Asset management

The Australian Government holds a wide range of assets including investments in the Future Fund, term deposits at the Reserve Bank of Australia, higher education loans and non-financial assets such as land and buildings. Strong fiscal outcomes over recent years have contributed to both an increase in financial assets and Australian Government net worth.

The establishment of the Future Fund and possible sale of the Government's remaining share in Telstra in 2006-07 will have an impact on the size and composition of Australian Government assets.

Future Fund

The Australian Government established the Future Fund in 2005-06 with seed capital of $18 billion. The aim of the Future Fund is to fully offset the Government's unfunded public sector superannuation liabilities by around 2020, thereby allowing the budget to cater for the increased fiscal pressures arising from the ageing of the population.

The Future Fund will be invested in a broad range of financial assets and be managed by an independent statutory agency governed by an appropriately qualified board — the Future Fund Board of Guardians (the Board). Further contributions to the Future Fund will be made from future realised budget surpluses and asset sales.

The investment strategy adopted by the Board will have an impact on the Government's balance sheet. The recently appointed Board has not yet developed an investment strategy for the Future Fund, so standardised assumptions have been made about asset returns for the purposes of this budget, with assets invested in term deposits in the short term and progressively being invested in equities over the forward estimates. The actual impact on the forward estimates will depend on the investment strategy adopted by the Board.

Assuming the Board has a diversified holding of financial assets, net debt will be affected during the transition from the short to long term. This is because some of the Government's holdings of cash and fixed-interest securities will be converted into equities, which are not included in the calculation of net debt. Beyond the forward estimates period, the Future Fund is expected to contribute to improved net debt, largely due to compound growth from fixed interest and cash holdings within the overall asset portfolio.

Net worth over the forward estimates is likely to improve due to the establishment of the Future Fund. While transfers of funds between asset classes have no impact on net worth, the Future Fund is expected to improve net worth beyond the forward estimates due to an expectation of higher average returns through the Future Fund than under current arrangements.

Telstra

The budget estimates have been constructed assuming the full sale of the Government's remaining shares in Telstra in 2006-07. The estimates also assume that the sale proceeds will be transferred to the Future Fund. However, the Government has not made final decisions in relation to the sale, including the structure of the sale, the nature of securities to be sold, or the quantity of shares to be sold. The structure that is ultimately adopted may vary depending on market circumstances and expert advice provided at the time.