Establishment of the Future Fund
The decision to maintain a CGS market while continuing to achieve a number of budget surpluses has allowed the Australian Government to accumulate significant financial assets, which have been used to assist in meeting within year financing requirements and to reduce the cost of its debt portfolio.
The outstanding stock of CGS is not the only significant liability on the Australian Government's balance sheet. The Australian Government has never fully funded its superannuation liabilities which are now valued at around $91 billion. To offset these superannuation liabilities, the Government will use budget surpluses to build a dedicated financial asset fund — the Future Fund (the Fund). This will reduce calls on the budget in the future, at a time when significant intergenerational pressures are expected to emerge.
The Fund is expected to be established later this year with seed capital sourced from the 2004-05 Budget surplus and from previous surpluses held on deposit at the Reserve Bank, once the Final Budget Outcome for this financial year is known. The Fund will be invested in a broad range of financial assets and will be managed by an independent statutory agency governed by an appropriately qualified board. Contributions to the Fund will be made from future budget surpluses and assets sales with the aim of offsetting the superannuation liability by around 2020. Details of the financial implications of the Fund are in Statement 2.
The decision to establish the Future Fund will not affect the issuance strategy adopted by the Government as a result of the review of the CGS market in 2002-03. Issuance in 2004-05 and planned issuance for 2005-06 reflects the continuing policy stance consistent with maintaining liquidity in the CGS market. The transfer of assets to the Future Fund is likely to necessitate some additional use of Treasury notes to manage the Government's within year financing requirements.
Implications for net debt and net worth
The investment strategy adopted in relation to the Fund will affect the exact impact on the Government’s balance sheet. As the Fund and its managing board have not yet been established, standardised assumptions have been made about asset returns for the purposes of this budget. This could mean there will be marginal changes across the forward estimates when the actual initial transfer to the Fund is determined and an asset allocation is set.
Assuming a diversified holding of financial assets, net debt would be expected to rise slightly in the early years. This is because the Government's holdings of cash and fixed-interest securities, including realised budget surpluses, would be converted in part into equities, which will not be offset against gross debt. Beyond the forward estimates period, net debt is expected to fall slowly due to compound growth in the overall asset portfolio, including fixed interest and cash holdings.
Net worth over the forward estimates is likely to improve modestly due to the establishment of the Future Fund because this broader measure includes all assets and liabilities. In addition, transfers of funds between asset classes as the Fund establishes itself will have no impact on net worth. Beyond the forward estimates, net worth is expected to rise steadily due to an expectation of higher average returns on the Fund than current arrangements.
Chart 2: Australian Government general government sector net worth
Source: Australian Bureau of Statistics Cat. No. 5513.0, Australian Government Final Budget Outcomes, Australian Office of Financial Management, and Treasury estimates.