Opinion piece by the Hon Peter Costello AC, Chairman of the Future Fund Board of Guardians, submitted to the Australian Financial Review and published on 22 August 2023.

Periodically there are calls to spend the $202 billion in the Future Fund on causes that segments of the population find very worthy.

Recently there was a call from the right-leaning Centre for Independent Studies to wind up the Future Fund and retire debt. Presumably this meant buying Government Bonds and cancelling them. Yesterday in this paper former Minister Craig Emerson suggested that part of the liquidated proceeds from the Future Fund could be used to provide subsidies for renewable energy and to build public housing.

Past schemes to spend the Future Fund have included building dams and redirecting rivers.

The point to bear in mind is that you only get to spend the Future Fund once. After that it is gone. The Government will borrow more and run up more debt, renewables will require continuing subsidies, housing and dams will always be needed, But once the Future Fund is spent, it is no more. The asset ceases.

The Future Fund is a once in a century asset.

As such It would be wise to spend it on the most pressing, the most needed cause, and in particular, at the time where it can make the most difference.

So, some background on the Future Fund.

In 2006, after the then Government had retired all its debt (in net terms) it pledged to put future surpluses in a fund and invest it over a long-term period to strengthen the Commonwealth Government’s financial position. The money seeded to the fund belonged to taxpayers. The Fund is owned by the Government on behalf of taxpayers. This is why it is a Sovereign Fund. The money is not owned by contributors like a Superannuation Fund. No individual contributed into the Future Fund and none can claim a payment out of it. And because it is owned by the Government the Government can spend it by passing legislation to do so.

There was $60.5 billion put into the Future Fund from 2006 to 2008. That money could have been spent on housing, or renewables, or dams back then, but because it was preserved and invested it has now grown to more than $202 billion. That original $60.5 billion has earned $142 billion.

The 10-year return has been 9.1% per annum.

Today the Government balance sheet shows liabilities of $887 billion in debt and $276 billion of unfunded superannuation and Defence Force death and disablement liabilities. On the asset side there is the Future Fund and $50 billion in other funds that it manages. If that asset is spent, there are only liabilities.

Craig Emerson wrote of the “free-rider” problem where some people are able to get the benefit of the work of others without paying for it. Spending the Future Fund represents the ultimate free rider risk- where one generation of politicians spend the asset built by a previous one. That’s why we need to be very careful when we hear proposals to spend it.

In the world of Sovereign Wealth Funds there are different Funds with different objectives. Petro-funds like the Norwegian fund, and the Saudi fund were set up to invest revenue from a depleting resource (oil and gas) for the benefit of future generations.

In Australia the Future Fund was set up to take the Budget surpluses of the early 2000s and invest them for the benefit of future generations. It is an inter-generational fund. It was a proposal to make a better future in an ageing society with more costs, lower economic growth, and poor productivity.

All of those things are upon us now. But my assessment is that it will get worse with the acceleration of population ageing. Remember you only get to spend the Future Fund once. If you spend it now you won’t be able to do it in 2040 or 2050 or 2060 which will be the focus of this week’s Intergenerational Report.

So how should subsidies for renewables be funded? Well, we already have agencies directed at that like the Clean Energy Finance Corporation and the Australian Renewable Energy Agency. And we already do that from the Budget, just as the Americans do it from their Budget. The U.S is not spending its Sovereign Wealth Fund on renewables. It has never had such a fund.

And what of retiring debt? Well, that is always a good cause. But unless we run persistent Budget surpluses, the money will be re-borrowed again. Remember we had paid our debt off in 2007 and we ran up over $800 billion of debt in 14 consecutive Budget deficits after that.

At least during that period, we also built a substantial financial asset to strengthen the Balance Sheet and partially offset the debt. Liquidate that asset now and all we have left is the debt.

Many will come up with ideas on how to spend the Future Fund. That is the easy part. The hard part is establishing and capitalising it in the first place. It’s been done once in Australia’s history. When it ends don’t expect it to ever be done again.


" Peter Costello founded the Future Fund and is its current Chairman"