Monday, May 21, 2007

Tuesday column: The Future Fund is a con.

The Future Fund is a con. A grown-up fairy-story. An exercise in re-labeling that would make the spin-doctors who thought up the term “WorkChoices” proud.

Just as the geniuses behind the name WorkChoices also invented the term “protected by law” to misleadingly imply that no further protection was needed (the government has now ditched the term WorkChoices, ditched the tag “protected by law” and is now advertising that further protection) so too the marketing professionals behind the term Future Fund invented a new term to describe the members of the board that runs it. They are called “guardians”, rather than “trustees”.

As the government’s Senator George Brandis, a barrister, mischievously pointed out in last year’s Senate estimates hearings, the term “guardian” has no legal meaning in finance. It applies only to people responsible for children or the insane...

To hear the Treasurer Peter Costello talk, you would think that the Future Fund was among his greatest creations.

He set it up “so that future generations won’t have to meet the liabilities of this generation”. Any attempt to direct that the money be used for broadband or another useful purpose would be “robbing from the future”. Under no circumstances would he “let any little bear get his hands in the honey pot,” and so on.

The Future Fund’s cover story is that it was set up to help the government meet the costs of its “biggest unfunded liability” – the superannuation payments it owes to its public servants. As the Treasurer put it in his post-budget address: “Public servants were guaranteed a proportion of their final salary for life and no money was ever set aside to fund that”.

But money was put aside to meet the payments each year. The government closed the unfunded Commonwealth Superannuation Scheme to new members in 1990. And it closed its replacement, the Public Sector Superannuation Scheme to new members in 2005. The payouts are set to peak in 2027 at levels not too much higher than they are today.

Anyone unfamiliar with the Treasurer’s rhetoric looking at the chart on page 7-10 of budget papers might be forgiven for thinking there’s no problem.

Except for military superannuation. The Treasurer hasn’t closed the military schemes to new members. As a result their payouts are set to grow without limit, by the middle of the century dwarfing those of the CSS and the PSS combined.

Why not also close those funds to new members and fix the problem? In this newspaper last week the commentator Brian Toohey surmised that the Treasurer does not want to do that because it “would rob him of the last threadbare excuse he has for dedicating the Future Fund’s accumulated earnings to what should be the trivial task of funding future public sector pensions”.

Even without closing the military schemes the Future Fund’s task is looking simple. Post-budget calculations by the ANZ bank suggest that the fund will only need the injection of one more budget surplus to achieve its goal.

(Note that the ANZ’s calculation takes into account that in this budget the Treasurer has diverted $5 billion that would have gone into the Future Fund into his new Higher Education Endowment Fund instead and that that the Future Fund hasn’t yet started investing its money. That’s right. All of the Fund’s $51 billion is either on deposit with Reserve Bank or in the form of the Telstra shares it was given but has not yet sold, which happen to be doing quite nicely.)

The real reason the fund was set up was to hide the loot the government was set to accumulate from running successive budget surpluses.

But not to completely hide. If the Treasurer wanted to do that he could adopted the cheaper route of paying each surplus directly to the trustees of the government superannuation funds, cutting each year’s headline budget surplus to zero, and with it his bragging rights.

Instead he will be paying the six guardians of Future Fund a total of $600,000 a year (and they will be paying heaven knows how much more to investment consultants) in order to duplicate the work of the super funds, and keep his surplus bragging rights. An accounting quirk means he can both claim a surplus and “spend” it on the future fund.

In earlier years this trickery wasn’t neeeded (“hypothecation” is the word economists use for it). Whenever the budget took in more money than it paid out the Treasurer could use the surplus to pay off debt.

But by 2005 when it looked as if the government was about to become debt-free Peter Costello had to think of something else to appear to do with the money. Otherwise as it grew earning interest Australia’s Premiers and Chief Ministers and his own backbenchers would start demanding that it be released to allow them to spend it on schools, hospitals, police, public transport and the like.

He might have found it hard to sell them on the truth: that Australia’s Treasury wants to hang on to each year’s surplus during our present extraordinarily good times in order to keep those good times in check and to build up a stash to spend when they end and we slide into recession.

The problem with inventing a plausible if untrue explanation for the need to hang on to each year’s surplus is that when, as is now the case, it becomes no longer as plausible, he has to invent a new explanation – in this case the new Higher Education Endowment Fund. And it makes his claim that Labor will try to rob money from a fund that scarcely needs it unconvincing.

Australia does need to hang on to big budget surpluses (in the view of Access Economics, we need to hang on to much bigger surpluses than we are).

We are being rocked by an unearned boom in our income unprecedented in modern times.

The windfall is best measured by our terms-of-trade; the ratio of the prices we are paid for our exports to the prices we pay for imports. Since 2001 Australia’s has soared 37 per cent, more than any other country’s. The runner up is Norway, whose petroleum-boosted terms-of-trade have soared 33 per cent.

Norway has dealt with its problem by setting up the Norwegian Petroleum Fund with the declared aim of investing its surplus to prepare for the day when petroleum runs low. Australia’s leaders are not so straightforward. They prefer to use spin and fairy stories to provide cover while they do the right thing.