Future Fund critics owe Costello an apology.
Opinion writers and policy wonks make regular criticisms of politicians and governments for their regular blunders. So, let us applaud that rare and wonderful thing, a public policy agenda that has actually worked.
I am referring to the Future Fund, which then-treasurer Peter Costello created in 2006. As Costello steps down as chairman of the fund, it is worth marking his achievement.
At the time, Canberra’s plan to store part of its budget surplus and the proceeds from Telstra’s privatisation into a public servants’ pension fund met scepticism, including from the conservative Wall Street Journal editorial page. The critics all owe an apology to Costello.
The facts now rolling in reveal that the sovereign wealth fund has grown from $60.5 billion in 2006 to $212 billion today. It has earned an average of 8.2 per cent a year. To the extent the earnings rate continues, it will be worth more than $800 billion by 2040. Not a bad return for the Commonwealth’s largest financial asset.
It is against this background that David Murray, one of our nation’s most distinguished figures in the financial community, has written an important new policy paper for the Centre for Independent Studies. Murray, the fund’s inaugural chairman (2006-12), says it has enormous global credibility and prestige: there should be no government interference with its independence or political direction of its investing.
Opinion varies on whether the Future Fund is worth keeping. Economist Dimitri Burshtein, writing in a CIS paper last year, made the case for liquidating the fund and using the proceeds to retire debt.
Former federal Labor cabinet minister and columnist for The Australian Financial Review, Craig Emerson, says some fund proceeds should be spent on the energy transition. But Murray warns that liquidation of the fund would signal a weaker fiscal policy stance and weigh against Australia’s AAA credit standing.
After Costello, as treasurer, had paid off all debt in the mid-2000s, subsequent governments just re-borrowed, which has been fine since Australia had relatively low borrowing levels. However, if the Future Fund is liquidated to retire some debt, irresponsible leaders are likely to borrow again and again until they run into borrowing limits or servicing difficulties.
“A politician short of money within the vicinity of a honey pot is a very dangerous person,” Costello warns.
If Canberra wants to direct more money into nation-building projects, it should use taxes, not raid the accumulated savings and earnings of past generations. Otherwise, government would just sacrifice returns and increase risk.
Cashing in on the Future Fund could also give the federal government an easy way out of its debt dilemma, not to mention any structural reforms designed to boost productivity and private sector investment at a time of an ageing population and intergenerational equity.
The path to true debt relief is to run sustained budget surpluses, or at least to balance the books. Liquidating the fund would also leave all infrastructure ownership to the union superannuation funds.
My colleague, Peter Tulip, calculates that the Future Fund has saved taxpayers about $90 billion since its inception, relative to the alternative of paying down debt. This is because the fund essentially borrows at the government bond rate, which has averaged about 3 per cent since 2006, and invests in shares, which have averaged a 7.7 per cent return. As a result, taxpayers have benefited handsomely from Costello’s brave and somewhat unorthodox initiative.
To be sure, investing in shares is risky. However, a large academic literature finds that the substantial “equity premium” more than compensates for this.
Almost 15 years have passed since Costello left parliament, and yet it is hard not to appreciate his achievements. It’s not just his long tenure at the Future Fund, which ends this week after having served for 14 years on the board, and the past decade as chairman.
It’s also his long record as treasurer, from 1996 to 2007: under his leadership, Australia’s economy was a model for the rest of the world, with low inflation, low unemployment, low interest rates, and economic growth at almost 4 per cent.
Australia was able to weather the global financial storm of 2008-09 because it was in an incredibly strong position. The Howard government had finished off the job of slaying inflation, pursued labour market flexibility, privatised government businesses, implemented income and business tax reforms, and put in place prudent regulatory oversight of the nation’s financial institutions.
By 2007-08, Costello had presided over nine surpluses out of the preceding decade – most before the commodities boom – the net cumulative result being a surplus of more than $100 billion. Unlike the UK and the US, Australia had no public debt and our banks were well regulated, well capitalised and profitable.
All of this gave Australia considerable padding and insulation against external shocks. As he departs the Future Fund, we should consider the debt that Australia owes to Costello. In our current straits, we have no one in Canberra to match him.
Tom Switzer is executive director of the Centre for Independent Studies.