Swings and roundabouts and the Australian dollar
(Published in the Geelong Advertiser, 5 May 2011, p. 16.)
By Roy Hay
If you were one of the lucky ones who chose to travel to the United Kingdom for the Royal wedding you will have done well out of the high value of the Australian dollar relative to the pound. Similarly if you go for a holiday in the United States or Europe you will find that the Australian dollar will buy you more. Also, imports of consumer goods are cheaper than they have been, helping to curb inflation in this country.
If on the other hand you are UK pensioner living in Australia you will have seen its dollar amount fall by one-third since 2006. Australia is one of a group of countries where the initial value of such a pension is fixed at the time it begins. This has reinforced a push for the indexation of UK pensions by pensioner organisations in this country. Among the arguments they use is that this would reduce Centerlink payments as top ups in this country, but the current government in the United Kingdom will not be keen to do anything while it is engaged in cutting back on expenditure at home.
These are just a couple of examples of the ways in which the current high value of the local currency has costs and benefits for different groups of Australians. In a recent column I pointed out that many of our export industries, particularly in manufacturing are struggling with foreign competition. Those where foreign demand is extremely high, and the mining and energy sector is in this position, benefit from the high dollar until such times as alternative sources of supply become available.
In recent times there have been calls for the setting up of a sovereign wealth fund to secure some of the profits of the current boom in energy resources. Several countries have such funds including many of the Middle East oil producers, Singapore and Norway. These government funds siphon off some of the temporary gains from economic activities and use them for investment in long term projects at home or overseas direct or portfolio investment.
This would be a good time to have a serious debate on a sovereign wealth fund. The terms of trade, the ratio of price of what we export relative to what we import are the most favourable they have been in a generation, thanks largely to the mining boom. Taking some of the funds generated out of present circulation could put downward pressure on inflation in the rest of the economy. It would permit the build up of resources for future investment. Norway has done this successfully with its North Sea oil bonanza. Here in Australia however, the current government has painted itself into a corner by its shambolic handing of the resources rent tax imbroglio. Today, the miners are making big profits and paying less tax in the investment phase of operations. They would not be enamoured by any attempt to extract some of these windfall gains for a sovereign wealth fund.
One of the problems of a sovereign wealth fund is that it is potentially subject to political raiding when the government of the day needs revenue for current purposes. Look at the Future Fund set up by the Howard government to meet long-term public service superannuation liabilities. It was supposed to be quarantined. But such a fund is always a huge temptation to cash-strapped treasurers.
Another issue with sovereign wealth funds is that of picking winners when investing public funds. Can governments outperform the private market or even match it in the long term? The respected economic commentator Ken Davidson always argues against attempts to share the risks through public-private partnerships arguing that governments can always borrow more cheaply than private companies. But that is only part of the story. If the government continues to operate the economic entity it risks becoming bureaucratic rather than entrepreneurial as has happened to some of our major utilities in the past.
As always this means that any economic decision has costs and benefits and what you may gain on the swings, you may lose on the roundabouts. Good policy requires a careful assessment of potential gains and losses and in a dynamic world this is not an easy exercise to perform.