Opinion & Commentary
The mining tax debate highlights the terms of trade boom
The debate on the resource super–profits tax raises the more question of how Australia should manage the terms of trade boom.
Some suggest making greater use of a sovereign wealth fund to smooth the implications for the budget over time. But similar objectives could be realised through better fiscal responsibility legislation, without the risks associated with sovereign wealth funds.
Australia has a sovereign wealth fund in the form of the Future Fund and its chairman David Murray concedes it is a de facto commodity revenue stabilisation fund, having been used by the Howard government to warehouse some revenue derived from the terms of trade boom after it had paid commonwealth net debt.
The Future Fund is viewed as a prudent way of saving for what would otherwise be unfunded liabilities in relation to public sector superannuation. But with these liabilities capped, it makes no difference if they are funded out of current or future taxation.
Although the government has other prospective unfunded liabilities in relation to an ageing population, the best way to meet these commitments is to grow the economy faster today to provide greater resources in the future.
The government needs also to focus on putting existing spending programs on a more sustainable long–term footing.
Private sector saving and investment already supports current and future economic growth.
Hoarding government revenue in a sovereign wealth fund partially nationalises this saving and investment task, with all the risks associated with a government entity becoming a multi–billion–dollar financial intermediary and asset manager.
The argument for greater use of a sovereign wealth fund is motivated in part by the notion that our resources are non–renewable and that current prosperity should be shared with future generations.
But Australia is not dependent on a single resource.
Australia’s resource endowment and overall economy is much more diversified, making it less exposed to the macroeconomic and other problems often associated with dependence on a single export commodity.
The terms of trade boom has led to an exaggerated sense of the importance of commodities to the economy. When commodity prices slumped in the late 1990s, the economy still grew strongly and there is no reason why we shouldn’t weather future commodity price slumps just as well.
The mining sector’s share of GDP is still small relative to other sectors, such as services.
The boost to Australia’s income through the terms of trade is attributable not only to higher commodity prices, but also to the benefits of cheap foreign imports.
While upward pressure on the exchange rate places increased competitive pressure on export and import–competing industries, it is unlikely warehousing government revenue in a foreign currency–denominated fund, as some have suggested, would take significant pressure off the exchange rate.
There is debate over the long–term trend in real commodity prices, but the fact they have generally trended down or sideways rather than up since the late 19th century argues against the notion that ‘non–renewable’ resources are becoming more scarce in an economically meaningful sense.
The boom in commodity prices since 2003 is an echo of the commodity price slump in the late 1990s, when investment in commodity production and related infrastructure also fell sharply.
The global commodity sector was caught short by the subsequent surge in demand out of China and India.
Supply and demand will adjust in the long term and the secular downtrend in real commodity prices will likely reassert itself.
What Australia loses in terms of future commodity prices, it is likely to gain through the increased commodity production, exports and employment that will contribute to that increased global supply.
Neither Australia’s current nor future prosperity depends entirely on commodity prices or the associated government revenue.
Governments will still need to manage the fiscal consequences of commodity price cycles, as well as the business cycle.
But a sovereign wealth fund provides no guarantee current revenue will be spent more wisely in the future than it is today.
If governments are unwilling to commit to binding fiscal responsibility legislation that improves on the existing Charter of Budget Honesty, there is no reason to believe greater use of a sovereign wealth fund will lead to better long–term fiscal management.
Dr Stephen Kirchner is a research fellow at the Centre for Independent Studies and a senior lecturer in economics at the University of Technology Sydney.
