This column was published by the Fin in early April and appears here as a matter of record – and invitation for comment.
Peter Costello told us that he would relentlessly attack the oppositionâs $2.7 billion raid on the future fund for broadband investment. And he did, doggedly raising the issue in parliament every sitting day last week. But the future fund is an unconvincing policy. And Costelloâs criticisms of the opposition are misleading.
The first thing to say about the future fund is that it is unnecessary. Before it was established last year, commonwealth unfunded superannuation liabilities were $95 billion. These are to be met over forty years. For 2005-06, they required less than $2.5 billion: one per cent of the commonwealth governmentâs cash expenses. This was entirely within the budgetâs capacity.
Unfunded liabilities stem from defined benefit retirement schemes many of which have been closed to new members. The commonwealth estimates that a peak liability of $140 billion will occur around 2020. There is no concern that the cash required – again to be met over the following four decades – would be unmanageable.
But the future fund was never about superannuation or the intergenerational issues canvassed in yesterdayâs report. It is a device – a jam jar – invented to justify Costelloâs multi-billion dollar budget surpluses. Putting these surpluses into a fund with a seductive label dampens pressures for higher spending or tax cuts. Too many untrained commentators think that jam jars are useful because they think that what is good for household budgets is good for governments.
The second point is that it is a shame that the commonwealth has nothing better to do with surpluses than to invest them in David Jones and Woolworths or, more interesting, in Tabcorp, Gunns Timber or other securities which many Australians class as unethical investments.
Some economists want Costello to invest surpluses in a taxation system that reduces the disincentive for those thinking of moving from welfare to work. Others argue for more infrastructure or for skills creation. If the government cannot identify needs which have a higher priority – and a higher return – than the shares to be acquired by the future fund, it is myopic. Even re-buying government office blocks would be a better deal.
Then there are the attacks of economic irresponsibility. Last Wednesday, Costello likened Laborâs plan to a theft of employeeâs savings, âThere have been a lot of demands in Australia for government employeesâ superannuation to be protected. The member for Lilley [the shadow treasurer, Wayne Swan] has been a persistent demander that the superannuation savings of employees be locked up in the future fund and not raidedâ. But that was mischievous; the boring truth is that the future fundâs assets are comprised of government taxes and assets; they are not employee savings.
Costello also equated his fund with state superannuation funds. He argued that state governments would not dare raid their superannuation funds in the way federal Labor would take from the future fund. But state and federal funds are not the same.
Like the commonwealth, the NSW government has unfunded superannuation liabilities. And like the commonwealth, NSW has injected lump sums to reduce these liabilities. (Its contributions once attracted significant commonwealth tax advantages.) But unlike the commonwealthâs allocations, those made by NSW reduced the stateâs budget surplus and reduced its superannuation liabilities. The way the commonwealth has structured its future fund – remember, Costelloâs prime goal is to record budget surpluses – contributions to the fund do not reduce the commonwealthâs surplus and do not offset commonwealth superannuation liabilities. Whatever might happen in 2020, the future fund is not funding superannuation liabilities.
Another issue, one which Labor should study, is the budgetary impact of drawing from the future fund. According to the concepts used by the Australian Bureau of Statistics, meeting expenses from the capital of the future fund (even for superannuation) would be treated as a cash borrowing (a reduction of savings), and this can only occur in times of cash deficits. And any investment of fund capital for policy reasons – as Labor proposes – would be classed as a purchase of non-financial assets, reducing the commonwealthâs cash surplus. Not a great start for Laborâs fiscal reputation.
Although Costelloâs future fund has some positive elements, be entirely sceptical about his glorious defence of it. And do not believe the desperate mistruths used in his attacks on the opposition.