[Land-and-Labor] What Australia could have learnt from Norway's sovereign wealth bonanza

[Lev Lafayette]

What Australia could have learnt from Norway's sovereign wealth bonanza

Had a little smart thinking been applied, Australia's biggest and longest
ride on the resources rollercoaster since the 1850s gold rush could have
been very beneficial indeed.

    It is about time that we recognised this reality by putting in place a
framework to ensure future generations will benefit from the
extraction of our finite mineral resources.

If federal and state governments had put a share of their windfall revenue
into a foreign currency future fund, thereby taking advantage of
record-high mineral prices and the soaring Australian dollar, they would
have amassed a tidy fortune.

Today, when converted back into local currency, this stockpile of wealth
would be worth much more than the capital outlaid, given that the
Australian dollar has naturally fallen in step with sliding mineral
prices. These savings could have been used to boost the economy after the
mineral boom, obviating the need for governments, and the nation, to go
further into debt.

Instead, hundreds of billions of dollars in windfall government revenue
have been spectacularly squandered. Now, at the end of this
feast-to-famine feeding frenzy, there's no prospect of the federal
government paying down its $325 billion net debt, which is likely to
continue rising for the rest of the decade. Australia owes the world more
than $1 trillion in net terms, two and a half times the amount owed at the
start of the boom.

Australia's lack of planning and foresight during this episode appears to
reflect our British heritage. Britain disastrously mismanaged its North
Sea oil bounty from the 1970s onwards, in sharp contrast to the measured,
controlled and long-term strategy adopted at the same time on the other
side of the North Sea in Norway. Australia's policy settings similarly
fail to register three fundamental truths about the resources
industry—that companies profit from extracting the minerals belonging to
the Australian people; that these resources are finite; and that price
booms never last.

Australian governments, especially during boom times, have consistently
operated as though none of these factors apply. This approach has been
reinforced by economic advisers and media commentators. Treasury documents
released to me under the freedom of information law reveal that the
treasurer was advised by his department in June 2007 that the rise in
national income from the mining boom, then in its fourth year, could be
considered 'permanent'. Treasury then said this provided a 'strong case
for spending additional revenue'.

Influential economic commentators even chastised the treasury for having
failed to predict the mining boom, therefore denying Australians an even
bigger round of tax cuts. According to a treasury research paper, the
Howard government spent more than 90 per cent of a $334 billion revenue
windfall in its last three years in office—on tax cuts and middle-class
welfare.

An astonishing lack of strategic thinking

Labor's planning was flawed too. In 2008 prime minister Kevin Rudd held
his 2020 Summit. The summit was supposed to raise issues affecting our
future prosperity, yet policies to better manage the mining boom weren't
mentioned in the economic discussion led by the treasurer, or in the
400-page report that followed. The lack of strategic thinking is
astonishing, especially when compared with the considered analysis and
long-term planning that prevailed at the start of Norway's oil boom.

The Labor government did try to introduce a super-profits tax in 2010,
which treasury sources said could have raised $100 billion over a decade.
This income was not earmarked for a sovereign wealth fund, but would at
least have delivered more of the profit to the nation, rather than to the
mostly foreign-owned mining corporations.

However, the design of the tax was overly complex and its hasty
introduction allowed the mining companies to ambush the government. In
what must be one of the most comprehensive policy defeats since
Federation, the miners knocked off the prime minister and then killed the
tax, thanks in part to an advertising blitz costing a mere $22 million.

Research commissioned by Big Dirt showed that the ads' rhetoric convinced
the Australian people that the nation's prosperity was dependent on its
lightly taxed mining sector. (Stock-exchange data indicates that the
effective tax rate on the resources sector is around 30 per cent, less
than half Norway's rate, and lower even than that of some emerging
economies.)

What we can learn from Norway

There are two key lessons for Australia from the story of Norwegian oil.
First, the government should revisit the super-profits tax, so that the
nation benefits the next time mineral prices surge. In order to head off
the political opportunists, the government must properly explain the need
for this tax, and perhaps package it with reform of imposts such as stamp
duty and royalties that are legacies of our colonial past.

Even though China's demand for coal and iron ore may have peaked, India is
likely to sustain demand for these key commodities for many years to come.
A period of low commodity prices provides an opportunity to introduce such
a reform, notwithstanding the likely backlash from a diminished mining
industry.

Second, this revenue should be channelled into a foreign currency fund to
hedge against the next commodity downturn.

The really big lesson from Norway is not the size of its trillion-dollar
fund; it is the way every single krone of surplus revenue has been
converted into foreign currency. Norway has a commodity-based economy like
Australia's, but it has built a giant hedge to help manage the boom times
and protect against the inevitable periods of subdued commodity prices.
This explains why Norway is a creditor nation that has almost doubled its
net foreign assets to around 185 per cent of GDP since 2010. That is the
equivalent of Australia having amassed net foreign assets worth $3
trillion; instead, we owe the world $1 trillion.

Neither the Australian government nor its private sector seems to
understand the long-term benefit of building up a hedge against mineral
downturns. Our much-vaunted $1.3 trillion in superannuation savings is
massively over-invested in domestic assets, with only 30 per cent invested
offshore. This industry, which has a guaranteed revenue stream as a result
of government policy, failed to take advantage of the high Australian
dollar as it surged above its long-term average of US70c and indeed went
above $US1 at the height of the boom.

Had these investment managers lifted their foreign currency allocation in
step with the rising Australian dollar, the superannuation savings of all
Australians would potentially be worth hundreds of billions of dollars
more than they are today, and the financial pressure on retirees and
government would be commensurately lower.

For most of our history, Australia has been dependent on the prices
obtained from shipments of bulk commodities to earn export income. It is
about time that we recognised this reality by putting in place a framework
to ensure future generations will benefit from the extraction of our
finite mineral resources.

This is extract from Paul Cleary's Trillion Dollar Baby—How Norway Beat
the Oil Giants and Won a Lasting Fortune, published by Black Inc. and
Biteback.


http://www.abc.net.au/radionational/programs/latenightlive/what-australia-could-have-learnt-from-norway-sovereign-wealth/7797560

-- 
Lev Lafayette, BA (Hons), GradCertTerAdEd (Murdoch), GradCertPM, MBA (Tech
Mngmnt) (Chifley)
mobile:  0432 255 208
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