States urged to set up future funds

David Murray said GST distribution methods discourage states from putting royalties into a long-term savings fund, and that the money should be set aside 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 chairman of the International Forum of Sovereign Wealth Funds, said Australia has a "resource depletion problem" and is 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, he said.

"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 a state's net financial assets per capita into account discourages states from accumulating money.

"I am from New South Wales 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.

He 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, he added.

A spokesman for the federal Treasurer said the GST arrangements were under review and the government expects a final report in September 2012.

A spokeswoman for the Victorian government said it already uses the Victorian Funds Management Corporation to invest state funds. "The Victorian government believes this model effectively serves this purpose. If Victoria received a fair share of the GST revenue Victoria would be in a better position to increase reserves," she said.