Budget Surpluses, Sovereign Funds and the slide of the US Dollar

ranger uranium mine

Yesterday’s Federal budget surplus of $21.7 billion raises the spectre of a global trend tied to the principles represented on this website. Take the foreign reserves of Singapore (US$176bn), Hong Kong (US$160bn) and Russia (US$563 bn). Singapore and Hong Kong have raised a significant proportion of their revenue via the capturing of economic rent from land. Russia is a new boom entrant with the capturing of oil rents.

However, the returns on foreign reserves from government bonds are dropping, especially when denominated in the falling US currency. This has seen a diversification away from countries holding their budget surpluses in foreign reserves and towards what is called sovereign funds.

Fifteen of the top 20 sovereign funds in the world are dominated by revenue raised from the resource rents that nature’s resources provide. Australia has benefited greatly from China’s resource boom. Hong Kong and Singapore have maintained their growing funds by ensuring the public share in the real estate bonanza of the last decade. (Remember, land appreciates, housing depreciates.)

We propose a balance of the two strategies, capturing money from both land and the resources below and above it. Then small business can be freed from the shackles of the compliance required in meeting the 56 taxes Australian businesses face.

Stephen Mayne has been tracking the investment by Chinese sovereign funds in strategic assets such as Australia’s coal and iron ore. The evolving challenges sovereign funds place on sovereign countries is a fascinating development in global economics, particularly when political motivations, rather than economic factors can be the catalyst for investment.

In a word of increasing resource scarcity, a Resource Rental system ensures the sovereign country can at least benefit from the scarcity rents (read rising prices of natural resources) even though a sovereign fund may own the company doing the digging. Elsewise Australia faces the danger of becoming a scrap heap for other country’s profits.

Treasurer Swan – increase resource royalties and decrease GST, income and company taxes!

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https://prosper.org.au/2008/05/15/budget-surpluses-sovereign-funds-and-the-slide-of-the-us-dollar/