Australia’s SWF Debate Mark II

Ashby Monk

Interesting (if a bit odd) news out this morning that Australia’s Treasurer Wayne Swan (…say that five times fast…) has actually re-opened the door to a SWF that would, in theory, be funded from the country’s new mining tax revenues. In his words, the new SWF remains an “entirely open question.”

Really? Recall that Swan was one of the key figures who came out against the new SWF back in May. At the time, a commodity fund to sequester mining revenues for stabilization and inter-generational saving was under formal consideration (as part of the Henry Tax Review). Swan argued, however, that there were far better ways to spend the rents, such as handing them out to Australia’s pensioners:

“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…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.”

It was a laudable position, and I was sympathetic to some of his arguments. But, ultimately, I thought he was making some mistakes:

  1. I noted that he was making 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). So, 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 transfers; it simply gives the mining wealth of the nation to today’s generation. Only a centralized, inter-generational savings fund (i.e. one that lives on after we are all dead and buried) can ensure that future generations are compensated for the depletion of the country’s current natural wealth. And as far as I know, the most pragmatic vehicle that can do this is a SWF (i.e. a fund without explicit liabilities).
  2. I argued that giving the money over to individuals wouldn’t provide the government with any revenue stabilization, since the assets would be owned by the pensioners (which would mean that re-appropriation would be politically impossible…at least in theory). In other words, the government wouldn’t be building up a buffer that could be used in future (leaner) years.
  3. While we’d all agree that putting the money in the hands of ‘the people’ should be the ultimate objective, there are other ways to do this that are sustainable and that facilitate stabilization (cf the Alaska Permanent Fund’s dividend policy).
  4. Finally, I noted with great irony that Australia had just finished providing advice to Papua New Guinea on how to manage the latter’s looming resource rents. And the main policy tool suggested was…well, I’m sure you can guess.

And, for these very reasons and more, public debate over the merits of a new commodity fund has actually been reignited. Policymakers of all stripes are raising the idea of a reserve fund once again as an option for dealing with ‘mining boom mark II’ revenues. For example, in addition to the Swan article, there was another article this morning reporting that:

“Future Fund chairman David Murray has joined the Reserve Bank of Australia (RBA) governor Glenn Stevens in urging the federal government to preserve revenue from the mining boom for future generations.”

Now, while I’d love to take credit for rekindling the SWF debate in Australia (…”Gosh, guys, I’m touched that you read my blog so closely and base your decisions accordingly”…), I’m pretty sure this debate was sparked by a November OECD report urging Australia to reconsider a reserve fund for its mining revenues. (…”Hello? Is anybody out there? Echo?”…)

And, to be fair, Treasurer Swan has been very careful not to actually endorse a new SWF. But, given what he said back in May, ambiguity is the only position that is politically tenable. So, the fact that he has said that he is willing to consider such a fund is a pretty big deal.

My own view is that Australia should first focus on paying down its debt. But once that has been retired, a commodity fund of some sort (one that can stabilize resource rents and facilitate inter-generational savings) is probably worth looking into.

3 Responses to “Australia’s SWF Debate Mark II”

  1. 1 Frank Ashe December 1, 2010 at 4:14 pm

    “Australia should first focus on paying down its debt”? Why? Government debt is very reasonable levels, especially when compared to the rest of the world.

    • 2 Ashby Monk December 1, 2010 at 4:48 pm

      Hi Frank, thanks for the comment. Fair point. Oz national debt is around $55 billion right? If I were choosing what to do with the commodity rents, I’d use some of it to cut down on this debt. In the same way that I wouldn’t keep a balance on my credit card, while accruing money in a savings account. That being said, I acknowledge there are reasons for governments to do so, such as creating a commitment mechanisms for short-sighted politicians etc…Anyway, just my opinion! Cheers. Ashby

  1. 1 Number of New SWFs is Staggering « Oxford SWF Project Trackback on December 3, 2010 at 9:58 am

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


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.

RSS Feed


Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 370 other followers

Latest SWF News

Visitors Since August 2010

%d bloggers like this: