Saturday, May 10, 2008

Tuesday's Budget: Rebuilding Australia

A massive investment fund to ensure that the benefits of Australia’s resource boom are preserved for future generations will be the centerpiece of a budget expected to bring in a surplus of around $20 billion on Tuesday night.

The fund, modeled on Norway’s Petroleum Fund will accumulate all future budget surpluses and could be worth as much as $100 billion in five years.

Entitled the Building Australia Fund it would have a mandate to invest in nation-building infrastructure and may be given a wider remit to allow it to also fund maternity leave payments and climate change initiatives.

Norway and Australia are the two nations that have experienced the biggest boost to their terms of trade since the start of the decade.

The prices that Australians receive relative to those that they pay to the rest of the world have climbed 40 per cent since 2004.

The head of the Treasury Dr Ken Henry has told the Canberra Times that he expects that figure to climb to 70 per cent by the end of this year.

Whereas Norway has salted away the tax proceeds from its petroleum revenue in its sovereign wealth fund in order to prepare for the day when its North Sea oil runs dry, Australia has handed most of them out in tax cuts and higher government spending.

As a result we are less well prepared to cope with an economic downturn...

A Treasury analysis prepared earlier this year says that during Australia’s four year mineral boom Commonwealth government spending has grown faster than in any four-year period since the 1990’s recession.

Aside from the Future Fund created to fund superannuation payments public servants and the $6 billion Higher Education Endowment Fund created in the last budget Australia has little to show it.

Australia’s infrastructure, including ports, roads and railways is so run down that exporters are finding it hard to ship minerals in the quantities they need to take full advantage of the high prices.

In February the government appointed the former British Airways Chief Sir Rod Eddington to run a new body, Infrastructure Australia, that will identify Australia’s most urgent infrastructure needs.

The Building Australia Fund would provide seed money and at times the entire investment needed to build them.

On Tuesday the Treasurer Wayne Swan will announce that almost all of the expected $20 billion dollar surplus will be directed into the fund, which given the future surpluses to be projected on Budget night would soon grow to $100 billion.

The fund would be one of the biggest investors in the country. It would dwarf the government’s planned $4.7 billion broadband project, which itself has been described as the biggest public project since the Snowy Mountains Scheme.

The Prime Minister Kevin Rudd alluded to the Building Australia Fund in a speech in Western Australia on Wednesday in which he said that Australia’s challenge was to “ensure that this extraordinary boom, and the dividend from it, is invested into the state’s and the nation’s long-term global competitiveness.”

“That is very much the mission statement of the Government I lead,’’ he said.

The political benefit of the Fund is it that will allow Labor to both claim economic responsibility by forecasting a big budget surplus and also to get accolades for the nation-building projects that surplus will fund.

The economic benefit is that it will keep the government’s accumulated surpluses away from the economy until the time they are needed.

The fund’s investments would be managed by the Future Fund's Board of Guardians, chaired by David Murray who was a Labor appointee as head of the Commonwealth Bank in the 1980s.

It is not clear whether its capital or only its earnings would be available for infrastructure investments as is the case with the existing Higher Education Endowment Fund.

It is likely the Higher Education Fund would be folded in to the building Australia Fund giving it a starting sum of around $26 billion.

Tuesday’s budget will unveil 649 individual measures – almost of them cutting spending or tax concessions, roughly twice the number of previous budgets.

The Budget documents, being printed in Canberra this week end are thicker than usual as a result.