The announcement by the treasurer, Jim Chalmers, that Australia’s Future Fund would be directed to invest in areas of national priority, rather than pursuing a purely commercial investment strategy, has drawn a strong reaction from Peter Costello and John Howard who established the fund in 2006. The ferocity of this reaction is a reminder of how much the world has changed since that time.
The fund was established at the high point of neoliberalism, initially using the proceeds of the privatisation of Telstra. The worship of financial markets, and the disdain for public ownership of any kind was at its peak. The guiding principle was the “efficient markets hypothesis” which, in its strongest form, states that the asset prices prevailing in financial markets are the best guide to the returns available to any investment, public or private.
Belief in this theory took a beating during the global financial crisis, when assets treated by financial markets as if they were as good as government bonds turned out to be worthless. Although no well-developed alternative has emerged, hardly anyone takes the hypothesis seriously any more. The booming market of cryptocurrencies – assets with few practical uses – is the clearest illustration of this point.
At the same time, the privatisation of Telstra turned out to be a disaster. When the privatised Telstra demanded extortionate terms to build a broadband network, the government was forced to establish the NBN, to buy back the assets we had just sold. The privatisation was effectively reversed, but at massive cost.
The Future Fund has been an undoubted success in terms of investment returns. But both the rationale for the fund and the hands-off approach to its investment strategy are now out of date.
The stated purpose of the fund – to cover government liabilities for future public sector pensions – reflected the panic about public debt which characterised the neoliberal era. Having reduced public debt to the lowest level consistent with the operation of bond markets, the Howard government sought to address the problem of unfunded liabilities (debt that is not covered by the value of assets, savings or investments), associated with the defined benefit schemes that had been the norm until then. But the closure of the Public Sector Superannuation Scheme (PSS) to new entrants in 2005 ensured that this liability would peak and then decline over time to zero.
In fact, the value of the Future Fund ($225bn) already exceeds the likely peak value of the PSS liability ($190bn), which will be reached around 2030. There is still a large liability associated with separate schemes for the Australian defence force, but this could be addressed by including funding explicitly in the defence budget rather than through an off-budget fund.
For all practical purposes, the Future Fund is now a sovereign wealth fund, a type of institution that had only just been described when the fund was established in 2005, but has now become an established feature of the financial landscape. It is the norm, rather than the exception for such funds to take account of national policy objectives in their investment decisions. The largest fund, that of Norway, has an explicit commitment to “sustainable economic, environmental and social development” including a climate action plan aligned with the goals of the Paris agreement. Similarly, the China Investment Corporation aims to combine robust investment performance while contributing effectively to carbon reduction goals.
Indeed, the success of such funds has led to the establishment of numerous special-purpose funds and funding agencies by Labor and Coalition governments, such as the Clean Energy Finance Corporation, the Northern Australia Infrastructure Facility and the National Reconstruction Fund.
The shift in priorities away from those implied by following the dictates of financial markets does not imply that the Future Fund should invest in projects that are unlikely to yield commercial returns (such as high-speed rail and the LNP proposal for publicly owned nuclear power). If projects of this kind are to be funded, the money should be allocated through the budget and subject to public and political scrutiny.
As John Maynard Keynes observed nearly a century ago, “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.” Our sovereign wealth fund must seek the best returns available from the casino that is the global financial system, but it must also give priority to the needs of its ultimate owner, the Australian people.
John Quiggin is a professor at the University of Queensland’s school of economics
