Australia: Lacking vision not capital

John Abernethy

Clime Asset Management

A few weeks ago, Sir Frank Lowy, one of Australia’s most successful business men, presented a simple solution for managing the Commonwealth budget and financing a visionary growth agenda.

To quote from the Sydney Morning Herald

“….. the country’s sluggish economy is clearly on his mind. As a former Reserve Bank board member himself, he appears to have heard loud and clear the polite pleas from the current bank governor for Canberra to lift its infrastructure spend.

If Sir Frank had his way, he would be re-designing the nation’s accounts so that there were, in effect, two budgets. One would be an annual budget, for “regular things”, he tells The Sydney Morning Herald and The Age. The other, he says, would be a “national” budget for “extraordinary things … the capital expenditure that we need to keep the country at the top end of the ladder”.

The government, he says bluntly, “needs to spend a lot more on infrastructure to make us current in the 21st century … we all know what needs to be done”.

In my view Sir Frank’s comments are logical and they abound in common sense. However, with so much noise in social media, the mainstream press and across the airwaves, it seems that good ideas are constantly being swamped by noisy nonsense. This has become an impediment for the advancement of good policy ideas for Australia and indeed the whole world.

So why wouldn’t Australia adopt what Sir Frank has suggested or at least seriously debate the concept?

I perceive that there is a bureaucratic bottleneck or a roadblock that restricts the formation of big, bold or “extraordinary” ideas. Australia has a plethora of immensely talented people, be they business leaders, entrepreneurs, wealthy philanthropists, scientists, professors, community leaders, social service providers and even bureaucrats. However, the embedded structure and rigidity of Australia’s governance seems to result in a failure to tap the potential of our extraordinary people and to investigate their ideas.

The result is a lack of a national vision with no desire to challenge the status quo or to explore what is possible.

To fund Sir Frank’s idea, I have connected it with the extraordinary capital base that exists inside Australia’s superannuation system. Today Australia has over $2.8 trillion in superannuation assets that represent over 140% of GDP. As my first chart shows we now have one of the largest superannuation or pension funds asset pools in the world.

The list above is notably dominated by Scandinavian countries that enjoyed the bounty of North sea oil. They acknowledged the windfall and banked it for future generations. Whilst those countries that had under saved for pension funding or whom have created terrible fiscal outcomes (through rolling deficits) are now forced to play catch up via higher savings ratios. This in turn stalls their short term consumption and actual growth outcomes.

I also observe that Australia’s superannuation pool is now five times greater than our total Commonwealth debt. In other words, if Australian superannuation funds were required to manditorily allocate 20% of their assets to Australian Government bonds, then we would have no need for foreign bond holders. We would not pay the estimated $10 billion of interest per annum to foreign owners of Commonwealth debt.

Superannuation assets are also 40% greater than the total size of household mortgage debt. Also they equal about 50% of the total financial debt of Australia which is estimated at over 300% of GDP.

Superannuation assets contribute to the very high level of Australia's net household wealth - when you combine superannuation assets to the net value of houses. However, that observation says nothing about the distribution of that wealth or its sustainability.

Yes – “Extraordinary ideas” can be funded in Australia

It seems to me that Australia has the potential to be the best growth economy in the developed world, given we have abundant resources and we are lowly populated. However, we have clearly not managed our water or energy resources sensibly. Nor have we defined our regional development to spread population, services and therefore jobs across the non arid parts of our great land.

Because of our large superannuation pool and our relatively low level of government debt (less than 30% of GDP) we are uniquely positioned to fund extraordinary national infrastructure projects or highly desirable social projects.

I therefore reiterate my statement above that Australia is not short of capital but it is immensely short of vision. That short sightedness is also entrenched in a thought process that seems to lock us into a narrow desire to follow the US or Europe into whatever direction they desire.

I support Sir Frank’s thoughts and suggest that his ideas could be funded by the formation of a series of infrastructure and special purpose bond issues that could be designed to generate enhanced commercial returns exclusively for the Australian superannuation funds that provide the funds. This would allow projects to be fast tracked or prioritised to improve both our living standards and our productivity.

The triangular connection of “vision, ideas and investment” through Australian Government engagement with superannuation asset pools could create an extraordinary outcome. By relieving the burden of paying interest on debt to foreign bond holders (whom are desperately seeking yield) more income would be recycled inside the Australian economy. That in turn enhances economic growth and provides cashflow to fund pensions.

It would also address the increasing flow of vast sums of Australian superannuation capital that are now defaulting into international economies or markets. Outward bound investment is desirable but not if it is substantially caused by a lack of alternatives or opportunity in Australia.

There will be many that will argue that Australia should not grow and that we need to slow population growth. This is because we are short of water and have expensive energy with high carbon outputs.

However, these are issues that can and should be addressed inside a bold and extraordinary capital investment program that is funded from our immense capital reserves. They are not inhibitors to a growth vision but are amongst the questions or problems that should be addressed inside a national investment plan. We may even happen upon solutions that become the generators of export income.

Our uniquely large capital base suggests that extraordinary ideas can be developed into plans that can be funded from our savings.

Importantly we need not print money to do it and nor do we need to draw upon the capital of countries that undertake QE.

John Abernethy
Clime Asset Management

John has 35 years experience in funds management and corporate advisory services. Prior to establishing Clime, John’s roles included ten years at NRMA Investments as the head of equities. Clime is a management and advisory business for mainly SMSFs.

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