REVENUE FUNDS COUNTERACT THE DETERMINANTS OF DUTCH DISEASE: LESSONS FOR WESTERN AUSTRALIA

Dutch disease occurs when government revenue from a booming non-renewable natural resource export sector is spent on recurrent domestic activities. Dutch disease amplifies the cyclical influence of commodity prices and inflicts adjustment costs on the economy through movements in the exchange rate. Revenue funds, such as revenue stabilisation funds or sovereign wealth funds, can help avoid this problem by either investing revenue abroad until downturns or holding revenue abroad indefinitely. Through an investigation of six open, natural resource exporting countries, revenue funds were found to delink exchange rate movements from the terms of trade. Although it is unlikely that revenue funds are the sole cause of this effect, revenue funds are considered a useful tool for, but not essential to, responsible fiscal management. Western Australia has been found to have Dutch disease. Recurrent government expenditure is vulnerable to decreases in royalty receipts. High levels of mineral exports are partly responsible for the high Australian dollar. Revenue funds are a potential policy tool if the Western Australian government decides to limit the impact of export prices on Australia’s exchange rate. As this is unlikely to be an objective for a state government, it should instead be seen as an added benefit to countercyclical or sustainable fiscal policies. In this case, only a sovereign wealth fund is considered appropriate at the state level and could be used to manage royalties sustainably, reduce movements in Australia’s exchange rate and gain greater fiscal autonomy for the states.