Use mining boom wisely

Comments on Michael Stutchbury “Save some prosperity”, 6/10/2009, http://blogs.theaustralian.news.com.au/currentaccount/index.php/theaustralian/comments/save_some_prosperity/

While the idea of a national wealth fund is not too bad in itself in theory, but it is unlikely to be so good in Australia in practice.

There are both revealed historical reasons and political ideological reasons.

Australia’s history shows that Labour governments have traditionally been a big spending government and a generator of national debts while the Liberals have generally been a smaller government and a source of government savings.

Ideologically, Labour has unsaturated want to spend as long as there is any inequality. Problems with Labour’s economic and budgetary management do not end there because many of its spending can be wasteful and inefficient as well as ineffective to achieve its intended policy outcomes.

So as long as the government has the power to spend, there is no guarantee that any national wealth funds will be safe when Labour is in government.

While Labour has shown its tendance and inclination to spend more than they possibly have, there is no guarantee that the Liberals will not learn from that and follow the suit.

The logic is not dissimilar to the reasons for an independent central bank even though both fiscal and monetary policies are government policy instruments to manage the economy and in theory should be considered and implemented as a package or a whole.

Why does an independent central bank have more merit? It is because only its independence from the government political party can save it from the influence of the government of the day and guarantee its policy disciplines to fight inflation.

A better alternative to a national wealth fund is to have the taxpayers be the real and tangible shareholders of any such funds with a management board independent from the government.

A taxpayer has a definitive entitlement to a certain share of the fund but cannot withdraw and use it until he or she is retired from the workforce and reached the retirement age. His/her shares can be passed on and inherited, just as any private superannuation or wealth.

The parliament can pass a legislation to specify how such a fund should and can be funded through booming mining activities and mining profits.

The initial entitlement can be determined as a combination of an equal per capita of a certain proportion of the windfall income and a proportionate allocation of the rest to every taxpayer.

The government can borrow from such fund when its revenue is below the trend, possibly with interest rates below the prevailing market rates.

So the essence of the idea can be implemented, but government cannot be trusted for managing the fund when it is available and can be spent by it when it has financial difficulties, or even at good times. A government can spend it and also bribe voters.