Alex Erskine, 12/5: "The Future Fund - how will it be taxed?"
Ray Block 12/5: "The Future Fund: Good as far as it goes, but the devil is in the implementation"
Ray Block (pre-budget) 4/5: "Costello's Future Fund"
I see the Future Fund as generally bad policy but good politics.
Superficially, it sounds appealing - a government initiative to invest in "the future", kickstarted with $16 billion of accumulated surpluses and receiving all future fund earnings, future budget surpluses (at least those that are not spent on tax cuts, as with this one) and apparently the receipts for the sale of Telstra. (Ha, but try to keep National Party hands off all that loot!)
The stated intention is to build up a pool of over $100 billion (and maybe much more if investment markets are kind) by 2020 to fund the government's liabilities to pay retiring public servants their superannuation entitlements that are currently paid out of tax receipts as they fall due. In the massive overselling of the budget, this (funding unfunded indexed pensions) is Australia's future!
Of course, if investment returns are miserable, the Budget not in surplus or asset sales do not proceed, the Fund's accumulations will be much less and taxpayers' pockets will still have to be raided.
The Budget set out surprisingly limited information for the fund, little more than the diagram made available in last year's election campaign. What has the government been doing? Clearly not thinking much about the future.
What has been announced is ill advised. Paradoxically, the government is in a position to set up the Fund because it has not funded the public sector superannuation scheme over the past 10 years and surpluses have accrued with great ease. Once the funds accumulated are deemed by some "experts" to be sufficient, the Fund can be raided by any for some grandiose electioneering without even being brought back "on budget". Some accounting chicanery allows the fund's revenues to accumulate inside the fiscal balance but outside the budget cash balance - they will be an added complexity to all future budget analysis.
"The Fund will be governed by a statutory board. The Government will set out an investment mandate to guide the board in managing the Fund." The Treasurer has suggested the investments will be passive and balanced, ranging across bonds and equities. Boring and - as I argue below - dangerous.
The driver for the Future Fund is the accumulation of surpluses. Surpluses previously opened up the prospect of abolishing the government bond market. The government has been blest by a sufficiently long and inflationary expansion that it is habitually running cash surpluses - albeit surpluses that are small (only 1% of GDP) in the context of an economy with an $800 billion GDP.
Opposition from the bond desks of the banks and fund managers sank the rather good idea of dispensing with the remaining stock of government bonds on issue. The Future Fund, by contrast, promises a commission to those who will be appointed external managers to invest the pool. It will be heralded as sound thinking.
But it does not make economic sense. Funds managers will extract a fee on the way in, during the funds' management and on their exit (much like the government's tax regime, even after abolishing the super surcharge). The government will be taxing you and me to fill the fund.
The social return risks being substantially less than giving the funds back to the public in tax cuts. The chance of the Treasurer and his statutory board being more astute than you or I in investment selection is frankly rather limited.
Worse, it opens up the scope for corruption. Alan Greenspan, Chairman of the Board of Governors of the US Fed and the closest person to God these days, spoke cogently (January 25, 2001) against the then very real prospect of the US government running long-term fiscal surpluses because of the problems inherent in investing the surpluses.
He opined "that the federal government should eschew private asset accumulation because it would be exceptionally difficult to insulate the government's investment decisions from political pressures. Thus, over time, having the federal government hold significant amounts of private assets would risk sub-optimal performance by our capital markets, diminished economic efficiency, and lower overall standards of living than would be achieved otherwise."
Instead he proposed tax cuts and a future of balanced budgets. In hindsight, President Bush's tax cuts were too big and today the US faces an excess of fiscal deficits. But God was right on the big issue: the potential for corruption in investing public funds in private sector assets.
The Future Fund gives an illusion of propriety, putting a statutory board between the government and the pot, but venal politics will always win.
Which assets will be chosen for the Future Fund? Especially which private sector assets? Optus or the privatised Telstra? Some feel-good but white elephant infrastructure? Iraqi or Solomon Islands roads?
US government bonds? My portfolio or yours? Nothing is ruled out, even with a statutory board of eminent persons operating under a mandate set by the Treasurer.
I'd argue that if the Fund must exist it should invest exclusively abroad, as an insurance against bad economic management in Australia. There is plenty of that about - like this budget's massive boost to domestic demand at a time of large current account deficit and rising inflation.
But my bottom line is that it would be better if no future budget surpluses were accumulated, even if they were to be invested in a Future Fund. I'd prefer the money handed back through some real tax reform that lowered marginal tax rates.
Henry Thornton's view, No losers?