Australia is likely to exacerbate the risks from a two-speed economy if it doesn’t cut its level of indebtedness to other countries, Future Fund Chairman David Murray said.
“This is not a time when state and federal governments should be becoming more highly indebted,” Murray, who oversees the government-owned entity controlling A$75 billion ($73 billion) of assets, said on the Australian Broadcasting Corp.’s “Inside Business” program. “And they are. So that is a weakness of fiscal policy in Australia and that’s holding back development and making the so-called Dutch Disease risk higher than it need be.”
Australia’s economy is benefiting from demand from developing nations including China and India for iron ore, coal and natural gas, even as other industries including tourism, education and manufacturing struggle. The so-called two-speed economy has prompted economists to debate whether Australia is suffering “Dutch Disease,” whereby companies extracting natural resources are prosperous while other industries are wiped out.
Murray also attributed the sovereign debt crisis in Europe to governments’ lack of understanding and discipline.
“This was a failure of government to understand the realities of financial markets and of fiscal discipline in their own countries,” he said. “What this says to me is that people elected to political life have far too little an understanding of the limits of debt than they should have.”
Concerns that a Greek default may be inevitable helped push global stocks into their first bear market in two years. European governments are exploring speeding the start of a permanent rescue fund, known as the European Stability Mechanism, for their cash-strapped economies amid fresh signs they may bolster efforts to halt the worsening sovereign debt crisis.
Asked by Bloomberg Television about bringing forward the start date of the ESM, European Union Economic and Monetary Affairs Commissioner Olli Rehn said the focus for now is on upgrading the temporary fund, the 440 billion-euro European Financial Stability Facility.
The Australian Future Fund’s investment strategy will remain “defensive” until the uncertainty over the global situation abates, Murray said.
The Future Fund is the world’s 13th largest sovereign wealth fund by assets under management, ranked behind the Qatar Investment Authority, according to the Sovereign Wealth Fund Institute, which analyses the sector.
“Nobody knows which political set of decisions will be made by the European leaders,” he said. “It has not been very clear which way the world would come out. That is, whether the world would come out of this problem with higher inflation, so the debt was devalued, or it would come out with lower growth with a dis-inflationary outcome.”