Oz Treasurer Defends SWF Decision

Ashby Monk

I noted yesterday that Australia, as part of the Henry Tax Review, decided against setting up a SWF to manage the country’s non-renewable resource rents. Today, Australian Treasurer Wayne Swan has a concise defense of this decision:

“…whenever you sell something non-renewable to pay for something that recurs every year, there is a very strong case to save some of the revenues for the future…One such idea is for a new sovereign wealth fund to hold our resource wealth for a rainy day and to prevent the revenues from fuelling consumption, to prevent a recurrence of the early years of the current century…That’s a fine idea, but we have a better one…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.”

While Wayne makes 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), I am actually sympathetic to his argument. After all, governments are notorious for squandering national wealth through inefficiency (or worse). This is part of the reason I became so interested in SWFs; I wanted to understand how these government institutions could be designed and governed so as to ensure they are effective stewards of a country’s wealth. Wayne goes on to say,

“…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.”

This sounds great. But, in my opinion, Swan is making another mistake. He is assuming that today’s generation has a universal claim on the nation’s resources (i.e. beyond that of future generations). 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 savings; it simply transfers the wealth of the nation to today’s generation.

This then begs a broad question — the same one famously asked by US economist Robert Solow — about how much of the country’s endowment of natural resources it is fair to consume today and how much governments should be leaving for future generations. Solow suggests that while current generations have no obligation to save the physical resources (by leaving them untouched in the ground), they do have an obligation to leave future generations the embedded productive capacity that these resources represent. Whether this is transmitted in the form of technological knowledge or in financial resources is irrelevant.

The big question then is whether Australia’s plan of giving individuals higher superannuation contributions transmits technology or financial wealth to future generations. I don’t see it. Maybe as a secondary effect of superannuation investment but definitely not directly. Only a centralized, intergenerational savings fund (i.e. one that lives on after we are all dead and buried) can ensure that future generations are compensated for the natural wealth of the country today. And as far as I know, the only vehicle that can do this is a SWF (i.e. a fund without explicit liabilities).

All that being said, average Australian voters will likely be pleased to hear that they will be richer in retirement.  And maybe that was the idea to begin with…

6 Responses to “Oz Treasurer Defends SWF Decision”

  1. 1 Rien Huizer May 6, 2010 at 3:33 pm

    Mr Swan may be on his way to be a one term Treasurer (a rare bird in Australia’s political aviary) but it is hard to argue with him. Not only does what he proposes buy more votes, it also is not too irrational in a political economy sense. Australia is a country that could produce its internationally competitive exports with a tiny fraction of its current population. The remainder is a very ordinary OECD economy with short sighted voters and messy social security legacies. No mileage in an SWF, but nice to mention it and explain why not.. And let’s face it, when the mines have run out, everyone returns to the UK…

  2. 2 Ashby Monk May 6, 2010 at 3:39 pm

    Ha! Mines or not, I’d stay in Oz. The UK’s problems are worse…

  1. 1 Australia’s SWF Debate Mark II « Oxford SWF Project Trackback on December 1, 2010 at 10:28 am
  2. 2 Sorry Swan, Stevens Makes Sense « Oxford SWF Project Trackback on January 10, 2011 at 9:27 am
  3. 3 Business Leaders Support New Oz SWF « Oxford SWF Project Trackback on February 17, 2011 at 9:06 am
  4. 4 Guest Blog: No SWF for Australia, superannuation instead? « Oxford SWF Project Trackback on September 7, 2011 at 7:19 am

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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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