As both parties announce tax cuts and goodies for grey voters and those of other hues, neither party has addressed the fact that the resource boom is doing more to reduce Australia's long-term prosperity than to enhance it.
As Australians plan for even more expansive overseas sojourns this Christmas, or an even bigger splurge on imported luxuries, all courtesy of the high dollar, ask yourself this simple question: Can a country that has racked up more than half a trillion dollars in foreign debt since the float of the dollar in 1983 really afford to have an exchange rate approaching parity with its US counterpart?
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The long-term challenge facing Australia is variously called the "resource curse", the "paradox of plenty" or the "Dutch disease". This is when an influx of income from resource wealth drives up the exchange rate and inflates the domestic economy, making the country less internationally competitive and thereby crippling its long-term prosperity.
The opening of the fiscal floodgates by the Howard Government in recent years, and by both major parties in this election, follows the resource curse script to the letter. This has led to higher inflation and interest rates, in turn driving up the exchange rate and making the country less competitive. And the fiscal stimulus rolled out in this campaign can be expected to do more of the same.
The resource curse is usually found in developing countries, but as former US Federal Reserve Board chairman Alan Greenspan explained in his recent book, The Age of Turbulence, the phenomenon was first identified in Holland, when revenue from North Sea oil flooded into the country.
"How is it possible that a super-abundance of natural resources ”” oil, gas, copper, iron ore ”” would not significantly add to a nation's production and wealth? Paradoxically, most analysts conclude that, particularly in developing countries, natural resource bonanzas tend to reduce rather than enhance living standards," he writes. "[It] takes the form of an economic affliction nicknamed the 'Dutch disease'. Dutch disease strikes when foreign demand for an export drives up the exchange value of the exporting country's currency."
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The absence of any policy response to the resource curse is all the more surprising when there are practical models that have been implemented in other countries, most notably Norway, which in 1995 established a "Petroleum Fund" (now known as the Government Pension Fund). More recently, East Timor adopted the model in full ”” with some additional transparency measures ”” for the management of its revenue from the Timor Sea. In Norway's case, all the tax revenue from its North Sea oil resources flows directly into the offshore fund which invests in government bonds and blue-chip equities. The government then draws on the fund.
Essentially, the country can spend the real interest on its natural resources long after the oil resources have been exhausted. The fund is designed so that Norway can transform a non-renewable resource into a financial asset that will last forever. Importantly, Norway avoids the pitfalls of natural resource wealth by parking the money offshore. Instead of driving up the exchange rate and making the country less competitive, the revenue simply drives up the value of the fund.
Former prime minister Paul Keating recently referred to the floating exchange rate as the "shock absorber" for the economy; a sudden inflow of export earnings was absorbed by the exchange rate rather than flooding the domestic economy. But Norway has taken a quantum leap forward; its shock absorber is the petroleum fund and it reaps the benefit of oil wealth by increasing the nation's assets rather than diminishing competitiveness.
After launching in 1995, Norway's fund is now worth 1800 billion krone ($A363 billion), and expected to double by 2010.
Australia's much vaunted Future Fund cannot be compared with the Norway fund, although it could be transformed to help Australia deal with the "curse". At present the Future Fund is only designed to address future liabilities from unfunded public service pensions. Its recent annual report shows that about half of its new investment went into Australian shares. In effect, the Future Fund is also helping to bid up the exchange rate.
The Future Fund should be collecting the proceeds of the resources boom and putting this money offshore. This could be achieved by imposing a levy on all resource projects which would be deducted from the tax already paid by resource companies.
But if Australia was really serious, all resource-based taxation would be paid into the fund and then drawn down by the Government at a sustainable rate.
This way, Australia could truly benefit from the resource boom without crippling the rest of the economy and undermining its long-term prosperity.