Asset management
Strong fiscal outcomes over recent years have contributed to both an increase in the Government's financial assets and in Australian Government net worth.
Continued budget surpluses, together with growth in Future Fund assets, will have an impact on the size and composition of Australian Government assets over the forward estimates.
Investments held by the RBA
Accumulated budget surpluses are held on deposit at the RBA. These assets are managed by the Australian Office of Financial Management, which gives consideration to the Government's cash management requirements and to achieving a rate of return on Government funds. The accumulation of surpluses at the RBA has a positive impact on both net debt and net worth.
Telstra sale
During 2006-07 the Government sold the majority of its shareholding in Telstra (34 per cent) and transferred the first instalment of these proceeds, together with unsold shares, to the Future Fund. The second Telstra sale instalment is due to be received in 2008. By undertaking these transfers the Government will reduce its financial risk relative to holding one single large asset, and will strengthen its financial position by investing in a diversified portfolio of financial assets.
Telstra shares will be held in escrow by the Future Fund Board of Guardians for a period of two years and then gradually sold over the medium-term.
Future Fund
The Government established the Future Fund in 2005-06 with the aim of financing its unfunded superannuation liability — the largest liability on the Government's balance sheet. The Future Fund is expected to offset this liability by around 2020, at a time when fiscal pressures from an ageing population are expected to emerge. The Government released the second Intergenerational Report in April this year which noted that demographic and other factors continue to pose substantial challenges for economic growth and long-term fiscal sustainability.
The Future Fund has now received over $49 billion in contributions comprising $18 billion in seed capital, $13.6 billion from the 2005-06 Budget surplus, and $17.6 billion from the Telstra sale proceeds, bringing the expected balance with earnings at June 2007 to around $52 billion. The Government will consider a transfer to the Fund from the 2006-07 Budget surplus once it is realised. The Government also expects to make a further contribution to the Fund from the second instalment of Telstra sale proceeds.
The Budget assumes that all Future Fund assets, which are currently held as cash and fixed interest securities, will progressively be invested in a mix of cash, fixed interest and equities over the forward estimates. The actual allocation will depend on the investment strategy adopted by the Future Fund Board of Guardians.
Net debt will be affected over the forward estimates as some of the Future Fund's current assets are converted to equities, which are not included in the calculation of net debt. However, in the long term the Future Fund is expected to contribute to an improvement in net debt through growth in its fixed interest and cash holdings (within a balanced asset portfolio).
The Future Fund is expected to improve the Australian Government's net worth in the medium to long term due to an expectation that returns will be higher than those from other assets, such as term deposits held at the RBA.
All States and Territories are now making provision for their unfunded superannuation liabilities (Box 1).
Box 1: State and territory superannuation funding arrangements All of the States and Territories (the States) have substantial unfunded superannuation liabilities that have resulted from accrued superannuation entitlements from past and present public sector employees. Unfunded State superannuation liabilities are estimated at around $45 billion in 2006-07. The States have established funds to make provision for unfunded superannuation liabilities now rather than passing costs on to future generations. Annual contributions are typically made from the budget each year to independent trustees who manage the funds. Contributions are based on actuarial assessment with the aim of offsetting the unfunded liability by a specific date. The re-investment of earnings ensures that funds grow over time to help meet the growth in the unfunded superannuation liability. Western Australia, New South Wales, South Australia and Victoria have established funds to meet their unfunded superannuation liabilities by the years 2025, 2030, 2034 and 2035 respectively. Tasmania expects to meet its superannuation liability by 2033, the Australian Capital Territory by 2030 and the Northern Territory by 2065. Queensland currently has sufficient assets to offset its superannuation liability. In all cases the principal and earnings are retained by the trustees to help fund superannuation expenses as they arise. These funds are not set aside for the purpose of meeting other government priorities. |
Higher Education Endowment Fund
The Government will establish a new, perpetual Higher Education Endowment Fund (HEEF) with an initial investment of $5 billion funded from the 2006-07 surplus. The HEEF will be invested to earn income which will be distributed by the Minister for Education, Science and Training, after receiving advice from a panel of experts, to individual institutions for capital works and research facilities on an annual basis. The Future Fund Board of Guardians will be responsible for managing and investing the capital component of the HEEF.
It is intended that capital contributions will be made to the HEEF from future budget surpluses to grow, over time, a Fund which will finance the building of first class institutions in the Australian higher education sector. (See Budget Paper No. 2, Realising Our Potential.)
Since the earnings of the HEEF will be spent each year, the impact of the HEEF on net debt and net worth is not expected to change over time.
Higher Education Loan Programme
The Higher Education Loan Programme (HELP), previously known as the Higher Education Contribution Scheme or HECS, is one of the largest financial assets on the Government's balance sheet. This asset relates to concessional loans that are provided to students so they can defer payment of their student contributions until their income reaches a certain repayment threshold.
The HELP asset currently stands at $12.7 billion and is estimated to grow to $18.0 billion by 2010-11. This includes the impact of the 2007-08 Budget measures in the Realising Our Potential package (see Budget Paper No. 2). Due to the broader policy objectives associated with these concessionary loans, returns may be lower than for other assets.