Will Henry Propose A New Australian SWF?

Ashby Monk

The Australian Government will soon release the results of its review of Australia’s tax system, which has been headed by Treasury Secretary Dr Ken Henry. Apparently, Henry is interested in taxing mining revenues in an innovative manner to set up a new commodity fund:

“Henry…has floated the idea that [the new mining taxes] could finance a Norwegian-style sovereign wealth fund to generate income when the mining boom ends and provide another instrument for managing Australia’s business cycle. The Australian Industry Group, whose director Heather Ridout sits on the Henry review, says such a fund could invest budget surpluses offshore to reduce the mining boom pressures that are driving the dollar higher…Get it? A resource rent tax on mining could be used not only to fund the soaring national health budget but also to ease the competitive squeeze on eastern states’ manufacturing.”

Interestingly, the mining union (CFMEU) has come out in support of the idea. According to union head Tony Maher:

“It is only fair and it is the smart thing to do. Other countries have sovereign wealth funds…This is an opportunity for the Australian people to have a sovereign wealth fund that can pay dividends after the minerals are gone.”

So the idea of a new Australian SWF appears to be gaining steam. Perhaps the new SWF will be announced at the May meeting of the International Forum of SWFs in Sidney?

4 Responses to “Will Henry Propose A New Australian SWF?”

  1. 1 Jason Hart April 27, 2010 at 8:32 pm

    The issue is certainly taking off. A year ago there was scarcely any mention of SWF’s in Australia, now a whole host of commentators are quite knowledgeable on the subject.

    The uncertainties I see are that Treasurer Lindsay Tanner has poured cold water on speculation by stating that his priority is to repay foreign debt before establishing a fund. This is wise, but it also makes it very hard to establish a fund when the economy is booming. If he’s smart he will announce it at the meeting in Sydney, a few days after the Henry Review is released, but make it clear that deposits will only be made once debt is repaid.

    It is also important to note that it is possible for the Future Fund to be transformed before any decision on the RRT is made, as the Commonwealth has off-shore and petroleum revenues that can be used. The two issues are not as coupled as they seem.

    The other problem is opposition from Western Australia and Queensland. I have shown that Western Australia does not do as well from mining as it appears, but the State Government is still unwilling to consider any proposals that weaken it’s financial power. This is understandable, as the States have been steadily loosing power to the Commonwealth. The States have shown that they cannot manage water in the Murry-Darling Basin and health provision, so these areas are being taken away from them (though WA still hasn’t signed up to the health deal). Public opinion is moving away from 3 tier government, and the States are looking like the lame duck that has to go.

    I see a large part of the coming debate centre around discussion of who owns the minerals in the first place – the State or the country? Collection means it is the States. Redistribution of GST means that it is really the country. In Western Australia the Royalties for Regions program acknowledges that to some degree it is the local regions. I worry about centralising power with the Commonwealth, especially in such a large and diverse country with some very isolated regions. I have argued with the State Treasury about establishing a SWF with royalties to shore up their claim to possession, but they are uninterested (and even suggested that the Commonwealth was in a better position to do so). The Western Australian Treasurer resigned in disgrace yesterday, so there may be a change of heart with a new leadership, but I doubt it. Given their reluctance to manage royalties responsibly, it may be best to remove them from the States, but this brings us one step closer to much wider discussions on the desirable forms of government and on what role the States actually serve.

  2. 2 Ashby Monk April 28, 2010 at 7:46 am

    Fascinating, Jason. Thanks for your ‘on the ground’ insights on this. I tend to agree that repaying foreign debt is a pretty compelling alternative to setting up a SWF. However, if the debt service is low, that has less sway with me. In developing countries it is crucial; it’s like putting your money in a retirement account while you still have credit card debt. Not wise. Still, I think a mining SWF in Oz makes sense. Maybe WA will go the path of Alaska? We’ll see with the new State Treasurer I guess. Cheers.

  3. 3 Rien Huizer April 28, 2010 at 3:59 pm

    Repaying debt tends to be the best way to apply windfall gvt revenue. But in Australia there are a few more things that count; (1) GST carve up (2) federal/state division of resource revenue (3) fiscal reform (the Henry project) (4) politics

    I guess politics will dominate and with all due respect, mr Barnett’s priorities are not supported by constitutionsl reality. A WA SWF is nonsense and the very competent mer Tanner is not going to devote a penny that can be used to vote buying, to the future.. Wanna bet?

    • 4 Jason Hart April 28, 2010 at 9:11 pm

      Constitutionally the States have more rights to royalties than the Commonwealth, but it is a gray area that has not been challenged. Barnett’s current claims to get more of a share “because it’s ours” is baseless, but that doesn’t mean all the arguments are. I still don’t understand why you think a WA SWF is nonsense when one has already been proposed by Barnett’s party with Barnett’s support. It was knocked back because the proposal was weak and confused on the details and the Government preferred to use credit over savings.

      As for betting that a politician will do the right thing for the country against his own self interest… I’d rather go down to the track and bet on the horse with the funniest name. Just look at former treasurer Peter Costello, who preaches restraint without ever practicing it.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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