It is a great pleasure to launch the Future Fund this evening.
This Fund is one of the great achievements of the Liberal-National Commonwealth Government. For generations Commonwealth Governments spent beyond their means delivering benefits to the current generation and the debts to future generations – those too young to vote or not yet born.
This was a policy of financial recklessness. And it culminated in Commonwealth net debt reaching $96 billion in 1996 under the previous Labor Government.
In 1996 we decided to change all that. First, we decided the Government would live within its means. And secondly, we decided we would begin to repay the Labor debt.
As we made steady progress toward our goal it became clear by 2002 that, under continuing Coalition Government, it would become possible to retire all net debt. This would eliminate the need for any Commonwealth borrowing and eliminate all Commonwealth Government Securities (CGS).
There was a great deal of concern that the elimination of the CGS market would have severe implications for Australian financial markets generally – eliminating the benchmarks for pricing other government, semi government and private borrowing.
In October 2002 I issued a discussion paper on the Review of the CGS Market. We took soundings from interested parties and after considering the issue carefully, announced in the 2003-04 Budget that we would continue the issue of Commonwealth Bonds – even though the borrowing was not necessary – to keep Australia’s financial markets deep, liquid and transparent. This means around $A50 billion on issue at any one time with a range of maturities.
As net debt began to reduce to zero (a position we reached on debt-free-day – 21 April 2006) we therefore needed to balance up our gross liabilities with a gross asset position.
In September 2004 the Government announced that it would establish a dedicated asset Fund – a Future Fund – to:
- begin to fund Commonwealth superannuation liabilities;
- help address future spending pressures faced by our children and grandchildren identified in the Government’s Intergenerational Report of 2002;
- increase national savings.
The Government implemented the Fund through legislation – The Future Fund Act 2006 – gaining Royal Assent on 23 March 2006. The Future Fund has an independent Board of Guardians, Chaired by Mr David Murray.
We have deliberately used the term Guardians as it is the Board’s role to guard these assets against any attempt to steal them from future taxpayers and it is their role to protect the Fund against future governments of any political persuasion which might try to use or appropriate them for their own purposes.
The Guardians set the overall investment strategy for the Fund and ensure that the assets grow in accordance with the targets set by the Government. The object is to invest wisely now in order to fund future liabilities which otherwise will have to be paid out of future tax revenue – just at a time when that revenue is under pressure as a result of the ageing of the population. Current superannuation liability is estimated to be $98 billion and is expected to grow to $140 billion by 2020.
The Fund cannot be drawn down until such time as it has met this objective or by 2020.
The Government provided initial seed capital of $18 billion to the Fund in May 2006 and we will deposit another $14 billion in to the Fund early in the new year. When the proceeds from the T3 sale and the transfer of any remaining Telstra share held by the Government are added, the Fund should have over $50 billion worth of assets under management.
Once we were running up bills for the future generation. Then we started to pay our bills. Now we are starting to fund our liabilities – liabilities incurred in this generation but payable by the next.
A key factor which has enabled the Government to make significant contributions to the Future Fund is the sound fiscal framework we have implemented over the last 10 years.
By eliminating the net debt of the Commonwealth, the taxpayer is saving around 1.5 per cent of GDP (or $14 billion) in interest payments, year after year. This places Australia in a very select group of seven OECD countries that have eliminated net debt – which includes Norway, Korea and New Zealand.
I note the newly appointed General Manager of the Future Fund Management Agency, Mr Paul Costello, was previously the Chief Executive of the New Zealand Government’s Superannuation Fund, which has a similar mandate to the Future Fund.
The IMF’s most recent report card on Australia’s economic performance (released 23 October 2006) stated that ‘the elimination of net debt is an impressive milestone that few countries have been able to achieve’ and explicitly endorsed the establishment of the Future Fund to ‘help Australia manage its long term fiscal challenges’.
The IMF report shows that achieving a significant objective like eliminating net debt is not easy. It is the result of tough decisions, fiscal discipline and a focus on measures that will produce long term benefits.
Consistent with this long term focus, the Government intends to make further contributions to the Fund out of future budget surpluses and will re-invest all of the earnings back in to the Fund. Future Fund assets and earnings have been quarantined from the rest of the Budget in legislation. This emphasises that this is a Fund for the future, it is not a ‘here and now’ Fund.
Unfortunately there have already been proposals to rob the Future Fund of its earnings. Like bears to a honey-pot, the Leader of the Opposition and the Shadow Treasurer want to drain the Future Fund of its earnings to spend on their election prospects. It is not theirs to take.
As Mr David Murray observed in a recent hearing in Senate Estimates:
‘If that is done, the real growth rate of the fund would be zero to negligible.’
Stripping the Future Fund of its earnings would undermine the objective of using Australia’s sound fiscal management to cover liabilities we are incurring now that will fall due in the future. It would undermine our preparation for the great coming challenge of the ageing of the population.
The Future Fund is one aspect of the Government’s strategy to keep working hard at managing Australia’s $1 trillion economy, to sustain economic growth and create more jobs.
Of course by building savings the Government is taking pressure off interest rates. Raiding those savings would add pressure to interest rates.
The Australian economy is now facing a number of challenges. These challenges are, in part, a result of the economy experiencing over a decade of continuous expansion and the lowest level of unemployment in 30 years. Strong global growth, leading to higher commodity prices, has resulted in incomes rising faster in resource rich states, than other parts of the country. The worst drought in 100 years will detract from GDP growth this year.
Continuing to focus on policies that will sustain economic growth, such as targeting low inflation and promoting flexible labour markets, and contributing to national savings by running budget surpluses and preserving the Future Fund, will assist Australia in meeting the challenges of today and the future.
Finally, I would like to extend my gratitude to the members of the Board of Guardians and the Management Agency who have accepted the challenge of investing the assets of the new Future Fund.
I welcome the establishment of the Future Fund – a $50 billion Fund designed to grow to $140 billion – to its new home in Melbourne.
I look forward to watching the growth of the Fund over the coming years.