FYI | May 11 2007
By Chris Shaw
With the Labor Party suggesting it would consider using some money in the Future Fund to set up a national broadband network the future of the Fund is now becoming increasingly a topic for discussion, particularly given the likelihood the government won’t need to make additional deposits into the Fund beyond FY09.
As ANZ Bank economist Cherelle Murphy points out, while the Future Fund’s liabilities have grown to around $148 billion by 2020 against a forecast $140 billion this time next year the Fund looks likely to meet its funding needs by that time.
Murphy suggests only one more budget surplus will be required to be deposited into the fund, as gains in the Telstra (TLS) share price and a larger than expected surplus last year mean the assets in the Fund have grown more quickly than expected.
On her estimates the balance of the Fund will be around $80 billion by 2011/12, meaning if the assets can achieve 8% growth the Fund will be fully funded by around 2020.
This has made the Fund a political issue, as currently there are no plans for any budget surpluses to be invested in anything other than the fund. This made sense when it was apparent there could be a significant shortfall in the government’s superannuation liabilities, but this is not so much the case now.
The latest Intergenerational Report, published last month, shows long-term fiscal sustainability has improved significantly since the Fund was established, particularly as the birth rate has ticked up slightly and people are now working longer to take advantage of changes to superannuation legislation.
JP Morgan suggests this adds weight to the argument for funds to be invested elsewhere, particularly in the area of infrastructure. The broker suggests redirecting some money into alternative investments and infrastructure projects in particular could boost productivity and so improve Australia’s long-term economic growth, as productivity in particular has suffered over the past decade thanks to poor levels of investment in infrastructure.
The Intergenerational Report included revised forecasts for Australia’s productivity growth, forecasting a fall to 1.5% this decade from 1.7% previously, well below the 2-3% range of the previous decade. The report suggests rebuilding productivity levels through enhancing infrastructure would help to not only alleviate bottlenecks and capacity constraints, which are clearly in evidence in the coal sector for example, but would also reduce inflationary pressures with the potential benefit of lower interest rates stimulating additional economic activity.
In addition, the report points out improving productivity is vital given the current ageing of the Australian population, as better productivity can offset a reduction in the number of people working.
As a result the broker suggests the Future Fund and a broadening of its investment scope is likely to increasingly become an issue in the upcoming Federal election.