Martin Parkinson flags one of the best arguments for a new Sovereign Wealth Fund
On March 7, Martin Parkinson the secretary of the Treasury, gave a speech about Australia’s economic circumstances at the Australia Israel Chamber of Commerce.
In the course of that he spoke about the sovereign wealth fund debate and in so doing underlined one of the main arguments for establishing another sovereign wealth fund (as he notes we already have one – the future fund). This is what Martin Parkinson said:
“At the same time, there is an emerging debate about the desirability of a
Sovereign Wealth Fund. Putting aside the fact we already have an SWF (the
Future Fund), the conflicting objectives of the different proponents of a new
SWF, and whether our superannuation system already has some of the
characteristics sought in a new Fund, it is worth making a fairly straightforward
Specifically, Treasury is often characterised as being opposed to an SWF – yet
our comments are neither supportive nor critical. Rather, we continue to
observe that the creation of an SWF per se does nothing to address either
Australia’s net debt position or, more broadly, the level of government or
national savings over time.
If the Australian Government had financial liabilities of $10 billion and runs a
$1 billion surplus, it can reduce gross liabilities to $9 billion, or it can maintain
them at $10 billion and buy $1 billion of financial assets to be held in an SWF –
in both cases, net financial liabilities are $9 billion.
The only way the creation of a Sovereign Wealth Fund delivers a faster
improvement in net debt is if it is used to justify a tightening of fiscal policy that
would not otherwise be achieved.
As such, if we are to have a sensible discussion about the merits of an SWF, the
proponents of such Funds, whether at the national or sub-national level, need to
be clearer about precisely what they have in mind. Absent tough fiscal decisions, an SWF does not constitute a contribution to future fiscal sustainability. “
Of course Dr Parkinson is quite right about net financial liabilities – the impact is the same whether a billion dollars is saved in a new SWF or used to retire borrowings. But the debate about a new SWF is being had with the prospect of returning the Commonwealth public finances to a negative net debt situation (ie paying off all our net borrowings and retaining only so much debt (offset by liquid assets) as is felt necessary to maintain a liquid market in commonwealth government securities).
However the key point he makes is the one I have marked in bold because it points to something many critics of a new SWF overlook – the behavioural aspect. In my view, were Australia to have a commitment to establish a new SWF, governments would be more likely to save than spend. And this proposition is based in political psychology.
When a Cabinet is presented with a surplus it is sorely tempted to spend it on some or all of the following: tax cuts, hand outs to politically important interest groups, infrastructure (often in marginal seats) and of course at the same time with lots of money sloshing through the doors it is very hard to persuade ministers to cut the costs in their own departments. “Why should my department have to cut back when Buggins over there is getting a few hundred million for his new project?”
Now one of the biggest problems with this temptation is that more often than not with an economy like ours the fat years, the years of surplus, are a consequence of a commodities boom – the revenues are therefore in large part cyclical. But the expenditures Governments are inclined to make, or increase, are more often than not structural – that is they will continue or be expected to continue into the future.
If rolling in a big cyclical surplus a Government were to cut income taxes that may not immediately send the budget into deficit, but when the cycle turns, tax receipts drop, unemployment benefits rise the tax cut will still be there and reversing it will cause much more political pain than delivering the cut derived political joy. The same is true with increases to benefits or indeed to new benefits – if these are funded from cyclical surpluses then they may be contributing to a long term structural deficit.
Of course Governments can just rack up surpluses and have the money in the bank but without a specific savings objective, the arguments for “giving us our money back” are pretty compelling in a political sense.
Another approach would be to have one off distributions – as a company would have a big dividend or return of capital after a super profitable year or sale of a major asset at a large gain – but in political or public finance terms these tend to create pretty high expectations that they will be continued into the future.
So imagine a Cabinet considering what to do with a surplus; on the table are some buckets, one is marked “unsustainable tax cuts” another is marked “infrastructure projects in marginal seats – don’t worry about a cost benefit analysis”, another is marked “some more middle class welfare”. But imagine if there was another bucket marked “saving for the our children and grandchildren’s future”.
Then you would at least have a cogent alternative. The new savings fund would be able to invest in infrastructure, but only if it had passed a rigorous cost benefit analysis. It would be able to be invested in foreign currency assets thereby offsetting to some extent the current upward pressure on the Australian dollar and hedging against its inevitable, post mining boom, decline in value. It would be able to be drawn on when times became tougher and government revenues went into a cyclical decline. A portion of it may be dedicated to investing to science and research. A new sovereign wealth fund could have many purposes and we should be having a debate about what they should be and how they should be defined and managed.
But in the absence of having such an alternative bucket on the table the temptation is there, and always will be as long as Cabinets are made up of human beings, to spend the surplus on objects of short term political, as opposed to long term economic, gain.
So put another way, what I am saying here is that we need to develop and promote a culture of responsible thrift in Government. A culture where we treat taxpayers’ money not as the right or entitlement of government but as other peoples money held as a fiduciary does on trust to be used responsibly and in the national interest. Just as we would encourage our children to be thrifty, to live within their means, to save for the future and hedge against misfortune, so too should that culture be part and parcel of our Government.
In conclusion, I well understand the rationalist arguments against another sovereign wealth fund. I am not a fan of big Government- far from it. And I have been a long term advocate for lower, fairer and simpler taxation. My instincts are libertarian, but over the years I have recognised that economics has got as much to do with human psychology as it has to do with mathematics and logic.
For more on my views on sovereign wealth funds and some detail on their design and examples in other countries, see this speechspeech.