Saturday, April 10, 2010

Getting with the program. Treasury starts to think sovereign wealth

Australia's Treasury has begun examining sovereign wealth funds that store resources income amassed during booms for use when times are bad.

The funds are used by resource-rich nations including Norway, Papua New Guinea, Kiribati and East Timor.

The examination does not mean that the Australian government is planning to set up such a fund in the near future.

Answering a question at the National Press Club in November Finance Minister Lindsay Tanner said it was "possible to paint a picture of the future perhaps in 10 years time where that kind of proposal might be appropriate," but that it would not be on his agenda until the budget was in surplus and the government had repaid its debt.

Australia's Future Fund and Education Investment Fund are not true sovereign wealth funds as they are set up for specific purposes, to fund public service superannuation payouts and to support education and research.

The Treasury research is published this morning in a paper entitled "Managing manna from below: sovereign wealth funds and extractive industries in the Pacific"...

If finds that where mining income is thought likely to be temporary or could disrupt the working of monetary policy there is a case for requiring such a fund to invest offshore, effectively shielding the currency and the economy from fluctuations. It notes that both the Timor and the Kiribati wealth funds hold their assets offshore, rather than at home in local currency "taking full advantage of global financial markets."

It says there should be clear guidelines governing the circumstances in which money can be withdrawn as well as rules limiting borrowing against the fund or building up substantial public debt in the knowledge that it is there.

As a general rule it makes sense for a government enjoying a resources boom to pay down its debt first before setting up such a fund.

The Treasury paper makes clear that the findings are those of the Treasury officers involved and not the Treasury itself.

Asked about the idea in November Mr Tanner said "were we to get to a point where Australia had a genuine choice of this kind, we would be celebrating, because not only would we have both returned the budget to surplus, not only would we have paid off all Commonwealth Government debt, but we would have such strong inflows of money arising from a renewed mining boom, that we would then be in the very happy position of having to ask, what are we going to do with this money in a way that doesn't generate an inflationary boom."

A separate Treasury paper also released this morning forecasts a debt-driven jump in Australia's net foreign liabilities from 60 per cent of GDP to 70 per cent or more in the decades ahead should the mining boom require continued investment.

Published in today's SMH and Age

Related Posts

. Thursday column: This time, get us a future

. This could have been us

. The Future Fund is a con