Murray's Future Fund brace is broken

David Murray's defence of the Future Fund can only inspire doubt about the ability of sovereign wealth funds to enhance Australia's prosperity.

Outgoing Future Fund Chairman David Murray expresses surprise at the 'cynical turn' in the public debate about sovereign wealth funds in Australia. Yet his defence of the Future Fund is unconvincing and can only inspire scepticism about the role of such funds in enhancing Australia's prosperity.

Murray says that "politicians routinely strip value off the future". True enough, but the Future Fund does not solve this problem. There is no reason to believe that future governments will spend the money in a sovereign wealth fund any more responsibly than the governments we have actually had.

Future governments are just as likely as existing ones to treat the revenue hoarded in a sovereign wealth fund as a windfall and spend it irresponsibly. The Future Fund kicks the fiscal responsibility problem down the road, it does not solve it. Government saving is just deferred government spending.

More seriously, the Future Fund strips value from the present. Murray suggests that the financial assets in the fund are equivalent to the current generation bequeathing infrastructure like roads and rail to future generations. In fact, the return on the financial assets in the fund is poor compensation for the alternative uses of these funds. This includes current government spending on productivity-enhancing infrastructure.

It is true that some of the Future Fund is invested domestically in tangible assets, but the government does not need a sovereign wealth fund to make such investments. It can be done responsibly straight from the budget on the advice of bodies like Infrastructure Australia. If today's governments can't be trusted to do this, then neither can future governments.

Murray says we are a "savings-short nation". But the assets in the Future Fund are not a source of additional saving. Every dollar in the fund is money that has been removed from private sector saving and investment decisions. He says we suffer "a considerable infrastructure gap", but this only adds to the case for using these funds to fill this gap today rather than handing the task to future generations.

Spending on infrastructure has the added advantage that it binds future governments in relation to the stock of physical capital and the stream of public services from such infrastructure. It denies future governments the option of treating the assets in the fund as a windfall to be spent irresponsibly. In other words, it solves the fiscal responsibility problem in ways a sovereign wealth fund cannot.

Murray downplays the risk of the Future Fund being raided by irresponsible governments. Yet the fund's proud father, Peter Costello, has warned that this is a real risk. Costello has written: "In circumstances where the government is short of money, there will be a huge temptation to raid the savings of future generations." His acknowledgment of this 'huge temptation' only makes Costello's support for the fund all the more difficult to understand.

The case against a sovereign wealth fund does not rely on assumptions about the income and wealth of future generations. There are good reasons to think that future generations of Australians will be far wealthier than ourselves due to ongoing technical progress. This weakens the case for inter-generational wealth transfers.

But even if we take the pessimistic view that technology will fail to raise future living standards, a sovereign wealth fund cannot solve this problem, only smooth its implications over time. The saving of past generations could never adequately compensate for the terrible disaster of secular stagnation, if that is indeed what our future holds.

Like many others who favour sovereign wealth funds, Murray claims that Australia's resources are 'finite'. Resources are not finite because we can always improve our ability to extract and use these resources more efficiently. Future resource availability is limited only by our ingenuity, which is an inexhaustible resource. Estimates of future resource availability in Australia are heavily qualified even by those responsible for making them.

Long before any single resource could be exhausted, substitution on the demand and the supply sides of commodity markets will have rendered that resource an economic irrelevance.

Governments can improve our current and future prosperity by lowering or abolishing inefficient taxes and spending on productivity-enhancing infrastructure. If current governments cannot be trusted with this task, then neither can future governments.

In the absence of large budget surpluses, the federal government will have nothing to put into a sovereign wealth fund. In any event, such funds are a distraction from the public policies we can adopt today to underpin future prosperity. The politicians and others who advocate greater use of sovereign wealth funds do so only because they have run out of better ideas for Australia's future.

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. He is co-author of Future Funds or Future Eaters? The Case Against a Sovereign Wealth Fund for Australia.


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