Several commenters have asked me to explain how I see an Australian sovereign wealth fund and resource rent tax actually working. Several others have questioned the wisdom of an SWF held offshore when Australia runs a current account deficit (CAD). That is, so long as we invest more than we save, we don’t have any money to stick in a fund. Further, they argue, that owing to the irrefutable laws of sectoral balances, any removal of savings from the private economy will necessarily mean it must shrink or borrow more. All true.
However, what these learned commenters overlook is that I’m not interested in the current account deficit at this point.
I’m interested in preventing a high risk venture into resource export dependency. That is, I wish to preserve a more balanced export mix. The CAD can wait (only until later in this discussion).
Introducing a large resource rent tax and offshore sovereign wealth fund achieves three things at three different levels.
The first level is the real economy. A large enough tax on mining (perhaps around the size proposed in the RSPT) will dent the mining investment boom. It won’t prevent the boom nor prevent the investment forever but it will slow it down at the margin as less economic projects are shelved. That takes pressure off the entire economy as the capital and labour being sucked in by mining diminishes. There will be less inflationary pressure and more capital available to other enterprise as the Rybczynski effect declines a little.
The second level is capital markets and structures. Less inflationary pressure will mean lower interest rates. That, in turn, will lower the currency somewhat through a reduced interest rate differential with the rest of the world and a reverse flow of savings into the offshore fund. Of course, that lower dollar will translate into two further effects. The first will be rocketing resource company profits as the suppressing effect of the high currency is lifted. But those profits are then taxed heavily and the proceeds sent offshore once more so that the boom does not accelerate. The second effect will be to boost the competitiveness of all non-resource export sectors, including manufacturing, and they will resume growth, filling any gap left behind through the removal of savings from the private sector.
The third level of effect is in global meta-finance. The realm of meta-finance is, by and large, governed bysignals and symbols not the real economy or even real economics. These markets are semiotic. To me, that’s why QE had such a powerful effect on debasing the $US and raising commodity prices. Not because there’s necessarily squillians of new dollars to rationalise the price movements but because, according to markets, it’s SUPPOSED to happen, they anticipate it happening, and hence it does happen.
The symbolic value of a move by Australia to suppress the dollar via an SWF could have a powerful effect. To date, we’ve had a parade of senior officials blessing the currency’s rise, which has made speculation on the Aussie a no-brainer. The carry trade into the Aussie would be dented by both a declining interest rate differential and a shift in symbolism towards fiscal control of the boom and currency. The Aussie would fall further.
Thus, what the offshore SWF creates is a kind of “dirty float” of the Australian dollar. The currency no longer acts as the solitary external pricing signal for the economy, rising during the boom dramatically to control inflation but also preventing the nation from accumulating a great deal of foreign wealth by denting resources profits. Instead, with an and SWF, a much greater amount of those profits flows through but they are recycled outwards as national wealth collected through the resource rent tax.
In effect, an offshore SWF shifts the super profits of the boom away from currency speculators and towards our children.
And what of the current account deficit? Well, it’s much the same. But there are crucial differences in other economic settings. You have a big pot of foreign savings you otherwise would not have. And, most importantly from my point of view, you preserve a better industry mix in the external sector. You have, in effect, de-risked the CAD. Then, when China busts, you have life beyond resources and you don’t have to endure quite so hellish a current account crisis.
But, there is a problem. Some of you will have already begun to wonder what the other consequences of these new macroeconomic settings will be. The primary problem I see is that the lower interest rates that result from the RRT and SWF will be exploited by the banks. They are very likely to fill the economic space vacated by mining with lending to households, for housing speculation. There’s not much point in supplanting productive investment in mining with unproductive speculation in houses is there?
So, to work as required, as I wrote yesterday, an SWF would also need changes to the fiscal settings that stoke housing speculation. In other words, we are looking at something rather like the Henry Review (+SWF).
