Clarity urged on sovereign wealth

THE Treasury Secretary has urged caution on the concept of a national sovereign wealth fund, questioning whether it would be the best way to achieve its mooted aims.

By InvestSMART · 10 Nov 2011

By InvestSMART ·
10 Nov 2011

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THE Treasury Secretary has urged caution on the concept of a national sovereign wealth fund, questioning whether it would be the best way to achieve its mooted aims.

Martin Parkinson said although there were "well-motivated intentions" in the growing calls for Australia to follow countries such as Chile and Norway by channelling mining wealth into a sovereign fund, more clarity was needed on what the exact aim of such a fund should be.

Dr Parkinson said Australia's focus should be on delivering surpluses and reducing net debt rather than "getting ourselves all hung up on whether we do it by reducing gross debt on issue or maintaining gross debt and building up financial assets in a sovereign wealth fund."

The idea of a new Australian sovereign wealth fund has gained currency, backed by the likes of the opposition frontbencher Malcolm Turnbull and the outgoing Commonwealth Bank chief executive, Ralph Norris.

But Dr Parkinson, speaking at an American Chamber of Commerce in Australia function in Melbourne yesterday, said "different commentators" calling for a new fund had "different motivations", with some wanting the fund to better spread the benefits of the mining boom, for example.

Dr Parkinson said Australia's superannuation system already acted as a series of "mini wealth funds", helping to ensure some of the mining boom's proceeds were invested. And trying to contain the exchange rate through a fund investing in offshore assets was "unlikely" to work, he said, adding that measures to bring down the value of the dollar could lead to Australia "throwing away" some of the mining boom wealth.

He said he was not suggesting the idea of a new fund was without merit "but that we should be clear about what role it could play."

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Frequently Asked Questions about this Article…

Why did Treasury Secretary Martin Parkinson urge caution about an Australian sovereign wealth fund?

Martin Parkinson warned that while calls for a national sovereign wealth fund come from "well-motivated intentions," there needs to be more clarity about the fund's exact aims. He suggested Australia should focus first on delivering budget surpluses and reducing net debt rather than rushing into a new fund without a clear role.

How did Parkinson say Australia should prioritise budget goals versus creating a sovereign wealth fund?

Parkinson said the priority should be on producing surpluses and lowering net debt. He cautioned against getting hung up on whether to reduce gross debt or keep gross debt and build up financial assets in a sovereign wealth fund until the fund’s purpose is clearly defined.

Who has publicly backed the idea of an Australian sovereign wealth fund?

The article notes the idea has gained support from figures such as opposition frontbencher Malcolm Turnbull and outgoing Commonwealth Bank CEO Ralph Norris, who have backed the concept of channeling mining wealth into a fund.

Can Australia's superannuation system act like a sovereign wealth fund?

According to Parkinson, Australia’s superannuation system already functions as a series of "mini wealth funds," helping to ensure some of the proceeds from the mining boom are invested, which overlaps with one of the goals of a sovereign wealth fund.

Would creating a sovereign wealth fund help manage or contain the Australian dollar's exchange rate?

Parkinson said using a fund that invests in offshore assets to contain the exchange rate is unlikely to work. He warned that measures aimed at bringing down the dollar’s value could risk "throwing away" some of the mining boom wealth.

What different motivations do commentators have for proposing a sovereign wealth fund?

Parkinson observed that different commentators advocating for a sovereign wealth fund have varying motivations — for example, some want a fund to better spread the benefits of the mining boom across the community.

Does Parkinson rule out a sovereign wealth fund entirely for Australia?

No. Parkinson did not say the idea is without merit; he emphasised that if a new sovereign wealth fund is proposed, there should be clear thinking and definition about the specific role it would play before proceeding.

What should everyday investors take away from the debate about an Australian sovereign wealth fund?

Everyday investors should note that policymakers like the Treasury Secretary are focused on national goals such as budget surpluses and reducing net debt, and that Australia already channels some mining wealth through superannuation. Any proposal for a sovereign wealth fund will need clear objectives, and debates about exchange-rate impacts and equity of benefit distribution remain unresolved.