A fork in Turnbull's road to salvation

There's plenty of grunt in Malcolm Turnbull's sovereign wealth fund proposal, so why are Wayne Swan and Joe Hockey not raising the same issue?

Recently, in a moment of rash exuberance, I bought a new motorbike with my credit card. Mother told me not to.

"But Mum," I said, "we all do it. My mates Steve and Kevin ordered an NBN on their credit card on a flight between Melbourne and Sydney. And that Tony Abbott from the cycling club put a paid-parental-leave scheme on his without asking his parents."

Mum wasn't happy. "It's not 'their' credit card," she scolded. "It's 'ours'. And I'm not paying the bill again!"

Indeed, Australia is at a tipping point in fiscal policy, with numerous commentators and institutions warning that our ability to pay for debt-funded government spending is at an end.

The Coalition has been harping on this point since the Rudd government's first GFC stimulus package (which is why Abbott has been pilloried for his off-the-cuff parental-leave promise during the 2010 election).

Wayne Swan joined the chorus last week, warning of substantial spending cuts in the May budget to offset some shocking declines in Commonwealth revenues – predominantly big falls in capital gains and corporate tax receipts.

And Treasury Secretary Martin Parkinson forecast years of 'razor thin surpluses' whoever is in power, saying even those will be achieved only with a permanent clamp on exuberant spending.

The long boom in our terms of trade has probably hit its upper limit, and as this metric edges down, Australia's long orgy of cheap imports will slowly abate and the taxable profits of Australian companies will be even more of a struggle to maintain. Oh, and our debt saturated property market and 'range trading' equities won't produce the capital gains of yesteryear. All very bad news for the Treasurer.

So we all seem to agree. Get back to surplus. Pay down national debt (which, on MYEFO forecasts is set to peak this financial year at around 7.5 per cent of GDP), and then do something to enhance national productivity with those 'razor thin' surpluses. No more motorbikes. An upgrade to an iron ore terminal is more likely. Mum'll like that.

But wait! That smart kid from the big house on the hill – Malcolm, I think it is – says he has a better idea. Instead of paying off the national credit card bill, we should divert some of the razor-thin surpluses into a national savings account instead. He wants to call it a "sovereign wealth fund". Posh bastard.

In fact, anyone who took time to work through Malcolm Turnbull's argument in favour of a SWF, published in Business Spectator yesterday (A fund to guard against Canberra's frailty, March 12) will see there is a lot of merit in the idea.

At first glance, leaving a large credit card bill to fester while storing cash up in another account seems crazy – and in one's personal finances, that's true. While my motorbike bill incurs something like 15 per cent interest, any savings I can stash away will earn me less than 6 per cent (and the tax man will get a third of that).

But Turnbull's SWF plan isn't like that. The Commonwealth government securities issued to fund budget deficits are one of the cheapest sources of finance around (a point highlighted last month by my colleague Robert Gottliebsen – Breaking up a rates ruckus, February 14) and the investments made by an SWF should, in theory, generate returns at least as high as the interest bill on the portion of the national debt that we could have paid down instead.

Moreover, while the first instinct with SWFs is to invest globally to hedge against a sudden end to Australia's resources boom, the reality is that a substantial portion of an SWF could be invested in domestic infrastructure assets to boost national productivity in key areas.

Sounds like a good idea. But it is not the only one being floated. The Business Council in its pre-budget submission has sketched out another way to protect national prosperity without an SWF.

In essence, the BCA want the national debt paid down at a sensible rate, with the proviso that it should be allowed to balloon a little if the eurozone falls over (or, presumably, some other 'black swan' global financial contagion erupts).

But the BCA's comfort with Keynesian fiscal stimuli has its limits. Future financial shocks are a near certainty, it argues, so we need to get busy now creating a fund that will pay for future stimulus programs without heavy borrowing.

Its submission states: "The immediate objective of fiscal policy – set with an appropriate medium-term perspective in mind – should be to target the generation of budget surpluses with a view to paying down debt. Having done that, the target should be to accumulate fiscal reserves that could then be deployed should the need arise in response to a major economic shock."

The BCA is calling for a 'hard cap' on the Commonwealth's tax/GDP ratio (implying ongoing spending cuts) and for the creation of a 'recharge reserve' fund worth approximately 3 per cent of GDP to help the economy through the crises.

Based on a report prepared for it by Mercer, the BCA argues that such crises come around, on average, every 13 years – so we'd better get cracking to create such a fund and remove the need to borrow during the next financial crisis (assuming the eurozone manages to limp back to health this time around).

Both Wayne Swan and Joe Hockey are promising the kind of spending restraint required to set Australia on this path – the big difference being that Swan's tax/GDP ratio is higher due to carbon pricing and the mining tax.

But will either side of politics announce a policy to create either an SWF or a 'recharge reserve'? The Future Fund provides a model for how this can work in practice – though, of course, its assets are already corralled for the single purpose of meeting public service retirement benefits. What Turnbull and the BCA are suggesting in different ways is the creation of Future Fund Mark II – and it's not at all certain that Labor or the Coalition are brave enough to grasp that nettle.

In the meantime, many will wonder why it's that posh kid Malcolm raising this issue again rather than Wayne, Joe or Tony.

Could it be that Malcolm's thinking of running for head boy again this year?

Follow @_Rob_Burgess on Twitter

{{content.question}}

SMS Code Sent…

Hi {{ user.FirstName }}

Looks like you've already taken a free trial

Please enter your payment details

We have sent you a code via SMS to {{user.DayPhone}}

please enter this code below to activate your membership

If you didn't receive SMS code please

Looks you are already a member. Please enter your password to proceed

Please untick this box when using a public or shared device


Verify your mobile number

Please sign up for full access

Updating information

Please wait ...

  • Mastercard
  • Visa

Related Articles