Thursday, November 05, 2009

Thursday column: This time, get us a future

WHY, oh why are we wasting our time debating economic questions that don't matter?

Are interest rates rising because of the "government spendathon" or because the economy is improving?

I really don't care. Given that one helped cause the other, the two seem pretty much the same to me. But listening to Wayne Swan and Malcolm Turnbull, you would think it was the only question that mattered. It is like arguing about the reason the cutlery moved on an ocean liner when the important thing is it avoided disaster.

What matters now is what we are going to do about what will happen next. And I don't hear Labor or the Coalition talking about it.

We've actually got a pretty good idea of what's going to happen next...

China's economic boom will resume and much of the world will once more be beating a path to Australia's door. Our dollar is already climbing in anticipation.

You know the rest of the story; a flood of money pouring into the country to buy LNG, iron ore, coal, uranium and the like, a windfall in company tax for the Government and money spewed out almost everywhere in tax cuts that swell property and share market prices, in grants to organisations that don't even want the money, in public service numbers that grow as if someone wanted them to . . . You know the story because it is what happened last time.

Fortunately, it wasn't all that happened. Former treasurer Peter Costello put the budget into surplus a wafer-thin surplus that never seemed to grow, but a surplus nonetheless and he set up the Future Fund. He could have managed things worse. But he could have managed them much, much better.

Australia was pretty lonely during the last boom, and it will be pretty lonely during the next one. Among developed nations, only Norway had a boost to its terms of trade anywhere near as big.

In Norway's case, the boom was the result of being loaded with North Sea oil. And it was prepared.

From the mid-1990s, it has funnelled all the extra government revenue that flowed from petroleum exports straight into its imaginatively titled Norwegian Petroleum Fund, later renamed the Government Pension Fund.

No mere accounting exercise, the rule ensures that most of the windfall revenue never makes it to Norwegian shores or into government hands. Invested offshore at arm's length from government, it cannot force up the currency, cannot inflate the local share market or property market and merely accumulates, in foreign currencies, until it is needed.

By December last year it was worth $A473 billion, a nice buffer for a population of less than 5 million, which is less than Victoria's. Between them, they own a reputed 1 per cent of the world's shares.

They did it because they knew North Sea oil was not going to last. They want to be able draw on the earnings from their oil earnings long after the oil is gone.

And they saw what happened to Holland. Its experience with North Sea oil in the 1960s gave rise to the term "Dutch Disease". Its currency and asset prices exploded, leaving the rest of the country uncompetitive. Timor has learnt the lesson too. Its Timor-Leste Petroleum Fund has grown to $A6 billion in just four years, all of it invested offshore, none of it near the locals or their politicians. Chile, Russia, Alaska and Papua New Guinea are doing similar sorts of things.

As is a mystery woman in Britain, who won $A2.7 million a few years back and didn't tell her husband. She phoned in anonymously to a BBC talkback on money and happiness in 2006 and allowed them to check out her story. She likes the job her husband has, likes the way her children are being brought up and doesn't want to disturb things. She knows the money won't last and that she might really need the earnings later.

It's a maturity that Australia has yet to demonstrate.

Documents obtained under the Freedom of Information Act by journalist Paul Cleary for The Australian Financial Review reveal Treasury examined the Norway model in 2006 and 2007 concluding it was an "excellent case study in managing commodity risk in a manner that maximises fiscal sustainability".

But the idea was never acted on, perhaps in part because of a June 2007 memo to Costello, which asserted instead there was "a strong case for spending additional revenue from the increased terms of trade to the extent that the increase is considered permanent".

During the election that followed, it was spent as if the boom would last forever. Even future revenue increases were spent in escalating tax cuts worth $34 billion with further "aspirational" cuts pencilled in. It would be a tragedy if we did it again.

And Costello, who now says he was an unwilling participant in the orgy of giveaways, has provided a way out. The Future Fund, originally set up to fund public service superannuation, could be given a much grander mandate, one really involving the future.

What if it was given resource taxation revenues automatically and told to keep them outside the country until the day they were really needed?

What if it was asked to act like the anonymous mother in Britain or the Norwegian Fund or Timor's, and preserve our way of life, our currency and our asset prices while really looking after our future?

It would give the creator of the fund a permanent and much-deserved legacy, one he has already shown he is keen to preserve by accepting a role on the fund's board of guardians. It would be a bipartisan legacy. The co-creator of the new-look fund would be Swan.

Rather than "going for growth", he would be coming as close as possible to setting Australia up for ever more. It would be a less-exciting but more assured ride, one I think we deserve.

Published in today's Age

Graphic: This Old House magazine

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