Lindsay Tanner (Melbourne, Australian Labor Party, Shadow Minister for Finance) Share this | Hansard source

The Future Fund Bill 2005 before the parliament today gives effect to the government’s commitment to create a fund to provide for the public sector superannuation liabilities that are continuing to accrue and will gradually mount over the next 20 or 30 years and that are currently paid for from the budget on a pay-as-you-go basis. Labor is not opposed to the bill per se, and we will vote for the ultimate bill, but I will move a second reading amendment which outlines a number of reservations that we have with the strategy that the government is pursuing. That amendment should have been circulated and stands in my name. I will outline the content of the amendment in due course.

I wish to deal with a number of aspects of the Future Fund Bill and in particular focus on what Labor regard as the serious weaknesses in the approach being taken by the government, even though we do acknowledge and support the broad concept. The rationale for the legislation is highly questionable. The public sector superannuation liabilities that the government is seeking to offset are finite because the relevant schemes have been closed. The defined benefit schemes which have been funded on a pay-as-you-go basis for some considerable time have all been closed to new entrants. So, although there is a considerable tale of liabilities associated with public sector superannuation in the vicinity of 50 years or so, it is a finite amount and will peak at a certain time in the next few decades and then gradually decline thereafter.

Secondly, at the moment the percentage of the annual budget of the government which is occupied by public sector superannuation liabilities is only in the vicinity of $4 billion, a couple of percentage points of total budget outlays, and although it is expected to increase to something like $7 billion—maybe three or 3½ per cent of total budget outlays—it is still a relatively small proportion of the total budget. It is questionable whether it is appropriate or necessary to establish a very large, stand-alone, supposedly independent investment fund in order to provide for the payment of these liabilities at some point in the future.

In many respects it is equivalent to an individual establishing a separate bank account with a very large capital sum in order to use the interest earned on that bank account every year to pay their council rates. Council rates for an individual or family are a fairly significant impost; they can often cause some difficulty with the weekly or monthly budget when they arrive. Sometimes people pay them quarterly; sometimes they create difficulties. Ultimately, it is really not very sensible for people to be setting up separate bank accounts to earn interest in order to cover their next 30 years of council rates, but that is effectively what the government is seeking to do in this instance. It is setting up a separate fund with vast sums of taxpayers’ money off the back of asset sales and recent large surpluses in order to earn revenue that can be used to offset a future liability that in the overall scheme of things is not particularly threatening or substantial.

It is also questionable why the government has chosen to set up an entirely separate fund for this purpose when it already has an established working and entirely adequate structure with respect to Commonwealth superannuation that manages investments on behalf of members of the various funds that are covered which could perform the same task with the sums that are involved to cover the employer contribution to the ultimate liabilities to the retired employees. The additional cost of having a separate fund, and all the arrangements associated with that, is approximately $30 million over four years and it is questionable whether there is any need to do this.

The Minister for Finance and Administration, Senator Minchin, indicated that, in his view, there was potentially a conflict of interest between investing on behalf of the individual fund members with their money versus investing on behalf of the government with funds that would be ultimately appropriated to the individuals. I think that is a highly technical way of looking at things and in practice I do not think that is very meaningful. I think the government is really spending money here which it does not need to.

There is also a question about the approach of not using the money that the government does have at its disposal—particularly asset sales, proceeds and surpluses of recent years—to further pay down government debt and to maintain the bond market. In effect, the government has made a decision to artificially maintain the government bond market at a given level in order to ensure a minimum level of liquidity. As a result of doing that, when it has the capacity to repay most or all of the remaining government debt, it therefore has to find something to do with that money. The end result of what it is doing is effectively borrowing to play the stock market. Whichever way you dress it up, the net outcome of what the federal government is doing is, by maintaining a substantial debt of $50 billion or $60 billion, to continue to borrow and, by implication, using the borrowings to play the stock market.

That means that it is going to be necessary for the Future Fund to always beat the bond market and the bond rate. It is going to be important that the Future Fund returns are better than the bond rate. You would expect they would be, but there is not necessarily a guarantee of that. Of course, if they are not, then the government is subsidising the bond market. It is maintaining borrowings for the purpose of ensuring that the bond market remains in existence—there are some arguments and a complex debate about that topic—and therefore losing money by not getting the same return when it invests that money itself. Time will tell whether the Future Fund and its managers manage to always get a better return than the bond rate. One would hope that generally they will. Historically, over time I suspect they probably will, but there are no guarantees when you are investing, and it clearly is a question that the government has failed to deal adequately with.

It is also important to note in this context that the government’s claims about the reduction of federal government debt and how this has come about are highly specious and should not be taken seriously. The bulk of the reduction in government debt that has occurred under the Howard government has been financed by asset sales. Particularly until the last couple of years when we have had very large surpluses driven by commodity price increases, mostly from demand in China, the bulk of the reduction in Commonwealth debt has effectively been financed by asset sales.

Irrespective of your view as to whether that is a good thing or a bad thing, the one thing that we should note is that it is not very difficult to sell an asset and repay debt. That is a very simple thing to do—any government can do that. It is a very simple thing to go out and sell a bit of Defence land or buildings or undertake any of the various asset sales they have undertaken—to sell parts of Telstra, take the returns and repay debt. To claim some sort of great economic triumph is simply ridiculous: it is not a sign of good fiscal policy or a sign of anything in particular. It is very simple to repay debt if you are selling assets. It is pretty easy to get rid of your mortgage by selling your house.

The second theme that I wish to address is the broader policy context in which this is occurring regarding the impact of the ageing of the Australian population on the budget. The government seeks to walk both sides of the street on this issue. On the one hand, it regularly regales us with tales of woe about the likely impact of the ageing of the population on the federal budget over the next 20, 30 or 40 years, particularly with respect to health expenditure, aged care expenditure and various other items in the budget. The 2002 Intergenerational report provided some pretty frightening projections of the likely impact of the ageing of the population on fiscal balances. So, when the government is seeking to do things like cut the access of ordinary people to pharmaceutical benefits or reduce the number of people on the disability support pension or do a whole range of different things that happen to support its broader political agenda, it suits it to talk about the ageing of the population and the longer term impact that that will have on the nation’s fiscal circumstances.

But at the same time, for narrow political purposes, it has also been rolling out a variety of new entitlements to particular groups in the population which will inevitably explode in their burden on the federal budget over time—things like the mature age tax offset, the utilities allowance, the capital gains tax exemption for people retiring from small business and the superannuation copayment. There is a very substantial and growing list of entitlements that the Howard government is producing for purely political support—electoral reasons—that are putting very substantial longer term burdens on the budget. They are relatively modest in cost at the moment, but when the people of my generation retire in large numbers—people who are currently in their late 40s or into their 50s, the baby boomers—the impact on the federal budget is going to be enormous. So, while the government seeks to portray itself as being fiscally responsible and looking after the longer term future, in many respects it is simultaneously doing the opposite in order to curry political favour with selected constituencies.

It is worth noting some interesting data regarding government spending. When you look at the figures for the percentage of government spending as a percentage of GDP over the past 15 or 20 years, you will see that over the past five or six years there has been a significant drop. That is a false comparison, because since the GST package there has been a major structural change in the accounting arrangements. Certain things that were previously counted as expenditure by the Commonwealth no longer are, even though in practice they are still happening, and so it looks much rosier for the Howard government than it actually is. In particular, the abolition of financial assistance grants to the states as part of the GST package—they were effectively replaced by the GST—means that a particular category of expenditure by the Commonwealth that is recorded in the figures for Commonwealth expenditure prior to 2000 is no longer in the figures. In 2000 it was something like $18 billion—a very large sum of money. Fortunately, in the budget papers there is actually a notional figure for what the FAGs amount would be had that system continued. So you can get that figure for each of the subsequent financial years.

When you factor that into the equation you then get a very different perspective on the level of federal government spending as a proportion of GDP. I refer back to the late 1980s, which is the previous time when Australia was in a period of fairly prolonged economic growth with a high current account deficit and things of that nature. Under the Hawke government, in 1988-89 federal government spending as a proportion of GDP was 22.7 per cent and in 1989-90 it was 22.4 per cent. Thereafter, it escalated fairly significantly because of the impact of the recession, which reduces GDP and effectively increases the burden on the budget and so increases expenditure. But that is where federal government expenditure was the last time we were in similar circumstances in this country.

When you factor in the FAGs payments, then for the past five years of the Howard government you get 25.1 per cent, 24.8 per cent, 24 per cent, 23.7 per cent and 23.7 per cent. So, even though we have had federal government revenue soaring and GDP has been generally growing strongly over that period, government expenditure has also been growing very strongly and is still, as a percentage of GDP, significantly higher than it was in the latter part of the Hawke government. In fact, if government expenditure now was the same proportionally as it was in 1989-90, the Howard government would be spending $11.6 billion less this financial year than it currently is.

All of this points to a core reality about the Howard government, that for all of its rhetoric about small government and freedom of the individual it is in fact, like the Bush government, a practitioner of big government, but it is big government in favour of its mates—big government in favour of favoured constituencies who it either expects or actually gets support from. The most outstanding and outrageous examples of this have of course been the regional rorts that have proliferated for many years through a whole variety of programs, Regional Partnerships being one example and Networking the Nation another—an endless stream of very substantial amounts of money being doled out very selectively and very carefully to marginal seats in order to entrench the positions of mostly National Party MPs.

The spread of new entitlements, the growth of middle-class welfare and the extension of family tax benefits to higher income earners: all of these things have put upward pressure on spending. So while the government is talking tough about the longer term fiscal situation with respect to public service superannuation, the Intergenerational report and the impact of the ageing population on longer term budgetary circumstances, it is busily adding to that future fiscal burden as fast as it can in order to protect its own political future.

The current surpluses that we are experiencing will not last. They mostly flow from the huge increases in commodity prices driven by demand in China and elsewhere and, inevitably, commodity price booms do not last. Access Economics is anticipating that the extreme nature of the surplus that we are currently experiencing is probably only going to last for another year or two. We will inevitably see the gradual deflating of that commodity price boom and the gradual reduction of the temporary surge in receipts that it produces for the government through a variety of taxation arrangements—through company tax, indirectly through income tax and so forth.

At the same time as we are coming off that wave, we will just be starting the initial wave of the giant demographic change that is going to be enormously adverse to the federal budget. At the moment Australia is in the optimal position where the percentage of the total population of workforce age is at its absolute peak. We will be in that position for another few years but, shortly thereafter, there will be a dramatic decline and the ratio of workers or potential workers to dependants, who ultimately have to be paid for either through families or through government, is going to alter very substantially in a way that is very adverse to the federal finances. The Future Fund does not address this problem, which is a much more serious and substantial problem; it is focused on one particular relatively lesser priority: federal government superannuation.

The next point that I want to address is the governance arrangements of the Future Fund, which are grossly inadequate and which are wide open to abuse. These are exactly the kinds of problems that both Labor and a number of commentators alluded to when the idea was first floated. We were told this was going to be a locked box. We were told that this would be impervious, that it would not be able to be accessed by nasty politicians wanting to curry favour in particular electorates—that is, the National Party’s grubby hands would not be let anywhere near it. In practice what has happened is quite the opposite. The responsible ministers, the Treasurer and the finance minister, will be given the power to issue an investment mandate to the managers and board of the Future Fund—in other words, to give them instructions about their investment direction.

In the explanatory memorandum there is a very telling phrase. In explaining the nature of this investment mandate and the powers of the two ministers concerned, it says that in issuing instructions the two ministers can ‘consider broader policy and national interest considerations’. We in the Labor Party have become a bit accustomed over the years to special meanings for terms like ‘national interest’ and ‘national importance’. They are code for National Party pork-barrelling. The most outrageous example of this in recent times is the infamous Roads of National Importance program, which many years ago, as shadow minister for transport, I dubbed ‘roads of National Party importance’. We had such outrages as the federal government, while not prepared to fund really major arterial roads, roads of huge economic importance to the nation, proposing to put federal government money into something like Main Road 92 between Nowra and Nerriga, a road that is in part a dirt road and not even a priority road at the state level. Why? Because it happened to suit the political agenda of the government at the time. So we know very well what coded terms like ‘national interest’ in this context mean.

It is significant to compare the governance arrangements with those in the New Zealand fund, which resembles the Future Fund in many respects. The minister there does have a power of direction with respect to the investment mandate of the fund but it is heavily constrained by a requirement that the directions must comply with prudential and commercial criteria. In other words, the minister there does not have the power to issue directions to invest other than in an entirely commercial way. The legislation we have before us today is effectively silent on that issue. It is wide open to abuse; it is wide open to a government in the future directing the board to invest in particular ways in order to obtain political benefit for the government. The government also retains a very broad power to dismiss board members. They can be dismissed on grounds of unsatisfactory performance—in other words, virtually at will. Most statutory boards have much tighter criteria for dismissing board members.

It is also worth noting that, although there is a ban on the Future Fund investing in non-financial assets—it cannot, for example, buy a coalmine, a bridge or something like that—that can be very easily circumvented through modern financial instruments, derivatives and various other devices. So, although that may be seen at first glance to provide some protection against National Party pork-barrelling, it is not that difficult to get around those kinds of restraints. ‘National interest’ in this context is code for National Party interest. It means that in practice the Future Fund is not going to be a locked box; it will be a slush fund. It may not be this year, it may not be next year and it may not even be the year after but, at some point, if the Howard government remains in office and the kind of philosophy that has driven its attitude to government spending remains, the Future Fund will be raided and it will be raided for political purposes. Labor believe that the governance arrangements in this legislation should be much stricter and that is one of the issues that is dealt with in our second reading amendment.

The legislation is also significant in that it deals with the prospect of the government moving some or all of its current Telstra share ownership into the Future Fund. The government, of course, has obtained parliamentary approval to sell the balance of its Telstra shares, the 51.9 per cent remaining public ownership in Telstra. The legislation is designed to enable the government to move the entirety of this shareholding or any part of it into the Future Fund. If that were to occur, it would produce an entirely bizarre outcome where we would have public ownership of Telstra without public accountability. So the government, in making the Future Fund the owner, would effectively retain government ownership and certainly retain the kinds of alleged efficiencies that it claims are associated with government ownership of Telstra but at the same time deprive itself of any capacity to exercise the benefits of public ownership, particularly its control over board appointments.

While the government would retain the power of the minister to direct Telstra until such time as the overall public ownership of Telstra fell below 15 per cent, that power has never been exercised. In reality, the main source of government power and influence over Telstra flowing from public ownership is board appointment. In effect, what the government is proposing here is a situation where it may ultimately retain government ownership but divest itself of the power to get any value for the community out of that government ownership. That strikes me as a complete absurdity. It also raises a significant question with respect to the structure of the fund because, even if half of the remaining government shares in Telstra were sold, it would still mean that the Future Fund will be heavily overweight in Telstra shares and that its weighting of Telstra shares as an investment versus other possible investments will be skewed. For obvious reasons, that is not particularly good investment practice—notwithstanding the question of what value Telstra shares have from time to time.

So there are some fairly complicated and difficult questions that the government has failed to address here. It is caught between conflicting imperatives: a desire to establish the Future Fund as a stand-alone, allegedly independent investment vehicle and, at the same time, a need to get itself off the hook from the mess that it, with a bit of assistance from Sol Trujillo, has got itself into regarding the future of Telstra. That is not good for the taxpayer or for future budgetary circumstances, and the risk of some kind of mess eventuating as a result of all that is all too high.

I would like to remind the parliament of Labor’s view of how the Future Fund should be dealt with. In our reply to the budget last year, we outlined our Building Australia strategy and indicated that it is our intention to use some or all of the returns on the fund for the purposes of financing infrastructure development in Australia—not the capital but the earnings from the fund which under the government are simply going to be locked away within the fund. In our view, there is a much more urgent priority for this nation than putting aside money to fund future public service superannuation liabilities, which ultimately will always be a pretty minor part of the overall budget. We believe that the dilapidated state of infrastructure throughout Australia and the major problems in many parts of our infrastructure networks require much more urgent attention and that it makes much sense to be investing some of the returns from the Future Fund investment in infrastructure.

Whether it is fixing the Pacific Highway or the Hume Highway, fixing our appallingly dilapidated interstate rail network, ensuring that Australia gets world-class broadband so we can be at the forefront on broadband internationally rather than languishing way behind as we currently are, dealing with the widespread problem of outer urban roads in major cities such as Melbourne, Sydney and Brisbane which were designed for small country communities and are now groaning under the huge traffic flows generated by new growth areas or dealing with problems at major ports with road, rail and sea interchanges, there are huge infrastructure tasks facing our nation. The Howard government’s only approach to these problems is to try to avoid responsibility by blaming the states and to use funds, where it is actually spending some money, in a way that is designed to maximise political bang for the buck rather than actually doing something strong and positive for the nation.

Our overall economic picture in Australia is one of relatively strong, albeit occasionally waning, growth along with low levels of unemployment. Our economic good fortune is being driven by a spectacular boost in commodity prices driven by demand in China and the fact that, for the first time in a very long time, all the major economies in the world are growing. This is the first time in a very long period—decades, in fact—that we see reasonable economic circumstances pretty much right around the developed world. From a more structural perspective, the reforms put in place by the Hawke and Keating governments and the very astute management of the Reserve Bank have been very important factors in setting the scene for the economic growth we are now enjoying.

There are some less benign factors involved, particularly a dramatic increase in Australia’s indebtedness at both household and national levels, which is a cause for great concern. For two years we had domestic demand increasing at the rate of six per cent. That is unsustainable—it proved to be unsustainable—and it is only our good fortune that, just as that fell away, the commodities price boom really took hold and has, in a sense, taken over as the engine of the economy. But both are transitory, and our government is allowing a range of fundamental weaknesses to build up in our economy which ultimately will come to a head—most importantly, our current account deficit and trade deficit, which are very serious and eventually will cause major shocks to the Australian economy, and our underinvestment in research and development.

In spite of a long period of economic growth, it is only just recently that Australia has returned to the level as a percentage of GDP of investment in research and development that we reached under the Hawke and Keating governments. We are the only nation in the developed world where public expenditure on education generally has been declining—and, of course, we have major skills shortages, which is in part a symptom of that. For the past 18 months productivity has been going backwards. After a prolonged period of improvement until the late nineties, our relative productivity compared with the United States has been declining so that we are heading back towards the magnitude of gap between Australia and the United States that we had 20-odd years ago. That is a very major cause for worry.

I believe that the Future Fund is, in some respects, the indulgence of an extremely complacent and arrogant government that is feeling very good about itself because it has the kind of short-term economic statistics that enable it to crow about particular levels of unemployment, economic growth and these kinds of things, which while important should not mask the fact that, underneath, the fundamentals are rotting. Eventually—sooner, maybe later (we do not know) but eventually—those fundamentals are going to bring us undone unless we take action. In particular, we need to focus on infrastructure and invest in learning through education and skills. We must start to get serious about exports beyond our agricultural and mineral sectors and start to tackle some of the structural problems that are associated with the very ordinary performance over the past five or six years of much of our export sector.

They are the challenges that we face in economic policy in Australia. I regard the Future Fund, albeit positive in its own narrow terms, as essentially an indulgence that is not particularly necessary. I think in years to come—in 10 years or 15 years—it will be looked back on as something of an oddity by a government that really had its priorities wrong. That is assuming that the Future Fund lasts that long and that the National Party has not got its grubby hands on it already.

I indicate again that Labor will be voting for the legislation, but I move the second reading amendment:

That all words after “That” be omitted with a view to substituting the following words: “whilst not declining to give the bill a second reading, the House is of the view that:

(1)

the Future Fund should only invest on a prudent commercial basis and manage funds in a manner consistent with:

(a)

best-practice portfolio management;

(b)

achieving desired returns without undue risk to the Fund as a whole;

(c)

enhancing Australia’s reputation as a responsible and ethical investor; and

(d)

building productive capacity in the Australian community; and that

(2)

the income stream from the Fund should be used for productive national economic purposes rather than being set aside solely to offset the cost of public sector superannuation as the Government intends”.

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