Costello issues inflation warning as Future Fund reaches record value

The Future Fund has surpassed its annual return target to reach a record value of $211.9 billion.

An investment return of 8 per cent added $15.6 billion to the Future Fund in 2023, the sovereign fund announced.

“Over the past decade the Future Fund has delivered an average annual return of 8.2 per cent against a target of 6.9 per cent,” said outgoing chair Peter Costello.

“As the government’s only substantial financial asset, the fund is fulfilling its role of strengthening the nation’s balance sheet, which is now carrying significant government debt.”

Addressing the “outbreak of inflation” that commenced in the latter part of 2021, Costello said there are signs that Australia’s 12 interest rate rises are finally moderating price rises.

However, he remains cautious about inflation’s downward trajectory.

“Inflation is still well above the government and Reserve Bank of Australia target. Strong labour markets, wage pressures and high energy prices are still feeding into price pressures,” Costello said.

“Although inflation has fallen from its peak, it is still well outside the target range of 2 per cent to 3 per cent and won’t be tamed until it is back within the target band. Whilst markets rebounded on an expectation that rates could be lower this year, there is still a way to go.”

According to Costello, the 8 per cent return delivered in 2023 was ahead of the Future Fund’s long-term investment return target, boosting the fund’s decade-average annual return to 8.2 per cent.

“Since 2006 the Future Fund has taken a once and only contribution of $60.5 billion and grown it to a record $211.9 billion. It has earned more than $151 billion,” he said.

Costello’s term concludes on 3 February. Addressing his departure after 14 years on the Board of Guardians, he said: “I leave with great confidence in the will and ability of the agency team to continue producing strong returns for the benefit of future generations of Australians.”

Also speaking on the results, Dr Raphael Arndt, chief executive of the Future Fund, said that over the past 18 months the fund made nearly $70 billion in changes to the portfolio to reflect the views expressed in its position papers The New Investment Order and The Death of Traditional Portfolio Construction.

“Those papers highlighted risks such as sustained higher inflation and interest rates and less investor-friendly conditions across markets. These risks remain prominent while geopolitical issues that also featured among our concerns have multiplied and will be in sharp focus for investors around the world this year,” said Arndt.

“The changes we have made are designed to provide resilience and flexibility to the changing investment environment. The portfolio is positioned around a neutral risk setting with a focus on resilience while we seek opportunities to generate attractive long-term returns.”

Late last year, Costello spoke out against “foolhardy schemes” to spend the Future Fund following calls to tap into the fund to pay down government debt.

“Because the Future Fund is a sovereign wealth fund, the sovereign can spend it as it sees fit subject to securing the necessary legislation through Parliament,” Costello said at the time.

“As the government’s financial position declines, I expect we will see more plans to spend it. It would be a way of favouring current voters over future voters – the ones who are not voting yet. But remember this: once it is spent, it is gone.”

While the federal budget was in surplus by $22.1 billion in 2022–23, the Intergenerational Report released in August predicted that the budget will be in deficit for the next 40 years.