THE head of the Future Fund has joined the mining tax and infrastructure debates by suggesting state governments should use mining royalties to set up sovereign wealth 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.
Frequently Asked Questions about this Article…
What did David Murray, head of the Future Fund, recommend for state governments?
David Murray suggested state governments use mining royalties to set up state-based sovereign wealth funds. He said those funds could be invested in long-term projects such as infrastructure to help replace exhaustible resources and lower the cost of doing business.
Why would states put mining royalties into a sovereign wealth fund instead of spending them now?
The article explains Murray’s view that Australia faces a resource depletion problem and relies heavily on resources revenue. Putting royalties into a sovereign wealth fund can create savings for future activity, fund infrastructure, and help smooth the economic impact as resources are exhausted.
How does the GST distribution system affect states’ incentives to save royalty revenues?
According to the article, the GST distribution method that accounts for a state’s net financial assets per capita discourages states from accumulating savings. If net assets reduce a state’s GST share, states may be less inclined to build up reserves from royalties.
Could the federal Future Fund be used to pay for state infrastructure projects?
No. The article states the Future Fund was established specifically to pay future Commonwealth superannuation obligations, so its money cannot be used for infrastructure. However, the fund’s governance model and expertise could help set up separate state funds to manage royalties.
What benefit does investing royalty revenue in infrastructure offer everyday investors?
Murray argued that investing in infrastructure lowers the cost of doing business, eases capacity constraints and could reduce upward pressure on interest rates. For everyday investors, better infrastructure and more stable interest-rate environments can support economic growth and investment returns over time.
Are any states already using a fund-management model for state funds?
Yes. The Victorian government said it already uses the Victorian Funds Management Corporation to invest state funds and believes that model effectively serves the purpose of managing reserves and investments.
What did the federal government say about reviewing GST arrangements?
A spokesman for the federal Treasurer said GST arrangements were under review and the government expected a final report in September 2012, according to the article.
How could a state sovereign wealth fund be structured to manage mining royalties effectively?
While the article doesn’t give a detailed blueprint, it notes Murray’s view that the Future Fund’s governance model and investment expertise could be used as a template. The key points from the article are to ring-fence royalty revenues, invest for the long term, and target infrastructure that lowers business costs.
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