Like all policy instruments, the Future Fund was created to manage the challenges the country was facing at the time. The government has every right and reason to adjust and adapt the mandate to manage very different political and economic challenges today.
The Future Fund (FF) was created by the Parliament at the time when the resources boom and exports brought into the country a huge trade and budget surplus. ‘To keep the bond market alive while eliminating net debt,’ the Parliament enacted the Future Fund Act 2006 (Castello and Coleman 2009). The decision to set aside budget surplus for an independently managed investment fund was neither natural nor exceptional. It was a political decision of the government at the time, as are the choices of all fiscal instruments.
The Treasurer, Jim Chalmers, on behalf of government, issued a statement on 21 November 2024, emphasising the primary focus of FF remains on its returns while requiring the fund to ‘consider Australia’s national priorities in its investment decisions, where possible, appropriate and consistent with strong returns.’ Three highlighted areas are: housing, energy transition, and infrastructure. The announcement was immediately criticised by Peter Castello, the former Treasurer and later the chairman of the FF Board of Guardians until 2024, saying government is using FF as a ‘political slush fund.’ The debate raises several questions: does government have a ‘right’ to change the investment mandates, requesting FF to invest in these three specific areas that represent the future rather than the past of the economy of Australia? Did the announcement change the FF as a sovereign wealth fund (SWF) to a pool of wealth that can be used and abused by government? Did the announcement oppose or undermine the Santiago Principles – the globally accepted standards for governance, investment, and risk management practices – a set of guideline negotiated by David Murray on behalf of Australia? The short answers to all are NO.
SWFs by definition are owned by sovereign states, there by their people. It is first and foremost a pool of public money set aside for a range of objectives. Around the world, over one third of SWFs are saving funds, one third stabilisation funds, and a third with a combination of objectives. FF is not a Liberal Fund or Labor Fund; it belongs to people in Australia. Thus ‘people’ through their representatives have ultimate authority to decide its mandates. A good example is the Norway Government Pension Fund Global (GPFG), the world’s largest SWF with assets under management of US$1.8 trillion (370% of the country’s GDP). In 2014, following a vote in the Parliament, GPFG divested all holdings in companies with more than 30% of their activities in the coal business, including BHP and Southern Co in the US. In 2006, GPFG divested from Walmart because of its ‘serious systematic violation of human rights’ – the decision caused a diplomatic row with the US embassy in Oslo. Indeed, GPFP holds a regularly updated blacklist of firms, which is drawn up by the Ministry of Finance. In sum, the sovereign nature of the FF gives the elected government the ‘right’ to decide and change its mandates.
Did Chalmers’ decision aim to use FF as a ‘political slush fund’? No. The decision did not change the basic operational principle of the FF – transparent and independent decisions made by the management under the guidance of the Board of Guardian, as stated in the initial legislation setting up the Future Fund. Neither did it change the ultimate objective of the fund to invest for future use. It did not change the benchmark for its performance. It did not propose to drawdown from the FF and use it for its political purposes. Instead, it gave another five years guidance for its operation beyond 2026-27 to 2032-33.
The initial future use of FF was to cover the unfunded liability of the public sector superannuation scheme that is estimated to be peaking at Aus$190 billion in 2033-34; the current asset of FF is US$150 billion (Aus$230 billion), exceeding the liability. Furthermore, the challenges this country faces today are dramatically different from those in 2004-07, due to the Global Financial crisis, Covid19, geostrategic competition. The Australian economy is facing the global shifts of, as Dr Chalmer put it succinctly: ‘globalisation to fragmentation, information technology to artificial intelligence, hydrocarbons to renewables, young to old, and the rapid growth of services. It is not unreasonable to expect FF to adjust its investment strategies to face the future challenges rather than yesteryears’.
Shifting investment is necessary and the core business of all SWFs. Peter Costello defended investment in fossil fuels back in 2013 in the name of high returns. Today, investing in many sources of fossil fuels is considered as investing in stranded capital.
SWFs know this core business better than onlookers. In a more recent example, given the widespread high inflation and interest rates, smaller investors lost appetite for real estate and SWFs around the world went in. Their investment in real estate rose by 50% to $14.8 billion in 2023, accounting for 40% of the total SWFs’ investment. Some of it went to residential; large parts went to logistic and other infrastructure. SWFs’ investment in housing is always a double-edge sword because they are the elephants in the room; when they invest in something, the value of the assets rises too and that potentially can squeeze out small investors. So far, real estate investment from SWFs has been primarily in hotels to develop tourist industries, logistic and data centres to meet the rising demand for IT and AI development.
Another trend in SWFs’ investment highlighted by Chalmers is the nexus of industrial, technology and energy transition. In 2023, SWFs’ investment in these areas was more than three times the previous year and the overwhelming proportion of it went to developed economies. Times have changed and this demands government adopt new ways of managing its economy.
The Future Fund was set up for a future that is consistently changing. If, the FF is to be for the future, then its strategies must change too.
That was the treasurer’s intent: to look forward, not back to past conditions.
Xu Yi-chong
Xu Yi-chong is a professor in the School of Government and International Relations at Griffith University.
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