He ain't our prime minister, who delivers barely-coherent shockers.
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On SpyCatcher, Assange and freedom of the press
Malcolm Turnbull, Sydney University Law School March 31
220 years ago the United States of America ratified the Bill of Rights, the most influential clause of which is the First Amendment:
“Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.”
Ever since then in America and in every other society inspired by an ideal of freedom, including our own, there has been a contest between Governments who wish to keep their activities secret and those among their citizens who wish to know what they are up to.
It has been ever thus. And when societies are threatened by war or other threat, civil liberties in general and freedom of speech in particular are always under threat or constraint.
To that anniversary perhaps we should add another pending one. In September this year it will be a decade since the Twin Towers were brought down by the terrorists Al-Qaeda and what has been described as the War against Terror began in earnest.
And so before turning to the case of Julian Assange, Spycatcher and the role of the Internet – it is worth reflecting that the cause for which we stand and when we must, fight, is freedom.
In 1986 Lucy and I represented a former MI5 officer, Peter Wright, in his efforts to publish his memoirs “Spycatcher”.
Mrs Thatcher, then Prime Minister of Britain, was determined that no former MI5 officer should ever be able to write about his work regardless of whether the information was still confidential, impacted on current operations or was otherwise of any real detriment to intelligence services.
While it is true that some of the best legal minds of the day had advised Wright’s publishers he had no hope of success, we always thought that the old spook turned Tasmanian horse breeder, would succeed.
That was because of a decision of the High Court of Australia in 1980, Commonwealth v. Fairfax, in which Sir Anthony Mason had held that a government could only restrain the publication of confidential information if it could establish that the information was still secret and, most importantly, that its publication would cause real detriment not just embarrassment, public debate and controversy.
“It is unacceptable in our democratic society that there should be a restraint on the publication of information relating to government when the only vice of that information is that it enables the public to discuss, review and criticise government action.”
It was also a fundamental part of our jurisprudence that a court would not restrain the publication of confidences if their disclosure would reveal the commission of crimes and unlawful acts.
It is worth remembering too in this context the words of US Supreme Court Justice Black in the Pentagon Papers case:
“The guarding of military and diplomatic secrets at the expense of informed representative government provides no real security for our Republic. The framers of the First Amendment, fully aware of both the need to defend a new nation and the abuses of the English and Colonial governments, sought to give this new society strength and security by providing that freedom of speech, press, religion and assembly should not be abridged.”
Spycatcher ticked all of the boxes in Commonwealth v Fairfax. The contents was at least twenty years out of date and had no relevance to current operations. Almost all of it had been previously published.
Nonetheless the British Government had easily obtained an interlocutory injunction on the basis of a breach of confidence. Our main argument was that there was nothing in the book which any longer had the requisite quality of confidence and probably the most important document in the case was a weighty volume called the consolidated particulars of public domain which proved, line by line, that there was absolutely nothing in the book which had not been published somewhere else.
The information in Spycatcher had in fact been provided some years before by Wright to Chapman Pincher for his books “Their Trade is Treachery” and “Too Secret Too Long” in an arrangement brokered by Lord Victor Rothschild with the assistance of MI6 and the prior knowledge of MI5
We also argued that the book revealed the commission of crimes and other wrongdoing.
Moving into the more esoteric we contended that Wright did not have a relationship of employment with MI5, and a consequent duty of confidence, because he was a servant of the crown – a creature of status (like a soldier) not contract.
And insofar as the British were trying to indirectly enforce his obligations under the Official Secrets Act that was plainly untenable as an effort to enforce the public law of another country in an Australian court.
I should note that this argument on public international law received limited attention at the trial which properly focussed on the facts, a deal more in the Court of Appeal but came into its own in the High Court where it was the basis of the two brief opinions written dismissing the British Government’s appeal.
The High Court was very clear in declaring that an Australian Court should not act “to protect the intelligence secrets and confidential political information” of a foreign government, even one which was a very friendly one and even in circumstances where the Australian Government requested the Court to do so.
I stress this point because it has a current relevance to the case of Julian Assange who you will remember our Prime Minister, Julia Gillard, described as someone who had broken the law by publishing the contents of confidential US State Department cables.
Not only was it perfectly obvious that Julian Assange had broken no Australian law (and despite the strenuous efforts of the American authorities there is no evidence to date he has broken any American ones) but the decision of the High Court in Spycatcher make it quite clear that any action in an Australian court to restrain Assange from publishing the State Department cables would have failed.
These remarks by the Prime Minister which were echoed by her Attorney General were particularly regrettable, not simply because she was so obviously in error from a legal point of view, but whatever one may think of Assange he is an Australian citizen.
More importantly perhaps, at the time he was being described as breaking the law by Ms Gillard, prominent American politicians and journalists were describing him as a terrorist and in some cases calling for him to be assassinated.
Sarah Palin, possibly the next US President, called for him to be pursued “with the same urgency we pursue al-Qaeda and Taliban leaders.” No doubt her supporters were able to read what they liked into that remark.
While Assange is no doubt quite safe from assassination, when an Australian citizen is threatened in this way, an Australian Prime Minister should respond.
Julia Gillard could have quite properly deplored his publishing of confidential information, sympathised with our embarrassed American allies, but at the same time registered our profound unhappiness that an Australian citizen is being threatened in this way by leading figures in another country whose commitment to freedom of speech and the rule of law we traditionally regard as being no less than our own.
She might even have taken the time to ask how on earth the United States security arrangements were so slack that hundreds of thousands of highly confidential documents could be copied onto a disk by a 23 year old US Army Private, Bradley Manning.
After all, let there be no mistake that Assange would not have been the subject of this kind of attack had he been an American let alone an American journalist. Can you imagine one of Mr Rupert Murdoch’s employees at Fox News calling for the assassination of an editor at the Washington Post or the New York Times, or indeed of any US citizen?
What if the US State Department cables had been published by the Wall Street Journal or Fox News itself? Do we imagine that Congressman Pete King, then the incoming chair of the House Homeland Security Committee, would have called for News Corporation to be declared a foreign terrorist organisation or compared Mr Murdoch to Osama bin Laden.
And what of Prime Minister Gillard? She was more than happy to accuse Assange of acting illegally, but I didn’t hear her describe the editors of The Age and the Sydney Morning Herald in those terms when they published the contents of the State Department Cables given them by Wikileaks.
It is easy for politicians in the midst of a media frenzy to jump on the bandwagon and compete to denounce the villain of the hour especially if he or she is seen as vulnerable or lacking in power.
But leadership, and in particular national leadership, requires cooler heads.
Assange’s conduct may be misguided, even reprehensible, but no Australian Prime Minister should accuse one of her own citizens of breaking the law when there has not even been a charge let alone a conviction.
It is a pity the commentary, both political and journalistic, did not retain the level headed approach taken by Secretary of Defense Robert Gates who responded to the release of the cables by describing the description of the leaks as “a meltdown or game-changer” as being “fairly significantly overwrought.”
Secretary Gates observed:
“Many Governments – some governments deal with us because they fear us, some because thy respect us, most because they need us. We are still essentially, as has been said before, the indispensable nation. So other nations will continue to deal with us. They will continue to work with us. We will continue to share sensitive information with one another. Is this embarrassing? Yes. Is it awkward? Yes.”
Representing Peter Wright all those years ago, we looked in vain in Whitehall for a sensible, cool head like Secretary Gates. After all Wright was an old, sick man and we wanted to get his book published and avoid at all costs the delays and strains of a long trial.
The obvious response for the British Government would have been to widely disseminate the consolidated particulars of public domain and say “It’s a load of old cobblers – we will keep an eye out for it in the remainders section!”
But instead they decided to make a martyr of Wright and fight a furious legal battle not just in Australia (where Wright lived) but around the world making themselves look foolish and Wright very rich.
In an effort to get the book published before a trial we offered it up to MI5 to be blue pencilled so that if there were any matters impacting on current operations they could be excised. They refused to co-operate – it was all or nothing.
While the over the top reaction of the British Government to Peter Wright is echoed in the reaction of the Americans to Assange – and with the same counterproductive result, it must be said that the nature of the material Wright sought to publish was very different to the Wikileaks revelations.
Wright’s material was very old and could not possibly impact on current operations. It was in every sense the stuff of history.
The material published by Wikileaks is very current. Much of it is very sensitive. It is worth considering it in more detail.
WikiLeaks opened its virtual doors as a site for publishing government secrets in 2006 but it did not become very prominent until April 2010 and the controversial release of a US Army video which became known as the ‘collateral murder’ video. This showed two Apache helicopters firing on a group of people in Iraq. Among the dead were a photographer and a driver employed by Reuters.
This was apparently the first of the material provided to Wikileaks by Private Manning.
Assange had previously used Wikileaks as a low profile clearing house – receiving information and publishing it. On this occasion he began the practice of releasing material in collaboration with established media outlets which have since then included the New York Times, the Guardian, Le Monde, Der Spiegel and the Fairfax broadsheets in Australia among others.
The original Army video was about forty minutes long and Assange edited it to make it, he said, more comprehensible. Needless to say the editing was controversial. But it indicated he was doing more than simply letting the sunshine in – he was adding interpretation to revelation.
In July last year Wikileaks obtained and later published the Afghanistan War Logs, about 92,000 US Army reports from the battlefields of Afghanistan between 2004 and 2009. He co-ordinated the release with major newspapers and it must be said that each newspaper approached the release and analysis of the documents differently. The most reported aspects were the alleged evidence that civilian casualties were much higher than reported by the US Government and that the Pakistan Intelligence Service were actively assisting elements in the Taliban. Neither melancholy revelation would, however, have come as a surprise.
It is worth noting here that many people, including myself, expressed great concern that these reports would compromise current operations and put lives at risk – especially those of people assisting the United States. This anxiety is relevant to all the Wikileaks revelations and is particularly so when such a large amount of documentary material is released at once. With the best will in the world, how can so much material be safely blue pencilled to ensure lives are not put at risk, and even with names deleted who can say sitting in an office in London or Paris that there is not enough information in a cable or a battle field report to enable our enemies to identify an individual and then kill them?
Nonetheless, it should be noted that in October 2010, Secretary Gates responded to a congressional inquiry by stating that the review of the leaks “had not revealed any sensitive intelligence sources and methods compromised by the disclosure.” 
In October, Wikileaks released 400,000 battle field reports from the Iraq war similar in content to those previously released from Aghanistan.
Different newspapers emphasised different aspects of the reports, Harvard’s Yochai Benkler summarises the impact in this way “the core facts established by the reports were agreed: Iraqi civilian casualties were higher than previously reported; the US military was well aware that Iraq’s military and police were systematically torturing prisoners and while discrete units intervened to stop these on the ground there was no systematic effort to stop the practice.”
The most controversial disclosure was to come in November with the first release of some of the 250,000 State Department cables. Once again Assange worked with mainstream media outlets to release the material and generally did not publish cables on his website until they had been published, often in a redacted form, by the newspapers themselves.
Each of the newspapers applied their own journalistic judgement to the materials and as Bill Keller, editor of the New York Times has described, often came to different interpretations and conclusions.
They sought and obtained advice from the US State Department about the cables with a view to ensuring that current intelligence operations were not compromised and that lives were not put at risk. When Wikileaks sought to obtain similar advice about the contents of the cables – in effect requesting a blue pencilling – they were rebuffed.
When WikiLeaks approached the Administration they responded with a letter from the department’s legal advisor, Harold Koh which stated they would not engage in any negotiation regarding the release of illegally obtained US Government classified material and demanded they not publish anything. In doing this the government was seeking to allocate Assange to an entirely different legal framework than the mainstream media organisations it has so often cooperated with.
How damaging was the release of the cables? The embarrassment, the awkwardness of it all, must be utterly excruciating. The idea that the greatest power the world has ever known can have its diplomatic secrets stolen by an Army Private whose only cover story for bring a CD into his work was that he was listening to Lady GaGa is so humiliating even those least sympathetic to our great and powerful friend must have a little sympathy….as they quickly review their own IT security protocols.
But what about the contents? Well the best overall comment was made by Gideon Rachman who observed that the biggest secret of all was just how pragmatic, principled and intelligent American foreign policy really is.
That what the American government publicly declares its position to be is generally the same as the position they take in private must have certainly come as a pleasant if not welcome surprise to many, including no doubt Assange himself.
It seems to me that the contents of the material can be said to fall into at least three groups. The most important is that which actually does compromise current intelligence operations and/or put at risk the lives of those assisting the United States especially in the ongoing struggle with Islamist fundamentalist terrorism. This type of material self-evidently should not be published.
The newspapers involved in the collaboration with Wikileaks claim that they have not done so and to date subject to what follows I have seen no evidence that this has occurred, but as previously noted the scale of the disclosure and the near impossibility of carefully editing and redacting it should give all of us cause for very grave misgivings.
There are two cables which have been cited as real threats to national security and which underline my misgivings. One from February 2009 listed particular pieces of infrastructure, both private and public, the interruption to which would hurt US interests. Obviously this would be of interest to enemies of America although whether it was new, or whether the characterisation was accurate is another matter. A second was a cable which indicated Morgan Tsvangirai had privately supported sanctions against Zimbabwe as a means of forcing Mugabe to step down. This was immediately used against Tsvangirai by Mugabe as a possible basis for a charge of treason. Obviously neither cable should have been published.
A second category is material which is, in my father-in-law’s memorable phrase, “a penetrating glimpse of the obvious.” It is amusing to read an Ambassador’s account that the Italian Prime Minister is over fond of young ladies or that the Libyan dictator has a voluptuous Ukrainian nurse, but hardly news.
The revelations about Labor MPS getting ready to roll Kevin Rudd fall intho this category too. It is not news to read an account from an American ambassador about official corruption in Mexico – although it must be recognised that the embarrassment caused by this cable, true or not, resulted in a very able diplomat having to return to Washington.
A third category is material which is diplomatically and politically sensitive and is most definitely of the kind that a Government would not want published but that no court would be likely to restrain. These include US diplomats being asked to spy on their UN colleagues, Saudi Princes urging the Americans to attack Iran, the corruption of numerous regimes including a number of Arab countries where the contents of the cables is said to have helped inspire the popular insurrections which have deposed the governments of Tunisia and Egypt and are presently battling to overthrow the regime in Libya.
The test for prior restraint of the publication of Government secrets is high, both here and in the United States although it is fair to say that it is more developed in America where they have both more secrets and more journalists.
In the Pentagon Papers case the Supreme Court’s Justice Stewart expressed the test as being whether publication must “surely result in direct, immediate and irreparable damage to our Nation or its people.” This followed on from the case of Near v Minnesota where the Court cited as an example of material which would be restrained as being “ the sailing dates of transports or the number and location of troops.”
It may be that the cable about infrastructure I referred to earlier would have been caught by that test but I suspect that the one about Mr Tsvangirai would not – regrettable though its publication may have been.
Threading right through the Wikileaks saga is the question of whether Julian Assange and Wikileaks represent journalism. Some have argued that they are not entitled to the freedom of the press guarantee in the First Amendment and many have gone to great lengths to seek to distinguish Assange from the newspapers who have been his collaborators in publishing the material.
And none more so than the newspapers themselves. In features published in the New York Times and The Guardian explaining the paper’s experiences with Assange, both the editors sought to distance themselves from Assange and WikiLeaks, explicitly stating they viewed Assange as a source and would struggle to call what he did as journalism. Needless to say the relations between Wikileaks and those newspapers is fraught.
But is there a difference? What does “freedom of the press” mean in the Internet era? When the First Amendment was ratified freedom of the press meant freedom of the pamphleteer, freedom of the bill poster with circulations measured in hundreds if they were lucky.
Now, anyone can establish their own blog on the Internet and millions have done so. Indeed you do not have to go as far as that – those of us who use Twitter are publishing in many cases to extremely large audiences – Justin Bieber and Lady GaGa’s ruminations are read by millions (no longer by Private Manning unfortunately).
In years past technology had made the media something of a closed club. You needed a lot of capital to publish a newspaper and you need a licence to be a broadcaster. There were considerable barriers to entering the media market.
Today’s technology has demolished those barriers. Facebook and Google between them reach billions of people every day – vastly more than any press baron could have ever dreamed of having as an audience. Is their freedom any less worthy of protection in a free society than the Sydney Morning Herald or the Daily Telegraph?
And if it were, it would mean that if I write an opinion on my Facebook page or on Twitter it is less protected than if I were to write it in a letter to a newspaper or print it as a handbill and give it to commuters at the bus stop?
The truth is that the media has gone from being a closed shop to being one of the most vulnerable businesses imaginable. Rupert Murdoch was no doubt thinking of several of his own properties when he said the Internet will destroy more profitable business than it will create.
The term citizen journalist is often used, but in a sense all of us who express our views for others to read, and that is probably almost all of this audience, are doing the same thing journalists do but generally without reward. (Journalists would say what they do is for scant reward but that’s another story.)
There have been attempts to articulate a criminal case against Assange in the United States on the basis that he conspired with or otherwise induced Bradley Manning to commit what was in his case undoubtedly an offence. No charge has been laid and what evidence we have (and it consists of online admissions in a chat room by Manning himself) suggest that his transmission of the materials to Wikileaks was entirely of his own volition.
Are Assange’s motives relevant? I don’t believe there is much, if any, legal relevance . If good motives are no defence – a journalist who taps a politician’s phone to find evidence of corruption is still breaking the law – I cannot see how bad motives (a personal grudge) would be relevant other than in the context of malice in a defamation case.
Assange’s motives are very relevant however from a political and moral point of view.
Daniel Ellsberg leaked the Pentagon Papers in order to expose the US Government’s deception over the Vietnam War and in doing so destroyed his own career.
Ellsberg was acutely aware of the risks in releasing the information and knew well the significance of the material he held, being careful not to disclose any documents that may have revealed ongoing diplomatic efforts to negotiate an end to the conflict. Ellsberg understood that some documents should, at least for a period of time remain secret. He also took a considerable amount of time by today’s standards to find a credible and suitable source to which he finally released the information.
Julian Assange’s motives are not so clear-cut. According to Assange, “there’s a question as to what sort of information is important in the world, what sort of information can achieve reform. And there’s a lot of information. So information that organizations are spending economic effort into concealing, that’s a really good signal that when the information gets out, there’s a hope of it doing some good.”
There is more than a touch of anarchism when Assange says “The truth does not need a policy objective” – a rather hypocritical comment when one considers how secretive the operations of Wikileaks itself have become. Indeed just as Governments point to their enemies to justify their secrecy, so Assange points to his enemies to justify his own organisation’s lack of transparency.
Those determined to deal abruptly with Assange might reflect that his success has spawned many imitators from mainstream media organisations like Al Jazeera, (whose publication of the leaked “Palestine Papers” added fuel to the revolts in the Arab world), and the New York Times to activist NGOs as well as former staff of Wikileaks.
The ability of the Internet to instantly publish vast amounts of material in a manner that is practically impossible to prevent makes it the perfect medium for somebody determined to disclose those things others want to keep secret.
And this is a key lesson for Governments to learn. Once information has left your secure system it can rarely be recovered because at the click of the finger, from a laptop or a smartphone or an Internet café it can be published to the world. The world of information has become a binary one – secret one second, universally available the next.
So what are we to make of Assange and his website? Well I trust I have made it clear that while I do not regard him as a criminal, nor do I regard him as a hero. The ineptitude of his detractors has given him greater kudos and importance than he deserved in precisely the same way Margaret Thatcher’s iron will made Spycatcher a global best seller. Better in this circumstances to roll with the punches, as Secretary Gates did.
There will be a medium term impact on the candour with which people talk to American officials. Frankly if I were an American citizen I would be less outraged with Assange than I would be with a Government that can allow such a gigantic breach of security. The United States will need to demonstrate that it has changed its ways, and it is not that hard. Most large organisations will not permit downloading of material to an external medium without express authorisation as those of you who work for large firms should already know.
And it goes without saying that if a young Private can copy so much classified material off his own volition, how vulnerable are US systems to more sophisticated operatives who have the backing and expertise provided by foreign intelligence agencies.
We will remain forever, I imagine, rightly angry at the recklessness of receiving and publishing so much confidential material. So far it seems less harm has been done than might have been the case, but the risks are extraordinary and if only one life was lost, if only one sensitive operation was compromised then the heavy responsibility for that must lie with Assange.
I would like to hope that in the future such revelations will be more discriminating, but it is hard to be confident.
The lesson for Governments, apart from improving their security, is to assume that everything said or written will, sooner or later, see the light of day. That may not be a good thing, and it certainly doesn’t make life easier, but it is, I fear, a reality.
The Governments with most to fear from such disclosure are those whose public statements are at odds with their private opinions – and as I noted earlier so far it appears, to its credit, that the US State Department’s private cables have been consistent with their public policy.
 Benkler “ A Free Irresponsible Press” forthcoming in Harvard Civil Rights – Civil Liberties Review p. 11
 Ibid at 12
 Bill, Keller, The Times’s Dealings With Julian Assange, New York Times, http://www.nytimes.com/2011/01/30/magazine/30Wikileaks-t.html
 Benkler, p.13.
 Gideon Rachman, America Should Give Assange a Medal, Financial Times, http://www.ft.com/cms/s/0/61f8fab0-06f3-11e0-8c29-00144feabdc0,s01=1.html#axzz1HxhrwLNg
 Christian Caryl, New York Review of Books, Why WikiLeaks Changes Everything, http://www.nybooks.com/articles/archives/2011/jan/13/why-wikileaks-changes-everything/
 Julian Assange, TED, Why the World Needs WikiLeaks, http://www.ted.com/talks/julian_assange_why_the_world_needs_wikileaks.html
 WikiLeaks, This Time It’s Different, The Economist, http://www.economist.com/node/17361416
ANOTHER SOVEREIGN WEALTH FUND FOR AUSTRALIA: MAKING SURE WE DON’T BLOW THE BOUNTRY OF THE BOOM
Malcolm Turnbull, Melbourne International CEOs Forum, April 7
Australia’s economic history over 223 years of European settlement is more complicated than a simple list of commodity booms and busts. But there is no question that the early establishment of successful agricultural, and then mining, industries powerfully influenced our economic and social development.
Of course it was Victoria’s gold rush which explains why Melbourne's nineteenth century urban architecture, both public and private, was so much more opulent and magnificent than its counterparts in Sydney.
So from very early on, beginning with wool in the 1820s, commodities have driven our exports, been our key attractor of foreign capital, and - it must be said - contributed most directly to the volatility of our economy.
As the current resources boom reminds us, this remains true today, which is unusual for an advanced economy. Of the OECD countries only Australia, Canada, New Zealand and Norway have large commodity sectors, and only Norway is comparable in the extent of its dependence upon resources (in its case oil and gas, about 19 per cent of GDP and half of exports).
Let me turn to the current boom. We all understand it is being driven by rapid growth, urbanisation and rising living standards in Asia (particularly China and India) which have expanded the global appetite for resources and other commodities. Since around 2003, growth in demand for many metals, mineral ores, fuels and more recently some foodstuffs has outstripped the rate at which supply capacity is expanding, and prices have risen sharply.
How sharply? Well, the Reserve Bank of Australia’s commodity price index (which focuses on items Australia produces) tripled between 2004 and 2008. It fell by a third during the global financial crisis, but then rebounded strongly from late 2009. In March the RBA index was up 41 per cent from a year earlier against a basket of currencies, up 32 per cent in Australian dollar terms - and roughly three and a half times its average level between 1990 and 2003.
Some of the heftiest price gains have been for bulk commodities where Australia is a key global supplier: iron ore and coking coal, both used to make steel, and thermal coal used to generate electricity. In addition, rising prices prompted many resources producers to invest heavily in extra Australian capacity during the past decade - capacity which enabled export volumes to more than double, in the case of iron ore.
Higher prices and rising volumes have driven extraordinary growth. Between 2000 and 2010 Australia’s annual resource and energy exports increased by a factor of four, from $45 billion to $176 billion. Annual exports of coal and iron ore increased by a factor of eight, from $12 billion to $99 billion. Bear in mind this was over a decade where the value of the Australian dollar doubled in US dollar terms.
One need not work at a mining company or own shares in one (although many Australians do, either directly or through their superannuation) to be a beneficiary of higher resources prices. There are several mechanisms which redistribute gains to the broader economy:
Obviously those who work in resources-related fields (or earn dividends from mining companies) have more to spend, which has a multiplier effect.
Governments collect more corporate and personal income tax and resource royalties.
Record commodity prices and flat or falling prices for many manufactures, particularly consumer technology, mean Australia’s terms of trade (the price of exports relative to imports) are at their highest sustained level in history.
And of course the Australian dollar is at higher levels than at any time since the float.
So purchasing power and real incomes are higher through the whole economy - by as much as 13 per cent (almost $200 billion this year), according to the most recent estimate of the Reserve Bank.
Leaving aside the contentious matter of how resources should be taxed, which has been discussed extensively over the past year, several related questions arise from all this:
· What impact will a large and sustained increase in the exchange rate, driven by higher earnings from commodity exports, have on industries that are trade-exposed but not directly or indirectly involved in resources? Put another way, to what extent can we (or should we) protect manufacturing, agriculture, education services and tourism, for example, against "Dutch disease"?
· How can our economy accommodate further rapid growth in the resources and energy sector, given near-full employment and the immense scale of the investments planned for the next few years in LNG, iron ore and coal? And how can public policy make our economy more flexible and structural adjustments less disruptive?
· What should we do with the large boost to national income we are currently experiencing - should it be saved or spent? By the public or private sector? Over what time horizon?
· And of course, hanging over our response to all of these matters lies the most challenging question of all: How long will the current boom persist, and how will Australia’s economic prospects look at its conclusion?
These are the central economic policy questions of the next few years.
They are already being debated by business leaders, economists and others in the community. As the Governor of the Reserve Bank, Glenn Stevens, told a British audience a few weeks ago: “We are now engaged in a national discussion about how to stretch the benefits of the resources boom over a long period, and how to manage the risks that it will bring.”
Unfortunately, they are not questions that have been canvassed in Canberra very often up to this point, other than during Mr Rudd’s bungled attempt to introduce his unworkable initial version of the resources rent tax and Ms Gillard’s hasty negotiation of her alternative.
In the remainder of my remarks I want to focus on the question of how we should deal with the additional income the boom is creating. The answer depends heavily on whether this income is permanent or temporary - and if it is temporary, then how temporary.
It seems very likely that a fairly large part of the recent gains will be relatively short-lived. Despite the strength of emerging Asia, its economies are not immune to cyclical ups and down - not even China. And there is a lot of coal and iron ore around the world. The early 21st century boom has already elicited a supply response and will continue to do so - not least via capacity expansion in Australia, but also in Brazil, Guinea, Mozambique, Mongolia and many other places.
So very few economists see the terms of trade remaining at their current lofty levels. The next year or so may be as good as it gets - although that is what everyone said last year, only to be proved wrong.
On the other hand, the global economy has evolved since the turn of the century, with many more developing countries enjoying sustained growth than previously and as a consequence most market analysts predict Australia’s terms of trade will remain materially higher than they were in the 1980s and 1990s for some time - at least a decade, and perhaps two or three. That is also what our top officials guardedly offer as their current best guess.
But neither they nor we can be certain - and in any case history tells us that whatever broad direction commodity prices take in the future, they are likely to remain fairly volatile.
Given the probably temporary nature of the income boost we are experiencing, and the fact that it arises from the consumption of finite (but abundant) resources, over recent months there have been numerous suggestions that Australia create a sovereign wealth fund. This would be a publicly-owned vehicle to save some of the extra income from the boom and smooth consumption over time.
Many countries, particularly those dependent upon single finite resource commodities, already have such funds - globally they are estimated to hold up to $4 trillion in assets. Some of the oldest are located in the Gulf and manage oil revenues. The Abu Dhabi investment Authority is the largest, while the Kuwait Investment Authority, founded in 1953, is perhaps the best known (in part for trying to take control of BP in 1988, prompting an uncharacteristic intervention in the marketplace from Mrs Thatcher).
Another group of sovereign wealth funds such as China Investment Corporation, Singapore’s GIC, and Korea Investment Corporation essentially seek to lift returns on official foreign exchange reserves in countries which have accumulated large holdings.
Perhaps more useful models in the Australian context are funds such as Norway’s Government Pension Fund, Chile’s Stabilization Fund, and the wealth funds operated by Alaska and Alberta, all of which adhere to more stringent standards of transparency.
The Norwegian fund manages net inflows from the nation’s government-owned oil and gas sector. It invest all of its assets (currently around $550 billion) offshore and hence to an extent ‘sterilizes’ the upward pressure on the Norwegian exchange rate arising from commodity earnings.
It is unclear whether this strategy is effective - in November 2010 the Governor of Norges Bank said: “Strictly speaking, the jury is still deliberating.”
Simple and fairly strict rules govern the Norwegian Fund - only 4 per cent may be withdrawn and used for budget expenditure each year, although this rule was suspended during the GFC. A different set of rules (and political controversies) have arisen around its investments - munitions makers, tobacco firms and various other entities are off limits.
A different model is Chile’s Stabilization Fund, whose role is explicitly framed in terms of stabilizing the extremely volatile swings in income created by Chile’s heavy dependence on copper exports.
The Stabilization Fund automatically receives all budget surpluses above 1 per cent of GDP (a separate pension reserve gets the first 1 per cent). This is in the context of Chile’s legislative requirement that the budget be in structural balance; the cyclical budget surplus rose as high as 9 per cent of GDP in 2007 as copper prices peaked.
While it is not explicit, ‘stabilization‘ in Chile seems to be conceived in terms of years or multi-year cycles, as opposed to the ‘savings’ and clearly intergenerational timeframe of the Norwegian fund. During the GFC, almost half of the funds it had accumulated over the previous three years were withdrawn.
Of course Australia already has a sovereign wealth fund - the Future Fund, established by the Howard Government to meet unfunded pension liabilities to former public servants and defense employees arising after 2020.
Managed by David Murray since 2006 and financed by budget surpluses and the last tranche of Telstra, the Fund has assets of $72 billion. That compares to a current target asset level of $109 billion needed to requite the obligations it is expected to cover - so David and his successors still have work to do over the next nine years.
Occasional flaps about its Telstra stake aside, the Future Fund has shown that with clear rules, transparency and a well-understood mission it is possible for public investment vehicles to operate effectively and with bipartisan support in Australia.
I think it is fair to suggest that support for an Australian sovereign wealth fund to save some of the income being currently generated has been fairly broad.
Business supporters include Ralph Norris at the Commonwealth Bank, Mike Smith at ANZ, Fairfax chairman Roger Corbett and Tabcorp’s Elmer Funke Kupper, among many others.
It is probably the case that some business support reflects discomfort the exchange rate is creating, and expectations that an Australian fund might, like the Norwegian fund, invest exclusively offshore. Whether ‘sterilization’ would be effective in an economy such as Australia, which historically imports capital and has the fifth most heavily traded global currency, is far from clear.
The OECD, in its most recent country note on Australia, urged the creation of “a reserve fund endowed with all resource tax revenues to assist in shielding the budget and the real economy from the effects of revenue volatility”. It rested its case on the fact that commodity and economic cycles are generally similar, and if commodity-driven revenues are spent or given to households as tax cuts at the time they arise, “fiscal policy risks being pro-cyclical”.
This, of course, is the critique leveled at the Howard Government’ last term between 2004 and 2007, when revenues from higher terms of trade started to flow. Critics claim that having paid off Australia’s public debt, the Government chose to cut taxes near the top of the cycle rather than have to defend budget surpluses of more than 1 per cent of GDP. There is a kernel of truth here, although not nearly as much as John Howard’s critics claim - I will return to this shortly.
The Premier of Western Australia, Colin Barnett, also recently revealed himself as supporter of a wealth fund - a West Australian wealth fund, that is. He said he was considering funding such a vehicle out of State budget surpluses. The Premier neatly summarized a common argument for such funds: "Given that we are dealing with finite resources, it does make sense to preserve some of that wealth for future generations."
Glenn Stevens has also spoken about the possibility of a stabilization fund, although he has not directly advocated it.
In November he offered this take on the likely longevity of the boom and how we should respond: “The most prudent assumption to make might be that the terms of trade will be persistently higher than they used to be...but not by so much that we shouldn’t seek to save the bulk of the surge in national income occurring in the next year or two, at least until it becomes clearer what the long-run prospects for national income might be.”
The Governor suggested such saving might ideally be in assets whose returns were uncorrelated with the source of the income.
As to how it might be achieved, he said: “It is possible that this behaviour might be managed through the decisions of private savers. There might also be a case for some of it occurring through the public finances. That would mean accepting considerably larger cyclical variation in the budget position, and especially considerably larger surpluses in the upswings of future cycles, than those to which we have been accustomed in the past. There would also be issues of governance and management of any net asset positions accumulated by the government as part of such an approach, including whether it should be, as some have suggested, in a stabilisation fund of some sort.”
The rules, governance, ultimate economic objective, investment mandate and transparency of any wealth fund would indeed be critical issues to resolve. But the Future Fund has shown such issues are far from insurmountable.
There are legitimate arguments against a wealth fund. Not least is the eternal but powerful point that all else being equal, it is better to leave money in the hands of private citizens and corporations than in the clutches of governments. John Roskam at the IPA has made this point forcefully recently.
In that context it is worth pointing out that Australians households are currently voluntarily saving considerably more than they were a few years ago, although that arguably has more to do with the jolt the GFC provided a few years ago rather than any sense that current conditions can’t last forever.
A related argument against a fund comes from the former Secretary of the Treasury, Ken Henry, who doubts it is possible to save if politicians are determined to spend: “Even if rules are put in place to restrict access to the fund, in the absence of liquidity constraints, a government that wants to finance an increase in current spending can borrow against the security of the fund. Money is, after all, fungible.”
Dr Henry also points out that stabilisation, consumption smoothing and exchange rate sterilisation do not necessarily require an autonomous wealth fund: “These objectives could just as well be achieved within the context of the overall budget strategy.”
In the same speech he also suggested smoothing could be achieved by investing in human or physical capital or via contributions to individual superannuation accounts (as the current Government proposes) although I note these do not necessarily resolve the problem of pro-cyclical spending.
Let me touch upon one more argument against a wealth fund, particularly if it has a broad investment mandate. The only thing people hate more than losing their own money is having their government lose their money. During the turmoil of 2008 Norway’s fund lost 23 per cent of its value, while Singapore’s Temasek lost 31 per cent. Both funds have since recovered, happily for politicians in each country.
On balance, after weighing the arguments, I believe that the time has come for Australia to create a new sovereign wealth fund.
A key question is whether its objective should be to smooth government spending over a ‘stabilization‘ horizon spanning years-to-decades (Chile) or rather a ‘savings’ timeframe of decades-to-centuries(Norway).
While it is true that our resources are finite, they are in most cases also very abundant, although if one takes the view, as I do, that the world will move over time to decarbonise its energy generation sector, then there will be a question mark, long term to be sure, over at least our thermal coal industry.
This would suggest a stablisation horizon was more appropriate, however such a fund could combine both objectives with a portion of the fund earmarked for very long term savings.
A simple rule for inflows into such a fund would be to require all budget surpluses be transferred to it. Outflows could be limited to investments in long-lived physical or human capital, and permitted only during periods when the economy’s output is below potential (there are idle resources). A requirement to hold offshore assets might well provide useful hedging or currency sterilization properties, but this would require careful study.
Needless to say investments in infrastructure should always be subject to a rigorous cost-benefit analysis. The investment rules for such a fund would need o be very clearly articulated with a strong and accountable governance regime. The Future Fund is a good precedent
Clearly, such a fund could only become operational after the Budget was back in surplus and the debt accumulated during the period of Labor Government paid off - there would be no point putting funds aside in a stabilization fund but continuing to borrow or carry debt.
I believe that a project of this kind would be very much in the spirit of the times. As the unhappy retailers constantly remind us, Australians are reducing debt and saving more. We know that our good economic fortunes are in very large measure a consequence of developments in other countries and we know that the world we live in is not becoming any
less volatile or more predictable.
All of us know the value of savings targets whether it is a child's money box or a family's super funds. Governments enjoying surpluses have a very strong temptation to splash money around and while tax cuts are always appealing, cutting taxes at the top of a boom run the real risk of creating a structural deficit when the boom subsides.
A national savings fund of this kind would become a matter of real national pride, evidence that we have the discipline and vision to recognise that good times don't last forever, that demographic changes will place greater demands on future budgets and that thrift is both virtuous and prudent.
Nonetheless, according to the forward estimates, we are many years away from being debt-free, despite the resources boom.
So perhaps as important as committing to a stabilization fund, given Australia’s current circumstances, is the urgent need for an authoritative, independent and clear understanding of what the nation’s real fiscal position is, after adjusting for the record terms of trade (and understanding such a calculation would require assumptions about future terms of trade).
The Rudd Government took a stab at this in the 2009-10 Budget - or to be more specific, its ministers accused John Howard and Peter Costello of negligence in handling the early part of the resources boom and allegedly creating a large structural deficit. This claim was based on a single graph in the Budget papers, and the Treasury reckoning behind it never revealed.
Intriguingly, in October last year Treasury’s Macroeconomic Group quietly released what appeared to be a revision of the earlier work on the structural deficit, this time making its calculations transparent.
The paper includes a graph of estimated revenue generated by high recent terms of trade. These estimates assume the new ‘structural‘ or normal terms of trade are 20 per cent above their average over the past thirty years - or about where they were in 2004-05.
Treasury’s revised estimates suggest only the final 2007-08 Coalition was in ‘structural deficit’ (by only 0.5 per cent of GDP) and undermine most of the alarming allegations made against Mr Howard and Mr Costello around the time of the 2009 Budget. As for claims of squandering the boom, the paper shows the terms of trade generating only $25 billion during Peter Costello’s three last-term budgets - not an insignificant sum, but less than half the $51 billion in surpluses over those years.
In contrast, Treasury now calculates that the resources boom generated revenue windfalls of approximately $65 billion during Labor’s first three years. Of course every cent and more was spent.
Treasury also projects another $30 billion will be tipped into the coffers by the boom in 2011-12 - but when Wayne Swan delivers the 2011-12 Budget on May 10, you can safely bet every cent of that will be spent too.
Indeed, the paper estimates the Budget will not return to structural surplus until 2019-20 - more than a decade after the brief downturn the Government uses to justify its profligacy, and despite windfall revenues from the highest sustained commodity prices in history.
The work done in the Macroeconomics Group Paper just referred to needs to be elaborated and debated as part of this year's Budget Papers. Until Australian taxpayers are provided with honest and transparent information about how the current resources boom is affecting the Budget, it is very difficult to have a meaningful debate about saving its proceeds for the future.
If we think back to the 1980s and 1990s, Australia’s ‘old economy’ reliance upon agricultural and resource exports and declining terms of trade were perceived as key weaknesses by investors in New York or London. Today’s lofty commodity prices were unimaginable. The notion that per capita GDP at market exchange rates in Australia could be 15 per cent higher than in the United States, as it was in 2010, was ridiculous.
It was only after two decades of difficult reforms and pessimism over our prospects that Australia was in the right place with the right resources, expertise and economic flexibility to take advantage of the unexpected commodities boom of the early 21st century.
The lesson is that the global economy is changing more quickly than ever before, often in quite unexpected ways. There is no room for complacency because the next shift may present adversity rather than opportunity.
Saving more of the income generated by the commodities boom, planning for the possibility that the boom ends, and determining the true position of our Budget if it does are all appropriate ways to enhance our future prosperity and hedge our risks.
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