New modelling conducted by Willis Tower Watson at the request of the Future Fund has revealed that liquidating the Future Fund to reduce government debt would lead to a net loss of approximately $200 billion over the next decade. The conservative think-tank, the Centre for Independent Studies (CIS), had recently advocated for the liquidation of the $203 billion Future Fund and its $47 billion in five subsidiary funds.
In a paper published by the CIS last month, Dimitri Burshtein proposed that the government could effectively reduce the nation’s $896 billion gross debt by more than 25 percent and save $10 billion annually in interest payments by liquidating the funds. He argued that the opportunity cost of maintaining the Future Fund and its subsidiaries amounted to about $10 billion per year, equivalent to the interest paid on an additional $250 billion of government debt at a 4.1 percent cash rate. Burshtein asserted that, to break even, the funds would need to generate returns of 4.1 percent after costs.
Future Fund creator and former treasurer, Peter Costello, welcomed the modelling findings as a vindication of his initial rejection of the CIS paper. The modelling, as presented, concludes that “under a scenario whereby the Future Fund is liquidated to pay down government debt, this would come at a median cost (i.e., lost value-add) of around $200 billion over a decade.” It further suggests that retaining the Future Fund is expected to outperform the cost of government debt on average over the projection period, resulting in a median value-add of around $200 billion at the end of the 10-year horizon.
However, the analysis cautions that considerable uncertainty surrounds asset class returns and market rates, leading to other “plausible outcomes.” At worst, there is only a slight chance of a break-even scenario by not liquidating the fund, while at best, the gain could be as high as $500 billion. It notes that there is only around a one in 20 likelihood that maintaining the Future Fund will not deliver any material benefit or cost over the next 10 years.
Mr. Costello, who also chairs Nine, the owner of The Australian Financial Review, argued that Australia cannot afford to “throw away $200 billion when we are going into a low productivity, low-growth period, and our population is aging.” He cautioned that calls to liquidate the Future Fund are poorly conceived and would damage prospects for future generations, emphasizing that the Future Fund is a national asset built up over nearly two decades. Once liquidated, it would be gone forever, including all future earnings, estimated at another $200 billion over the next decade.
The modelling’s key assumptions include a six-month period to liquidate the funds due to the significant scale of assets that would need to be put on the market. Additionally, if the government secures support for its $10 billion Housing Australia Future Fund, it would become the sixth subsidiary fund. The Coalition has not endorsed the legislation, as it believes that the interest costs on the $10 billion in borrowings could potentially outweigh the returns.
