Future funds or future eaters? The case against a sovereign wealth fund for Australia

27 Feb 2012

This paper considers the arguments for and against greater use of a sovereign wealth fund in Australia. It argues that the existing Future Fund is unnecessary and that greater use of a sovereign wealth fund would harm Australia’s future prosperity.

Sovereign wealth funds (SWFs) have become more prominent both in Australia and abroad since the term was first coined in 2005 by State Street’s Andrew Rozanov. A SWF can be defined as a pool of stated-owned or -controlled financial or other marketable assets designed to finance government activities in either the short or the long term. SWFs can be broadly divided into pension and non-pension funds. The growth in state-controlled pension funds reflects government policies that have increasingly sought to anticipate the fiscal implications of ageing populations. The global commodity price boom since 2003 has increased the role of commodity stabilisation funds in commodity exporting countries, particularly oil-producing states. The accumulation of large foreign exchange reserves as a result of managed exchange rate regimes in East Asia, particularly China, has also seen SWFs emerge as adjuncts to the traditional reserve asset management role of central banks.

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