THE head of the Future Fund has joined the mining tax and infrastructure debates by suggesting that state governments use mining royalties to set up their own sovereign wealth funds.
David Murray said goods and services tax distribution methods discouraged states from putting royalties into a long-term savings fund and setting aside the money for infrastructure projects.
"The states own the minerals under the surface. They do levy royalties and the Commonwealth doesn't, so [the states] are entitled to decide how they reimburse their own people in each state for the loss of that resource," he said after a speech in Melbourne yesterday.
Mr Murray, an honorary chair of the International Forum of Sovereign Wealth Funds, said Australia had a "resource depletion problem" and was heavily dependent on resources revenue to maintain a high standard of living.
He said state-based sovereign wealth funds should be used to invest in infrastructure which has the "effect of lowering the cost of doing business". Without sufficient infrastructure, Australia would keep running into capacity constraints and the Reserve Bank would have to increase interest rates.
"When you look at the characteristics of Australia, we have high real interest rates because this is a continuing problem and we have huge dependency on the rest of the world for capital," he said.
However, a GST distribution system that takes into account a state's net financial assets per capita discourages the states from accumulating money.
"I am from NSW and they keep digging coal out of the ground and shipping it somewhere. I would like to know that there is some future activity that will replace it," he said.
Mr Murray reiterated that money from the Future Fund could not be used for infrastructure because it was set up with the specific purpose of paying future Commonwealth superannuation obligations. However, the fund's governance model and expertise could be used to help set up a fund to manage state royalties.
His comments came a day after the federal Treasury secretary, Martin Parkinson, said the national budget would have to return to surplus before the country could consider starting a sovereign wealth fund.
Dr Parkinson told an Australian Industry Group conference in Canberra on Monday it wouldn't make a lot of sense to have such a fund until the country's debt had been paid off.
He also said the mining boom from the digging up of non-renewable assets was "finite" and that was part of the rationale behind the federal government's proposed minerals resource rent tax.
Frequently Asked Questions about this Article…
What did Future Fund head David Murray propose about state sovereign wealth funds and mining royalties?
David Murray suggested that state governments use mining royalties to set up their own sovereign wealth funds. He argued states own the minerals, levy royalties and are entitled to decide how to reimburse their people, and that state-based funds could invest those proceeds for long-term benefit.
How would state-based sovereign wealth funds use mining royalties to help infrastructure and investors?
Murray said state funds should invest mining royalties in infrastructure, which would lower the cost of doing business, relieve capacity constraints and reduce pressure on the economy — benefits that everyday investors can expect from better long-term economic performance.
Why does the article say Australia has a ‘resource depletion problem’ and how does that relate to sovereign wealth funds?
The article cites Murray saying Australia is heavily dependent on resources revenue and faces resource depletion, meaning finite non-renewable assets. Creating sovereign wealth funds from royalties is presented as a way to convert one-off resource revenue into lasting investments for future economic activity.
How does the current GST distribution system affect states’ incentives to save mining royalties?
According to Murray, the GST distribution method takes into account a state’s net financial assets per capita, which discourages states from accumulating savings from royalties because higher net assets can reduce future GST payments — weakening the incentive to put royalties into long-term funds.
Can money from the Commonwealth’s Future Fund be used for state infrastructure or a state sovereign wealth fund?
No. Murray reiterated that the Future Fund cannot be used for infrastructure because it was set up specifically to pay future Commonwealth superannuation obligations. However, he said the Future Fund’s governance model and expertise could help design and manage state-based royalty funds.
What did federal Treasury secretary Martin Parkinson say about starting a national sovereign wealth fund?
Martin Parkinson said Australia would need to return the national budget to surplus and pay down debt before it would make sense to start a national sovereign wealth fund. He argued it wouldn’t be sensible to create such a fund until the country’s debt position had improved.
How does the proposed minerals resource rent tax relate to the finite nature of the mining boom?
Parkinson noted the mining boom from digging up non-renewable assets is finite, and that reality is part of the rationale behind the federal government’s proposed minerals resource rent tax — aiming to capture returns from a limited resources boom for public benefit.
What macroeconomic benefits might investors see if states invest royalties in long-term infrastructure funds?
The article suggests investing royalties in infrastructure could lower business costs, ease capacity constraints and reduce the need for the Reserve Bank to lift interest rates — outcomes that could support a more stable investment environment and potentially benefit everyday investors over time.
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