplus. Otherwise, Norwegians argue, their fund would be built on illusory savings.
Alaska offers a contrast. The Alaskan Permanent Fund requires at least 25 per cent of oil revenue be transferred to it. However, there is no rule stipulating that these transfers be conditional on a budget surplus. The Alaskan fund has continued to grow significantly despite the Alaskan state returning substantial deficits over several years. Accumulation of sovereign wealth in this manner does not constitute actual savings.
Politicians in Australia have argued that a commodity fund should not be considered until the budget returns to surplus in 2012-13. Turnbull acknowledged that a sovereign fund should only become operational after surplus, but he did not rule out setting up the fund beforehand. Again, Norway supplies us with a precedent. It set up its fund in 1990, but the fund did not receive any money until 1996, after a return to surplus in the 1995 fiscal year. So there is no reason to delay establishing a commodity fund, but we should consider a rule that revenue can only be transferred to it in times of surplus to ensure genuine savings.
That said, how much we should care about budget surplus as a condition for saving resource wealth depends on how we characterise this windfall. Is it income or wealth? This is the second point overlooked so far. Insisting on using our current resource income to help get the budget back to surplus assumes this capital is income, a flow of money to be disposed of to meet present needs. Wealth, however, is a stock of capital, saved to provide security for future needs. The money can be used for both if we design a fund that allows limited drawdowns for prescribed present needs while saving for long-term fiscal challenges.
Indeed, a fund that draws its revenue from resources that no one created and that are finite arguably should benefit both present and future generations.
This leads us to the third and most neglected issue in the debate - who owns the resources. When Labor announced its mining tax last year the then prime minister Kevin Rudd pointed out that these resources belonged to the people and the minerals tax was about ensuring "Australians got a fairer share of the resources they own".
Corporate figures such as the Commonwealth Bank head, Ralph Norris, used similar reasoning for supporting an Australian sovereign wealth fund: "Mining companies are recovering resources that are the natural endowment of Australians, and therefore Australia . . . should look to get some return."
If it is all so obvious that the people own these resources, then we had better ensure that our ownership claim is protected. There are several options. One is to follow the Alaskans, who pay an annual dividend to every citizen based on a per capita share of their fund's annual return. Another is to give every Australian equity in the commodity fund or to deposit a share of the fund's returns into individual superannuation accounts. Treasurer Wayne Swan could even get behind this idea, since part of his mining tax proposal involved using new tax receipts to increase individual super.
Whatever we decide, if this commodity fund is to be a keeper, it needs to be part of a coherent budgetary process, clearly defined as wealth or income and owned in a meaningful way by individual citizens.
Source: http://www.smh.com.au
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