Peter Costello’s indefensible legacy
On Friday, Peter Costello used Fairfax to tell us how handsome he is and how splendidly the Future Fund he chairs is performing.
He was responding to fellow establishment figure Howard Mitchell’s comparing its returns against the Alaska Permanent Fund. The whole debate was probably a Tory setup. They do odd things like that.
Alaska’s fund is a poor model to emulate. The gold standard of sovereign wealth funds is Norway’s Government Pension Fund Statens pensjonsfond Utland, established in 1990 and worth around 900 billion Australian dollars.
It is funded entirely by taxes on oil production. Norway discovered resource extractive industries can be taxed quite heavily if the impost is at Earnings before Interest, Tax, Depreciation and Amortisation (EBIDTA). No one can argue Norwegian oil producers are in any way discouraged by this – their willingness to invest and prodigious output speak for themselves.
Norway had feared the paradox of plenty, also known as the resource curse or Dutch Disease. The production of gas offshore The Netherlands brought in vast sums of money. The currency rose strongly and made all other economic activity completely uncompetitive, closing big employing export industries that had built their position over decades, if not centuries.
Which is exactly what happened to Australia while Costello was Treasurer – the wealth was spiralled off into tax cuts for high income earners, land price inflation and lazy imports.
“The (Norwegian) fund is a success in the sense that parliament has managed to put aside money for the future. There are many examples of countries that have not managed that,” Oeystein Doerum, chief economist at DNB Markets told Reuters.
Australia is one of the failures Doerum refers to, Costello is the architect, and you and I are the losers.
Costello says: “In Australia resource royalty revenue goes to the states, not to the Commonwealth, or its Future Fund.”
This encapsulates two policy failures: firstly, the states using royalties which have to be set pitifully low so as not to discourage the most marginal producer, and secondly, not deflecting the revenues into a sovereign wealth fund to save all other activity from drowning under a too-strong currency.
Treasury’s 2010 tax reform manifesto, Australia’s Future Tax System, argued for the introduction of an EBIDTA-based Resource Super Profits Tax and the extension of the paralleling offshore Petroleum Resource Rents Tax to all onshore oil and gas production.
Then-Prime Minister Rudd agreed, but the RSPT was diluted away as the Minerals Resource Rents Tax then repealed by Tony Abbott. The PRRT continues on all oil and gas production but has been rendered ineffectual by concessions and exemptions.
A better Prime Minister than either of these clods, Julia Gillard, laid out the law to the Mineral Council of Australia in May 2012:
”You don’t own the minerals. I don’t own the minerals. Governments only sell you the right to mine the resource – a resource we hold in trust for a sovereign people.
”They own it and they deserve their share.”
If our elected leaders had a better sense of the national interest and been prepared to fight for it, we would now have:
- A mining industry paying properly for the right to sell our minerals
- Lower land prices
- A lower more stable currency
- A more diversified industrial base
- A sovereign wealth fund worth many many hundreds of billions
Instead, we have Peter Costello smirking over making a 10.5 per cent a year return in the Future Fund – which is hypothecated to pay Commonwealth public servants’ superannuation.
Boy, have we been dudded!