Sovereign Wealth Funds: A Political Slush Fund in Disguise

Budget Deficits and Political Incentives Make a SWF a Risky Fantasy

President Trump signed an executive order earlier this year calling for the Secretary of the Treasury to develop a plan for establishing a sovereign wealth fund (SWF).

More than 90 countries currently operate some form of SWF. However, most of these are either undemocratic (such as China and Saudi Arabia) or resource-dependent (such as, Norway). Among the handful of countries with SWFs that don’t fall into either of these categories, we see little evidence that SWFs limit the size and scope of government.

Fiscal Foundations Matter

In a recent Wall Street Journal op-ed, former Intel CEO Pat Gelsinger advocated for the creation of a U.S. SWF, citing examples such as Norway, Singapore, and the United Arab Emirates. What he didn't note, however, is that a key feature these countries share — one that fundamentally distinguishes them from the United States — is that they consistently run budget surpluses, which allow them to finance their sovereign wealth funds without resorting to deficit spending.

In Norway and the UAE, the surpluses are fueled by massive oil and gas reserves. In Singapore’s case, the surplus stems from a long-standing commitment to fiscal discipline — something American policymakers have had little experience with and even less appetite for.

Over the past 15 years, Norway has averaged a budget surplus of nearly 10% of GDP, Singapore 3.6%, and the UAE just under 3%. By contrast, the United States has averaged a budget deficit of 7% of GDP over the same period. Simply put, the U.S. lacks the surplus revenue to invest. Instead, it is on course to issue roughly $116 trillion in additional debt over the next 30 years.

A Misallocation Machine Masquerading as Investment

Advocates of a SWF argue that the government could profitably borrow at the risk-free rate and invest at the market rate, generating “free money” and reducing the deadweight loss of taxation. However, this argument relies on flawed assumptions about government incentives, economic distortions, and market efficiency.

Unlike private firms and individual investors, who are disciplined by direct profit-and-loss feedback, governments do not operate under market incentives. Sovereign wealth funds are inherently political institutions, and their investment decisions are subject to lobbying, regulatory capture, and ideological biases.

The notion that the government can borrow at the risk-free rate and invest at the pre-tax market return assumes a permanent and predictable rate differential. But in reality, risk-free borrowing rates are neither permanent nor predictable, but influenced by investor perceptions of government debt sustainability. Expanding government leverage to fund market investments could ultimately drive up borrowing costs, eroding any presumed advantage.

Furthermore, as Tyler Cowen has noted, it isn’t the nominal returns on the government’s portfolio that matters, but the net social gain from increase in investment value:

“If the government buys some of my mutual funds, for instance, and it earns the 7% return that I would otherwise have earned, there is no net increase in social value. On paper, the sovereign wealth fund looks like a big success, but the government has simply issued more debt and redistributed some equity returns away from the citizenry and toward itself.”

Even if a wedge does exist between borrowing costs and expected returns, that alone does not justify government intervention. Private investors already engage in leveraged investment when profitable, and the market does not suffer from a lack of capital. If the government truly had an arbitrage opportunity, the implication would be that the private sector is systematically failing to take advantage of a clear profit opportunity—an implausible claim in a well-functioning capital market.

So how would the government fund its SWF? It lacks Singapore’s fiscal discipline, so perhaps it plans to emulate resource-dependent nations. But even this doesn’t hold water. According to the Office of Natural Resources Revenue (ONRR), the Department of the Interior collected $74 billion in royalties from oil and gas companies on federal leases between 2012 and 2022. The only issue is the government ran a cumulative budget deficit of $11.6 trillion during that same decade. That means the U.S. ran a deficit 157 times larger than its oil and gas royalty income — hardly the foundation for a sovereign investment strategy.

SWFs Don’t Just Allocate Capital — They Rewire Incentives

An SWF would give the government direct ownership stakes in private enterprises, creating conflicts of interest and distorting competition. If the government owns shares in major firms, it has a vested interest in crafting regulatory policies that favor those firms over competitors, reducing market dynamism. This is fundamentally at odds with the principles of limited government and free enterprise.

Austria’s SWF, Österreichische Beteiligungs AG, is a state-owned holding company. It controls 100% of publicly owned real estate in Austria, 53% of the national postal service, and 51% of the country’s largest electricity provider. This isn’t sovereign investment or wealth creating — it’s soft nationalization, cronyism, and corporatism all rolled into one.

Moreover, an SWF is unlikely to remain a purely financial vehicle. The temptation to use the fund for “strategic” investments — whether green energy, domestic infrastructure, or politically favored industries — is too great. Over time, this politicization erodes the fund’s returns and leads to inefficient capital allocation.

In Australia, the SWF (Future Fund) is used as a political football. In the 2010s the center-right Liberal government directed funds toward projects like the Medical Research Future Fund. More recently, the center-left Labor government announced that the Future Fund will be directed to invest in green energy and housing projects.

Talking about using SWF assets for political purposes, New Zealand’s government has spent years divesting large sums from politically unfavorable investments, such as fossil fuel companies through its Superannuation Fund.

Empirical studies of South Korea’s SWF find that it too has become largely captured by political interests. Here is one conclusion from a 2012 academic article:

“First, the case of KIC effectively shows the problem of having an unclear mission statement, which allows the mission to evolve over time and multiple missions to coexist, which may contradict each other. Second, it effectively reveals the typical conflicts that may arise between the central bank and the ministry involved when setting up a reserve-based SWF. Third, it effectively shows how much an SWF can be operated in a way that favors the bureaucrats and the politicians.”

Real Prosperity Comes from Markets, Not Ministries

Proponents claim that a SWF reduces the economic burden of taxation by generating revenue. But the more effective way to reduce the burden is not through government-run investment schemes — it’s by restraining government spending and enacting pro-growth regulatory reforms that allow private capital markets to allocate resources efficiently.

Rather than expanding the government’s role in capital markets, policymakers should pursue structural reforms that lower regulatory barriers and foster a more competitive business environment. These policies would boost private investment and innovation far more effectively than a government-run investment fund.

The case for a sovereign wealth fund relies on unrealistic assumptions about government competence, overlooks market realities, and opens the door to greater government intervention in the economy. Instead of trying to act as an investment manager, the government should stick to its proper role: maintaining a stable legal and economic environment in which private capital can flourish. Anything else risks turning capital markets into yet another arena for political patronage.