Macro

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.



Comments

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Dr Jerome Lander

We don't need QE to boost overpriced houses, which is fake wealth which merely leads to generational and social disharmony. We absolutely need our capital and our existing resources to be spent more wisely, by encouraging capital to be allocated to growth projects that are genuinely in the long term national interest.

Harry

Good ideas John, in a world where any new ideas are feared and pillored. The reason why most intelligent people stay out of the political arena is because it panders to mediocrity and anybody that genuinely leads is put down so vitriolicly today that one wonders why one should not let society wallow in its own self pity.

Malcolm

20% of our superannuation funds forced to buy government bonds AKA "Toxic waste". Yuk! Malcolm

Ron Kucharski

Well said John, another wise observation that sadly will probably fall on deaf ears in parliament. Many years ago all public superannuation fund were compelled to invest a large portion of their portfolio in low risk Government Bonds. The abolition of the ‘30/20’ rule for investments in government bonds for life companies and superannuation funds started 11 September 1984. Since then the chase for yield has led Australia's pension system to have the highest allocation to riskier growth assets (local/international equities plus listed property trusts) in the developed world John what if the Government legislated that 20% of all public superannuation must be invested in our State and Federal Bonds, how much more money would the Government have to fund our growth needs. What if it was also compulsory to allocate 10% into infrastructure ? Maybe we would solve problems like the grid-lock on the roads in Melbourne, Sydney & Brisbane and the consequent loss of productivity. Or bottlenecks at our hospital and schools. Until we have a fixed 5 year Federal election cycle (or at least 4 years) nothing will improve. Sadly little or nothing will be done to plan a better future for all Australian in the decades ahead. If the useless bunch in Canberra continue to focus in the short term-ism of being re-elected and on their own salaries and perks, our standing of living will continue to be eroded. Twenty eight years of continuous economic growth has bred an attitude of complacency, this is why the upcoming global recession will be very painful for most Australians.

John Abernethy

Thanks Harry The largest public superannuation fund is the Future Fund with over $150 billion in assets and still underfunded. Your proposal may have merit because the Future Fund has not paid a pension since inception and is unlikely to until it exceeds $200 billion. The taxpayer is paying defined benefit pensions for Commonwealth Public servants whom were in these unfunded schemes prior to 2004. The tax payer has s getting very little for this obligation and the actuaries have never correctly forecast the liability - at least publicly! Thus, the requirement for the Future Fund to invest in essential public infrastructure to make them happen without the need to draw from foreign capital seems worthy of debate. $30 billion would build a lot of infrastructure! Many thanks John Abernethy

John Hyde

"If you want a different result you have to do something different" The "different" you and Frank Lowy suggest is spot on in my humble opinion. We need vision and action and we have navel gazing.

David James

Right ideas John. I have been banging the super funds should fund critical infrastructure for a number of years. Super funds have increasing inflows they need to deploy. Using these funds effectively could secure Australia's future prosperity and security. But it requires cooperation between super funds, govts, businesses and the community. If you are interested, I outline a long term vision and roadmap for Australia here: https://www.linkedin.com/pulse/australia-lucky-country-da...