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Whatsapp Did Australia let one of its greatest financial opportunities pass it by?

Norway built the biggest sovereign wealth fund in the world by investing a share of revenue from its offshore oilfields. Australia should have followed its example with the money from the mining boom, writes Paul Cleary.

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.

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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.



