One savings account we don't need
How could a Liberal support a sovereign wealth fund?
A number of Liberal MPs have recently been publicly floating the idea of a sovereign wealth fund for Australia. They've been joined in their calls by the Greens (always a good barometer of bad policy) and some economists. The idea is relatively straightforward: the Federal government should take advantage of our unprecedented high terms of trade, driven by the mining boom, to save and invest capital for Australia's future. A number of countries, most notably Norway and the oil-rich Gulf states, already have such systems in place.
The precise reasons for the establishment of a fund, however, are hard to pin down. Advocates are typically vague about what specific purpose the fund would serve, beyond ‘saving for the future'. One argument is that thanks to our rapidly aging population we will need savings to fund the expensive retirements of a dauntingly large generation of baby-boomers.
This amounts to a recognition that while our current generous healthcare and pension schemes are fiscally unsustainable, instead of reforming them we should simply squeeze the current generation of taxpayers more to fund them.
Of course, Australians already have enforced saving for the cost of retirement, via compulsory superannuation. Do we really need another layer of government-directed investment?
We're also told that a sovereign wealth fund will allow us to finance ‘investment in the future'. Whatever that means, it is logically flawed. For starters, this is akin to poorer countries giving aid to richer ones, because every generation to come will be vastly wealthier than those before it if current growth trends continue. The only reason to doubt this is if you believe that technological development and human innovation will cease in the future.
Nevertheless, the best way to ensure successive generations are as wealthy as possible is to keep government as small as possible and to tax the productive parts of the economy as little as possible. If our economic future is uncertain, the best approach is to keep the economy strong, not to squirrel away productive resources in a misguided attempt to make government more able to face these challenges. Levying higher taxes to fund government-directed investments will only depress economic growth.
The third argument for a wealth fund is that it would allow us to finance Keynesian government spending. Supporters argue that if the economy took a turn for the worse, the government would have a large pool of assets that it could quickly liquidate to resuscitate the economy. Clearly some politicians haven't noticed how Keynesian ‘stimulus' spending spectacularly failed to lift the US out of the economic mire.
While the Future Fund, established by then-Treasurer Peter Costello in the final years of the Howard government, is in some ways akin to a sovereign wealth fund, at least it had a very specific purpose: to meet the unfunded liabilities of commonwealth superannuation schemes. It was never designed to be a honeypot that governments could dip in to whenever they felt the need. But there is always the risk that the temptation will grow too great - and recent media reports have suggested the Gillard government will be raiding the jar in its next budget.
There is no evidence to suggest that government managers are better placed to determine the best investments for a nations' future. In fact, there's ample evidence for the opposite. After all, government decisions are inevitably influenced by political factors that have little to do with sensible, long-term investment.
But what is truly bizarre is the number of Liberal MPs who have been prominent among the sovereign wealth fund boosters. Because there can be no doubt that a sovereign wealth fund is utterly incompatible with any reading of liberal philosophy.
At its core, the idea of a sovereign wealth fund comes from the government-knows-best school of politics. It presumes that bureaucrats know better how to spend a nation's resources than do individuals and companies. There is only one word to describe a sovereign wealth fund: statist.
How else to describe a belief that, even after government has paid for all its current (extensive) spending commitments, it should continue to tax individuals so that it has a large enough surplus to lock away in government-managed investment funds? After all, the capital to invest in a fund has to come from somewhere, and in this case, it comes from taxpayers.
Wouldn't that surplus government revenue be best returned to taxpayers via lower marginal tax rates? The answer for Liberals should be clear. Liberals believe that individuals know better than government how to spend their own money. They trust them to make decisions in their own interests without ‘guidance' from the state. They believe a small government best preserves individual freedom. And they think that the free market and private enterprise are the best tools for generating wealth and prosperity.
A sovereign wealth fund violates all of those principles.
It's also peculiar that Liberals - who fought so hard for decades to privatise government-owned businesses - would advocate what amounts to the stealthy renationalisation of the private sector through massive government purchase of private assets.
So what accounts for the recent explosion of support in Liberal circles for a fundamentally illiberal policy?
On a superficial level it is easy to understand what attracts some Liberals to this idea. First, it gives the Opposition something ‘positive' to talk about, and helps combat the Labor party line that the Opposition is purely negative and has no agenda of its own. Second, it dovetails nicely with the Liberal party's criticism of the Rudd-Gillard governments' profligacy and the record debt they have accrued in office. Finally, it allows individual MPs to brand themselves as ‘thinkers' who are future-focused and willing to explore innovative policy solutions to complex governance problems.
The embrace of the idea of a sovereign wealth fund by many in Australia's party of free enterprise and individual liberty is deeply concerning. It suggests a wider disconnect with the values and philosophies that are supposed to underpin the Liberal party. It is doubly unsettling when considered alongside other departures from liberal philosophy in the name of political expediency, most notably the Opposition's growing flirtation with outright protectionism and its stubborn fealty to an absurdly generous, government-funded, paid parental scheme. It's time that Liberals who truly support the free market stood up to slay these illiberal policy ideas.