Ideas@TheCentre

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WA should invest and lower taxes before hoarding revenue

Stephen Kirchner | 24 February 2012

On 22 February, WA Premier Colin Barnett said his government would announce a sub-national sovereign wealth fund as part of the forthcoming state budget and legislate to introduce the fund later in the year.

The Liberal-National government is committed to ensuring future generations of West Australians have a legacy from this historic period of economic development, built predominantly on the significant but finite resources available to us at present.

Robert Carling and I explain why the premise behind the WA move is flawed in our just released CIS Policy Monograph, Future Funds or Future Eaters? We note that Australia’s resources are not finite in any economically meaningful sense. Well before these resources are exhausted, substitution on both the supply and demand side of commodities markets will have consigned them to being an economic irrelevance. In the meantime, continuing productivity growth and technical progress will mean future generations of Australians will enjoy a much higher standard of living in an economy that will increasingly be dominated by service industries.

To the extent that Western Australia is now enjoying windfall revenue gains, there is no reason why the state government cannot invest this revenue in productivity-enhancing infrastructure and other projects that will yield a stream of valuable services into the future for the benefit of future generations. Government expenditure programs should aim to do this anyway, but it is particularly important to the extent that the revenue streams from the current mining boom are thought to be temporary. Mining revenue could also be used to lower or abolish inefficient state taxes that will expand the economy and grow the state tax base for the benefit of future generations.

Hoarding revenue in financial assets will produce a return in line with the future performance of those assets, but this is likely to be poor compensation for not using the revenue today to increase spending on productivity-enhancing infrastructure and lowering the state tax burden.

Stephen Kirchner is a Research Fellow at The Centre for Independent Studies and co-author of the report Future Funds or Future Eaters. He tweets here.