Peter Costello’s indefensible legacy

By David Collyer, cross-posted from Prosper Australia

On Friday, Peter Costello used Fairfax to tell us how handsome he is and how splendidly the Future Fund he chairs is performing.

He was responding to fellow establishment figure Howard Mitchell’s comparing its returns against the Alaska Permanent Fund. The whole debate was probably a Tory setup. They do odd things like that.

Alaska’s fund is a poor model to emulate. The gold standard of sovereign wealth funds is Norway’s Government Pension Fund Statens pensjonsfond Utland, established in 1990 and worth around 900 billion Australian dollars.

In early January 2014, every Norwegian became a crown millionaire, thanks to the fund. That is about 156,000 Australian dollars each. You can look at it’s market value here.

It is funded entirely by taxes on oil production. Norway discovered resource extractive industries can be taxed quite heavily if the impost is at Earnings before Interest, Tax, Depreciation and Amortisation (EBIDTA). No one can argue Norwegian oil producers are in any way discouraged by this – their willingness to invest and prodigious output speak for themselves.

Norway had feared the paradox of plenty, also known as the resource curse or Dutch Disease. The production of gas offshore The Netherlands brought in vast sums of money. The currency rose strongly and made all other economic activity completely uncompetitive, closing big employing export industries that had built their position over decades, if not centuries.

Which is exactly what happened to Australia while Costello was Treasurer – the wealth was spiralled off into tax cuts for high income earners, land price inflation and lazy imports.

“The (Norwegian) fund is a success in the sense that parliament has managed to put aside money for the future. There are many examples of countries that have not managed that,” Oeystein Doerum, chief economist at DNB Markets told Reuters.

Australia is one of the failures Doerum refers to, Costello is the architect, and you and I are the losers.

Costello says: “In Australia resource royalty revenue goes to the states, not to the Commonwealth, or its Future Fund.”

This encapsulates two policy failures: firstly, the states using royalties which have to be set pitifully low so as not to discourage the most marginal producer, and secondly, not deflecting the revenues into a sovereign wealth fund to save all other activity from drowning under a too-strong currency.

Treasury’s 2010 tax reform manifesto, Australia’s Future Tax System, argued for the introduction of an EBIDTA-based Resource Super Profits Tax and the extension of the paralleling offshore Petroleum Resource Rents Tax to all onshore oil and gas production.

Then-Prime Minister Rudd agreed, but the RSPT was diluted away as the Minerals Resource Rents Tax then repealed by Tony Abbott. The PRRT continues on all oil and gas production but has been rendered ineffectual by concessions and exemptions.

A better Prime Minister than either of these clods, Julia Gillard, laid out the law to the Mineral Council of Australia in May 2012:

”You don’t own the minerals. I don’t own the minerals. Governments only sell you the right to mine the resource – a resource we hold in trust for a sovereign people.
”They own it and they deserve their share.”

If our elected leaders had a better sense of the national interest and been prepared to fight for it, we would now have:

  • A mining industry paying properly for the right to sell our minerals
  • Lower land prices
  • A lower more stable currency
  • A more diversified industrial base
  • A sovereign wealth fund worth many many hundreds of billions

Instead, we have Peter Costello smirking over making a 10.5 per cent a year return in the Future Fund – which is hypothecated to pay Commonwealth public servants’ superannuation.

Boy, have we been dudded!

Unconventional Economist
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  1. And somehow he still remains on the board of Nine Entertainment.
    No wonder Mr J Packer sold out, and left the country, and is now doing very well, thank-you.

    • “They are patriotic in time of war because it is to their interest to be so, but in time of peace they follow power and the dollar wherever they may lead… They claim to be super-patriots, but they would destroy every liberty guaranteed by the Constitution. They demand free enterprise, but are the spokesmen for monopoly and vested interest. Their final objective toward which all their deceit is directed is to capture political power so that, using the power of the state and the power of the market simultaneously, they may keep the common man in eternal subjection.”

      Henry Wallace on Facism in America……his points remind me of………..just about every single politician elected to Australian Parliament

      • Agreed, and they expect persons to serve in a military under the control of these types.
        Here we are going to spend billions on submarines, with no one to man them.
        Yes Sir ee. big changes afoot.

  2. Norway does not have mass immigration either.

    And they have massive tax breaks for electric cars.

    How do we get a government like Norway.

  3. I’m attending a corporate budget event on Wednesday 4 May 2016 where “esteemed guest speakers the Hon. John Howard OM AC (Melbourne) and the Hon. Peter Costello AO (Sydney) will share their insights into the Budget, and what it takes for Australia to reform to perform”

    It will be interesting to see how they answer my question of why they created a structural budget deficit rather than investing for the future………….. I’ll let you know the answer!

    • Don’t pike!! You should put your question in the context of a deficit at a time of unparalleled continuous economic growth – grill the sh*T out of them!!!

    • I suspect the answer will be along the lines of a superior snort followed by the smirk, a few words on how he paid Labor’s debt off and then move right along to the next, more friendly, question.
      I can pretty much guarantee that the substance of your question will remain unanswered.

    • “Mr Howard, Mr Costello.

      It is widely acknowledged that your paired governance has left a most harmful structural deficit to the nation and is universally regarded as the most destructive act of economic vandalism in the history of this country.

      Bearing this history in mind and its ongoing impacts, we now see calls to cut the welfare payments that may harm many vulnerable people. One may pay attention to your respective ongoing parliamentary pensions and view them as a form of welfare, a very generous form at that, and conclude this should be an area to cut instead.

      Would it perhaps be considered prudent that moving forward the Australian people should consider revoking your welfare payments, or at the very least means testing them, particularly in light of the fact the both of you receive substantial payments for ‘speakers fees’ and board appointments?”

  4. Ronin8317MEMBER

    While I am not a fan of Peter Costello, the attack is somewhat unfair. Most of the State governments are run by Labor under the Howard/Costello era, so changing the royalty regime is simply not possible. During the Howard era, unemployment hit 4% at one point in time, so further government spending at that time would have driven up inflation.
    The time to do infrastructure projects is after the GFC. Instead, we got ‘pink batts’ and another round of First-home buyer grant. Household should have deleverage instead of pushing the housing bubble even higher.

    • Isn’t the point that the further government spending should have been in the form of a proper SWF rather than tax cuts which would also put pressure on inflation.

    • I fear too much of Labor’s stimulus was driven by politics and perception, not need. I mean if you wanted cash handouts to be spent, and not saved, why on earth would you not include unemployed people and students?! I think students were included in the second round, but still.. Also, why not rebuild school buildings based on need? Did all schools really need brand new shiny buildings, or was it more about parents seeing what Labor? By memory, they also took money from panned social housing to put into its school building program.. As for the Pink Batts, I remember the leftie ABC interviewing people form the industry that warned against rolling it out too fast. Maybe I’m being unfair, but it seems hard to believe they couldnt have done things differently.

      • To be fair, no one had much practical experience of what to do during a crisis like the GFC. I think the ALP can be satisfied with how they performed although obviously with hindsight, some things could and should have been done differently.

      • True Jason, but recessions historically are not that uncommon, and given the harm structural recessions/depressions can cause, you’d think major parties and the public service would have some sort of action plan hidden away. Plus there were warning signs.

    • To be fair, the Feds did fund a rail line in Melbourne post-GFC; but nothing in Sydney, even though NSW was at the time governed by a Labor faction with Federal approval. The problem was that our idiotic Premier put up a nonsensical project (the Balmain rail link) instead of a sensible one (the Epping-Parramatta link).

    • “so further government spending at that time would have driven up inflation”

      I don’t think the problem was lack of government spending. More like the opposite: lack (reduction) of taxation of the very well off, superannuation tax in particular.

  5. It’s hard to envisage that any living person will recover from the effects of the disastrous Howard years.

    After 13 years of a once in a century government in terms of talent, we turned the place from an English speaking, aspiring Germany to an English speaking Brazil.

    It is telling that to many, the best path for recovery is not reform, but to burn the whole place down and rebuild from the ashes.

    • You might be wrong on Brazil… it’s the ‘country of the future’. Perhaps Argentina.

      Like both of those countries, the best thing for young people of means to do is L E A V E!

      • Leave to where? Most of the northern hemisphere has its own issues and inflated realestate in most cities where the good jobs are anyway. Berlin and Amsterdam are probably the two cities I would head too next (still affordable cost of living and generally good societies).

        I’ve worked in the Netherlands (left after 9 months due to a promotion to the USA).
        Lived in the USA for 2 years. Left due to bullshit manager and shit visa conditions (also cancer in the family). So I broke that visa and returned to Aus.

        Was offered a job in Germany with blue card.. (recently) but Germany is probably going to go to shit in the near future. So I turned that down. Now I am headed to another tech job / startup in Sydney with a good chance of success.

        In general I agree that leaving Australia is probably worth it. I am hoping that the housing bubble goes bang or deflates 20% over the next 2 years. If not, i’m probably going to leave this political backward rent seeking country and never return. Or I will run for local council and rent seek myself some DA approvals. *shrug*

      • Paul: sounds like you had some bad luck in the USA; bad manager plus shitty visa. I can imagine that would be awful. I will admit that the biggest danger for moving to the US is the visa going wrong combined with bad employers. I have perhaps lucked out on both in California.

        However, I still think the US diversified economy is worth quite a bit. Australia could have a sufficiently diversified (and prosperous) economy given its population size, but the powers that bee seem intent on ensuring that doesn’t happen. Sigh.

      • Definately think you’ve lucked out LD.
        Had my 1st ‘tour’ in the US from ’01-’06 and came back because of 2nd class citizen treatment I experienced over there (working visa).
        Went back again in ’10-’11 (couldnt take the stupidity here) and was reminded again of the fragility of my visa situation.

        So, back in Oz again fuming at the governance of the place. Where next? Definately not the UK – tried that once too, potential employers laughed at me when I defined my salary expectations…

  6. “On Friday, Peter Costello used Fairfax to tell us how handsome he is and how splendidly the Future Fund he chairs is performing.”

    Unbelievable, so utterly shameless.

    voters is stupid.

  7. We often hear of Norway’s sovereign wealth fund but not much about their present fiscal situation. Wouldn’t the low oil price be making life hard for their budget (like the Saudis and Russians)? Maybe their future is eating their present? Anyone know? PS Check out the Norwegian political drama on Netflix ‘Occupied’…

  8. All we had to do was look.

    “The original idea behind establishing the Fund was twofold: First, the Fund was to serve as a long-term savings vehicle which seeks to secure the income from a non-renewable resource by diversifying into a broad portfolio of international securities. There is an ethical obligation to share the wealth from natural resources, developed over millions of years, with future generations and to use these savings to cover government expenditures that will be associated with an ageing population.

    Second, the Fund was a device to insulate the domestic economy from the resource curse, known as “Dutch disease”. The experiences of other countries have shown that the receipt of a sudden increase in natural resource wealth can rapidly inflate domestic prices and the exchange rate, decrease international competitiveness and result in de-industrialisation. A further potential problem is that this enormous resource wealth could disincentivize citizens from working and developing their human capital.”

  9. while Costello was Treasurer – the wealth was spiralled off into tax cuts for high income earners

    including but not limited to tax cuts for superannuation that went entirely to high wealth individuals. And Costello gets lauded for this! What a stupid country (the “lucky” country) Australia is.