Former RBA governor cites ‘irresponsibility’ in liquidating the Future Fund

Amid recent talk of winding down the $260 billion Future Fund to pay down the government’s $895 billion government debt, a former governor of the Reserve Bank of Australia (RBA) has described the move as a “sign of desperation and irresponsibility”.

Earlier this year, Dimitri Burshtein from the Centre for Independent Studies think tank advocated for the “economically responsible action” of liquidating the fund to pay down current government debt, which is projected to reach some $923 billion at the end of the 2024 financial year according to the most recent Commonwealth budget forecast.

He noted the fund is the 10th-largest Commonwealth expense by function, with an opportunity cost of maintaining it at some $10 billion per year, which is the interest paid on $250 billion of extra government debt at the current cash rate. 

“Put another way, the Future Fund needs to generate 4.1 per cent returns after costs to just break even, and to break even on a cash basis only,” he said.

VIEW ALL

View all

However, according to Ian Macfarlane, who was governor of the RBA from 1996 to 2006, it is a measure unlikely to be adopted by future governments.

“Sovereign wealth funds are strange animals. You can see the origin of them in places like Norway and Saudi Arabia where there’s a huge amount of [wealth] and you didn’t want the current generation to get to spend it all on themselves, you want to put it away for future generation,” he told audience members at the Citi Investment Conference 2023.

“In our case, the origin of the Future Fund was very different. In our case, the origin was the fact that the government was running into surplus, and when a government runs into surplus, it can either buy back its debt or acquire assets, those are the only two things it can do.

“They started buying back the government debt, Australia started to run down, and markets were saying ‘no, we need it out there, don’t run it down any more’ so the only alternative was then to buy assets.”

He explained the creation of the Future Fund, established in 2006 under the tenure of then-Treasurer Peter Costello, was ultimately tied to funding future public service and pension obligations. 

According to Macfarlane, the sovereign wealth fund will continue to service this purpose.

“That’s what it’s there for and I think it will continue,” Macfarlane said to Super Review. “I don’t think future governments will raid it. I think it will be seen as a sign of desperation and irresponsibility.

“I think [the Future Fund] will fulfil its purpose.” 

Previously, independent modelling by Willis Towers Watson (WTW), commissioned by the Future Fund, also revealed a median cost or lost value-add of around $200 billion to taxpayers over a decade in liquidating the fund.

“Our analysis suggests that under a scenario whereby the Future Fund is liquidated to pay down government debt, this would come at a median cost (i.e. lost value-add) of around $200 billion over a decade with plausible outcomes around this ranging from approximately break-even at the fifth percentile to a cost of up to $500 billion at the 95th percentile,” WTW said.

“The expected value-add of retaining the FF relative to the alternative scenario of liquidating the FF’s assets and retiring the equivalent amount of government debt increases gradually over the projection period as the FF’s assets are expected to outperform the cost of government debt on average in any given year.”

Its modelling suggested the expected (median) value-add is around $200 billion at the end of the 10-year projection.

Outlining its observations, WTW continued: “Asset class returns and market rates are variable and subject to considerable uncertainty, and so it is important to consider the likely range of plausible outcomes for value-add. 

“Our analysis suggests that there is only around one in 20 likelihood that maintaining the FF will not deliver any material benefit (or cost) if maintained over the next 10 years.”