Superannuation and Public Investment
By Harold LevienIn 2003–04 contributions to super funds totalled $58 billion. This year they will exceed $60 billion. However this will neither guarantee security in retirement—because of corporate collapses and losses—nor significantly assist Australia’s economic development.
The vast majority of contributions flow into the purchase of paper securities—shares, debentures and bonds—and property, both in Australia and overseas. The effect is simply to raise the price of these securities and property that redistributes income—particularly to higher income groups and investment trusts. Some of this income will flow into increased consumption especially imports that will then enlarge our current account deficit.
By leaving superannuation to the market Australia squanders a magnificent opportunity both to provide absolute security to superannuants and to fund sorely needed improvements to our public infrastructure and environment.
The Problem
The parlous state of much of Australia’s infrastructure is well known. Yet despite an increasing capacity to deal with this problem the Commonwealth Government is doing little. Here are a few examples. Our railways are more appropriate for a 1940’s economy. A fast efficient rail system would permit a redirection of much of our freight from roads and of passenger traffic from road and air. This would greatly reduce oil imports and prepare the economy for the looming oil crisis. It would also cut our huge current account deficit (CAD) and our contribution to greenhouse gases. Major roads are equally unsuitable for the 21st century raising costs and increasing accidents. Congestion in some ports is impeding exports. The universities are desperately under-funded with our most prestigious institutions dependent on the income of full-fee paying overseas students. The CSIRO is in urgent need of additional funding especially to reduce its Government enforced increasing dependence on commercial arrangements which skews its culture from the long-term national interest towards short-term commercialism.A report on Australia’s environmental degradation, produced by the ACF and the National Farmers’ Federation in 2000, with the assistance of the Commonwealth’s Land and Water Resources Corporation, found the current cost of land and river degradation was ‘at least $2 billion each year and is increasing at an accelerating rate’. The report claimed that remediation would require public investment of around $3.7 billion annually over 10 years and private sector investment of about $2.8 billion annually—a total of $6.5 billion. The government has had this report for five years.
In the 2004-05 Budget the Commonwealth allocated $257 million to environmental repair with similar projections over the next three years.
There is need for a government Development Bank to provide funding for the commercial development of clever products and techniques coming out of the CSIRO, universities and elsewhere which currently cannot get funds from our financial institutions if there are risks and long-term pay-off. There is no financial institution with a charter to give priority to the long-term national interests such as increasing exports, import replacement, expanding employment opportunities, reducing environmental impacts, enhancing the quality of life. The absence of such an institution has already cost Australia dearly with many Australian products (from pharmaceuticals to renewable energy technologies) being developed overseas. This potentially deprives Australia of billions of dollars in exports and increases imports which exacerbates our current account deficit. As a percent of GDP the CAD is now the largest in the industrialised world. The larger the CAD the less scope for the Government to pursue expansionary policies. This restricts the growth in GDP and thus tax revenue and social spending.
Australia’s infrastructure and long-term development appears to have little place in the Government’s priorities. In 2004 it unexpectedly budgeted $1billion on the Iraq war and in the lead up to the elections and during the campaign it announced vote buying programs, with little relevance to the economy’s long-term interests, totalling $66 billion over five years.
The Solution?
The Commonwealth Government could establish a National Development Superannuation Fund (NDSF) to attract a significant proportion of super funds. This would achieve the dual aims of providing absolute security for those superannuants contributing to the NDSF and funding urgently needed infrastructure and environmental repair. Superannuants could be attracted by a Government guarantee of principal and of interest rates indexed to inflation-- perhaps with tax concessions--and through solving the portability problem. ( that being the frequent problem of switching superannuation funds when an employee changes jobs )The NDSF could expand the economy through investments which raised productivity and increased employment. Such investment would need to be related to appropriate training programs for the unemployed. The considerable scope for economic expansion was revealed in recent ABS figures showing almost 1.2 million want work but are not recorded in official unemployment figures. The listed obstacles to employment were lack of training, lack of child care, and tax/benefit-withdrawal policies which provide a strong disincentive to seek work.
Increased tax revenue accruing from appropriate public investment could readily provide a competitive return on funds. If the NDSF attracted only $10 billion annually this should permit an increase in economic growth of at least 1%. This would add over $8 billion to GDP and about $2 billion to tax revenue--since Commonwealth receipts are around 25% of each increment in GDP-- allowing a 7% return costing $700 million. The remaining $1.3 billion would be available for increased social spending such as on public schools and public hospitals. In the short-term it’s likely that the NDSF could attract well over $20 billion annually permitting a much larger public sector dividend.
To avoid inflationary impacts from public sector expansion it would be desirable to reinstate statutory reserve deposits (under which a proportion of bank deposits are to be lodged with the Reserve Bank depending on the current relation between demand and productive capacity) and Reserve Bank directions on bank lending policy. The Hawke-Keating Government cancelled both requirements in the 80’s. Bank lending could then be rationed by priorities rather than interest rates. The NDSF proposal would thus result in a redirection of some resources from consumption to public investment –initially of a little over 1% of GDP.
Superannuants in the NDSF could be funded either through a special tax on company profits or a dedicated proportion of existing company profits tax. Currently superannuation benefits are provided from dividend and interest payments made to super funds through their holdings of shares and interest-bearing securities. In principle, the NDSF funding proposal is therefore not so very different from the current system. But the impact on society is a chasm apart. First, the risk to capital and return is virtually removed. Any remaining risk depends on the Government’s handling of the economy—which also exists on current arrangements. Second, the NDSF can channel resources into high priority investment which provides the foundation for a stronger economy permitting substantial increases in spending on public sector facilities and services-- such as education, health, child care, public housing, the environment, the ABC etc--leading to a vast improvement in the quality of life.
(This article does not take account of the case for substantial switches in Government spending: for example transferring the $3billion private health fund subsidies to public hospitals and community health care facilities or transferring part of the $4.3 billion private schools’ grants to public schools. Taking these matters into account creates greater opportunity for significant social developments.)
* Harold Levien is retired after teaching economics for many years. In the 1950s he founded and edited Voice, a monthly current affairs reviewIn 1966-67 he wrote Vietnam-Myth and Reality. Over the years he has written many articles on economic and political issues