Future Fund furore raises a crucial question
A debate in Australia arguing for the liquidation of the sovereign wealth fund has relevance to the global fund community.
A spirited debate in Australia raises an important question about sovereign wealth funds. Specifically: when do you spend them?
In August, Australia’s Centre for Independent Studies released a report calling for the liquidation of the A$256.2 billion ($163.4 billion) Future Fund in order to pay down government debt.
The arguments are as follows. One, the Future Fund was founded to meet the unfunded superannuation liabilities of the Commonwealth by 2020. That date has passed.
Two, there is an unrecognized opportunity cost to that A$256 billon of capital: specifically, the cost of debt that could otherwise be repaid. Since the Future Fund was established in 2006, Australia’s net debt position has moved from negative A$30 billion to positive A$550 billon. The interest rate on that – calculated on the 10-year government bond at over 4% – means that the money managed by the Future Fund costs Australian taxpayers over A$10 billion a year through interest rate payments.
And three, this environment of high rates and inflation is precisely the time to spend the Future Fund. Furthermore, the report’s author, economist Dimitri Burshtein, argues that despite the noble purpose behind the fund's foundation, it has become a distortion to Australian public policy and finances.
Since then, the Future Fund has put across the alternative case. Its chair, the former federal treasurer Peter Costello, argued later in August that there is a central bargain to consider when talking of spending and closing the fund: that it can only be spent once.
It is a “once-in-a-century asset,” he says. “Once the Future Fund is spent, it is no more. The asset ceases.”
Costello is not blind to the arguments. The Future Fund, he says, is “an inter-generational fund. It was a proposal to make a better future in an ageing society with more costs, lower economic growth and poor productivity.
“All of those things are upon us now. But my assessment is that it will get worse with the acceleration of the population ageing.”
If there is one thing the sovereign wealth industry is short of, it is any kind of clarity on how and when to spend
His view is that the greater need till come between 2040 and 2060.
“And what of retiring debt?" he asks. "Well, that is always a good cause. But unless we run persistent budget surpluses, the money will be re-borrowed again.”
To put some meat on the bones of its argument, the Future Fund board then commissioned Willis Towers Watson to have a look, modelling the cost of paying down government debt by liquidating the Future Fund. It concluded that this would come at a median cost to government of about A$200 billion over a decade, based on lost value-add.
There is sufficient political support for the Future Fund that it is highly unlikely to be liquidated, though calls will continue for one-off drawdowns to address the issues of the day. Indeed, the Future Fund itself is only one of six funds under a broader umbrella, with the others devoted to specific causes: among them disability care, the Aboriginal and Torres Strait Islander community and future drought.
But it is good to see the issues thrashed out in public because there is a question that is rarely answered in the sovereign wealth world: when is it time to spend?
To date, there has only really been one occasion when a sovereign wealth fund has been called upon to save a nation, and that was during Iraq’s invasion of Kuwait. The sovereign fund there, the Kuwait Investment Authority, moved to its London premises and became a de facto central bank until the country was liberated, after which its funds were used to rebuild the country.
Covid-19 looked to be the ultimate rainy-day event that would cause sovereign funds to put their assets to work, but in practice very little of that actually happened. Hydrocarbon diversifier funds in Norway and the Gulf have a clear purpose: making sure there is money around when the oil and gas runs out. But for the sovereign funds with a less visible raison d’etre – China’s, Singapore’s, Australia’s – eventually the question arises: when is the right time to use it?
As Costello has noted: “Many will come up with ideas on how to spend the Future Fund. That is the easy part. The hard part is establishing and capitalizing it in the first place.”
So there will always be a reluctance to deploy the funds so painstakingly built up over decades beforehand. But if there is one thing the multi-trillion-dollar sovereign wealth industry is short of, it is any kind of clarity on how and when to spend it.