Published in Business Spectator (Melbourne), 4 May 2011
Which country in Europe is most like Australia? No, it’s not Britain despite a history of shared values and institutions. It’s certainly not Germany, although a senior diplomat, who knows both countries well, recently assured me that the quality of political debates was as poor in Berlin as it is in Canberra.
Australia’s country doppelganger in Europe must be Norway. Norway is almost as sparsely populated as Australia. Its coastline is about the same length as Australia’s. But crucially, it is a developed economy heavily dependent on commodities.
There is one difference, however. Norway has used its revenues from oil and gas to establish a sovereign wealth fund (SWF), which is now one of the largest state funds in the world. Australia, on the other hand, has no such fund (the Future Fund operates on a different model).
That could change now, at least if we took the advice from the International Monetary Fund. Last week, the IMF advocated that Australia should follow the example of countries like Norway and divert profits from the mining boom to a new SWF.
The IMF experts were not the first to suggest such a move. Apparently, the OECD had urged the Australian government last year to establish an SWF. Malcolm Turnbull had advocated it in a speech to the International CEO’s Forum about a month ago; and, according to media reports, both the Treasury and the Reserve Bank have been considering the issue. To round off the support, even the Australian Greens have backed the IMF’s call.
When a coalition includes Bob Brown, the OECD, the IMF and Malcolm Turnbull, there are good reasons to be suspicious. Either the proposal is self-evidently correct. Or it is sufficiently open to interpretation.
With Australia’s proposed SWF it is probably the latter. While everybody agrees that it is wrong to waste a commodities boom, it is far less easy to agree on a feasible alternative. Likewise, the idea of a Sovereign Wealth Fund may sound appealing at first, but that is not enough to decide who should pay into this fund, how it should be managed and what goals it should pursue.
Such practicalities aside, it is not even clear whether the much hailed success stories of international SWFs are really worth emulating in Australia. And, for that reason, it is worth looking at the Norwegian example.
Norway is a small but resource-rich country. Its GDP per capita is the fourth-highest in the world after Qatar, Luxembourg and Singapore. Unemployment is virtually unknown at below 4 per cent. Though the Norwegian economy could not escape a recession in the global economic downturn, its long-term development has been solid. The icing on the cake is Norway’s traditional first rank in the United Nations’ Human Development Index (usually closely followed by Australia).
It is hard to argue with Norway’s economic record or with its quality of life for that matter (that is if you don’t mind spending half the year in winter darkness). Nevertheless, there are some reasons for concern.
The main reason for Norway’s spectacular wealth lies in its oil and gas fields. Unfortunately, the high proceeds from this sector have led to complacency in other areas. In particular, state spending is high and, adjusted for petroleum, the government is running substantial budget deficits to sustain Norway’s generous welfare state.
As Norway’s oil boom will eventually come to an end when the country’s oil reserves run out, the Norwegian government had established a fund. It was meant to secure Norway’s welfare state beyond the oil era. Whether this measure will in fact future-proof Norway’s competitiveness is an entirely different question.
Rather than thinking how welfare can continue after oil, perhaps the Norwegians should have thought more about the structure of their economy after the resources boom. It is in this area that the Norwegian model shows weaknesses.
Norway’s labour market is highly regulated; many industries are state-owned; and both taxes and cost of living are high, even by European standards. Taken together, these factors negatively impinge on Norway as a place to do business. Rather than stashing the money from the resources boom away in its SWF and invest in a wide range of companies abroad, the Norwegians could have equally considered how to make their own country a more attractive place for households and investors alike.
Just to get an idea how this could have looked like, consider the following figures. Last year, the Norwegian government ran a non-petroleum budget deficit of 109 billion NOK, which it offset through its SWF. From its petroleum revenues, the government allocated a further 162 billion NOK to the SWF, while the fund also generated an income of 84 billion NOK. In total, the resources sector contributed 355 billion NOK to Norway’s public finances.
To put this into perspective, all of Norway’s taxes on wealth and income were 202 billion NOK; all indirect taxes, customs and excise duties (except for Value Added Tax) added up to 99 billion NOK. In other words, it would have been possible to reduce all national taxes in Norway to zero (except for VAT), if the money currently going into the Norwegian SWF had been used to cut taxes.
It is not hard to imagine what a boost to Norway’s non-petroleum economy this would provide. Almost overnight, Norway would become a tax haven attracting enormous foreign investment, encourage entrepreneurship and ultimately diversify the structure of the economy.
Instead, Norway’s money sits in its SWF, invested around the globe, and is waiting for the day that it is needed to keep the Norwegian welfare state alive after the end of Norwegian oil and gas. For sure, that is a better use of the money than wasting it on school halls and pink batts. But it does not help Norway much either.
The much praised Norwegian SWF may not be as shining an example as it first appears. Australia is well advised to think twice before following the Norwegian model.
And, in any case, before it can ‘save’ any money, the Australian government should first reduce its $42 billion budget deficit. Otherwise Australia could end up looking like some entirely different European countries.