Calls for New Australian SWF Meet Resistance

(June 30, 2011) – Internal critics are striking back against domestic and international calls for Australia to establish a sovereign wealth fund (SWF) on the back of a commodities boom fueled by rising Asian demand.

Australia is faced with the question of what to do with the proceeds of a large surge in demand for its vast deposits of coal and iron ore. At the heart of the dispute is whether Australia should try to emulate Norway by establishing a sovereign wealth fund or rather impose a tax on mining profits as the best way of capitalizing on the boom.

In May, the International Monetary Fund (IMF) urged Australia to create a SWF to protect the country against a possible Asian market bubble. IMF director Anoop Singh said at the time that the revenue from the current resources boom should be saved “to ensure a more equal distribution of its benefits across generations and reduce long-term fiscal vulnerabilities from an ageing population and rising health care costs.”

The IMF’s suggestion came on the heels of similar advice offered by Pacific Investment Management Co. (PIMCO), the California asset management giant, about the utility of a creating a SWF, aiCIO has reported. Robert Mead, managing director and head of portfolio management at PIMCO, said in April that Norway’s Norges Bank Investment Management offered a good example for which Australia should follow. “The Norges bank model has obviously been a very successful model,” Mead said, adding that for Australia’s model, “quarantining the additional revenues raised from the resources boom should be fed into a long-term fund structure.”

Within Australia, however, decision makers are less receptive to the idea of a SWF. Australia’s treasurer and deputy prime minister Wayne Swan has dismissed arguments for a new SWF, saying that the government’s proposed 30% mining tax will serve the country better.

“I don’t think it makes sense at this stage of our development,” Swan said in a speech reported by Dow Jones Newswires. He said the economy needs capital and that creating an SWF would “starve the productive base of our economy from the use of that money.”

At a June 30 conference in Melbourne outgoing Australian Reserve Bank board member Warwick McKibbin echoed Swan’s concerns.

“Everyone seems to be focused on maximising the returns of the boom,” Dr. McKibbin said according to the Australian. “But we should be also aiming to minimise the risks, whether that is macro or climate policy. We don’t know what the future will bring so we should be trying to minimise risk.”