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Australian Government Coat of Arms

Budget | 2014-15

Budget 2014-15
Australian Government Coat of Arms, Budget 2014-15

Statement 7: Debt Statement, Assets and Liabilities (continued)

The Australian Government's major assets and liabilities

Assets

The Government's total stock of assets is estimated to be around $393.0 billion at 30 June 2014, increasing to $414.6 billion in 2014‑15 and $506.1 billion by the end of the forward estimates.

The Government's financial assets are estimated to be $279.8 billion at 30 June 2014, increasing to $297.4 billion in 2014‑15 and $380.8 billion by the end of the forward estimates.

The Government's non‑financial assets are estimated to be $113.2 billion at 30 June 2014, increasing to $117.2 billion in 2014‑15 and $125.3 billion by the end of the forward estimates.

Future Fund

The Future Fund was established in 2006 to accumulate financial assets and invest them on behalf of the Australian Government to address the Government's unfunded superannuation liability.

The Investment Mandate for the Future Fund sets a benchmark return of at least CPI plus 4.5 per cent to 5.5 per cent per annum over the long term. The Investment Mandate gives guidance to the Future Fund Board of Guardians (the Board) in relation to its investment strategy. The Board is independently responsible for the investment decisions of the Fund. The Investment Mandate also requires the Board to take an acceptable but not excessive level of risk for the Fund, measured in terms such as the probability of losses in a particular year.

The portfolio of assets has performed well, given the extent of uncertainty and volatility in financial markets over the past five years. Since the first contribution to the Future Fund on 5 May 2006, the return has been 6.8 per cent per annum.

At 31 March 2014, the Future Fund's return for the financial year to date was 9.8 per cent.

The Future Fund was valued at $97.6 billion at 31 March 2014.

The Future Fund's portfolio has now been substantially invested but will continue to evolve as the Board manages the portfolio in line with its mandate and strategy. Table 13 shows changes in the asset allocation of the Future Fund over 2013‑14.

Table 13: Asset allocation of the Future Fund
Asset class 30 June 13
$m
31 March 14
$m
Australian equities 8,596 9,972
Global equities 27,473 31,574
Private equity 6,450 7,777
Property 5,354 5,140
Infrastructure 7,231 7,692
Debt securities 13,869 11,532
Alternative assets 14,764 13,295
Cash 5,152 10,592
Total Future Fund assets 88,889 97,573

Asset Recycling Fund

The Asset Recycling Fund (ARF) to be established on 1 July 2014 will provide a dedicated vehicle for providing funding and financial incentives primarily to the States and Territories to invest in infrastructure, including under the Asset Recycling Initiative.

The ARF will be seeded with $5.9 billion of capital from uncommitted balances of the Building Australia Fund (BAF) and Education Investment Fund (EIF). Further contributions to the Fund will be made from proceeds from the sale of Medibank Private and other privatisations.

Drawdowns from the ARF will be made from capital and net earnings. Such drawdowns will primarily fund payments to States and Territories through the Council of Australian Governments (COAG) Reform Fund, governed by the National Partnership Agreements that will include those for the Asset Recycling Initiative and Land Transport Infrastructure Projects.

The ARF will be managed by the Future Fund Board of Guardians. The Treasurer and Minister for Finance will set an investment mandate for the Fund which will provide broad direction to the Board in relation to its investment strategy.

The BAF and the EIF will be subsequently abolished on 1 January 2015. Remaining committed milestone payments of the BAF and EIF will be transferred to consolidated revenue to continue to be paid based on contractual obligations under the responsibility of the relevant department.

Medical Research Future Fund

The Government will establish the Medical Research Future Fund (MRFF) on 1 January 2015 to provide additional funding for medical research from 2015‑16, primarily through payments to the National Health and Medical Research Council.

Contributions to the MRFF will come from $1 billion uncommitted funds within the Health and Hospitals Fund (HHF), and the amounts equal to the estimated value of health function savings measures published in the 2014‑15 Budget until the Fund reaches a target capital level of $20 billion. That is, every dollar of savings in health in this budget will be given to the MRFF for the next six years, until the MRFF reaches $20 billion.

Net earnings on MRFF capital for a given financial year will be available for drawdown the following financial year. Payments met from drawdowns will be determined through the annual Budget process. The capital of the Fund will be preserved in perpetuity.

The MRFF will be managed by the Future Fund Board of Guardians. The Treasurer and Minister for Finance will set an investment mandate for the Fund which will provide broad direction to the Board in relation to its investment strategy.

The HHF will be abolished on 1 January 2015. Remaining committed milestone payments of the HHF will be transferred to consolidated revenue to continue to be paid based on contractual obligations under the responsibility of the Department of Health.

DisabilityCare Australia Fund

The DisabilityCare Australia Fund (DCAF) will be established by 1 July 2014 to assist the Commonwealth and the State and Territory governments with spending directly related to the National Disability Insurance Scheme (NDIS). This is consistent with the commitment by governments to roll out the NDIS across Australia.

Revenue raised from increasing the Medicare levy by half a percentage point from 1.5 to 2 per cent will be placed into the DCAF from 1 July 2014. The investments of the DCAF will be managed by the Future Fund Board of Guardians. The Treasurer and Minister for Finance will set an Investment Mandate for the DCAF which will provide guidance to the Board in relation to its investment strategy for the Fund. The Investment Mandate will outline the benchmark return and the risk profile of the DCAF.

A fixed amount of the money flowing into the DCAF each year will be set aside for the State and Territory governments consistent with the DisabilityCare Australia Fund Act 2013. In 2014‑15, this fixed amount will be $825 million. Thereafter, the amount to be set aside for the States and Territories in the DCAF will be indexed annually by 3.5 per cent over 10 years.

The State and Territory governments will be able to draw down from the DCAF when they meet key conditions such as agreement to fully roll out the NDIS and milestones relating to the participation of people with significant and permanent disability in the scheme. The balance of the DCAF, after taking into account allocations to the States and Territories, will be available to the Commonwealth to assist with meeting the Commonwealth's contribution to the NDIS.

Residential mortgage‑backed securities

During the global financial crisis, the Australian Government directed the AOFM to invest in high‑quality AAA‑rated residential mortgage‑backed securities (RMBS) to support competition from smaller lenders in residential mortgage and small business lending markets. As a result, the AOFM directly invested $15.5 billion in high‑quality RMBS.

Conditions in the Australian securitisation market have improved substantially since the introduction of the AOFM programme. Since September 2012, private demand for securitisation had increased to the extent that the AOFM was not required to provide any direct investment in new RMBS deals. Given the improvement in the market, the former Government announced on 10 April 2013 that the program would close for new investment.

Conditions have continued to improve since then. More than $25 billion of new RMBS was issued in 2013, the highest in any calendar year since the crisis. Consistent with the ongoing market recovery and increased demand for RMBS, the AOFM has sold close to $850 million (in amortised face value terms) of its holdings over the past 12 months. As at the end of April 2014, the AOFM held $6.7 billion (in amortised face value terms) of RMBS. The amortised face value of RMBS held by the AOFM is projected to be $1.6 billion by the end of 2017‑18.

The AOFM and the Treasury will continue to monitor conditions in the RMBS market closely.

National Broadband Network

The Government is changing the National Broadband Network (NBN) to ensure it will be delivered faster and at lower cost to the community. The Government has instructed NBN Co Limited to continue to progress the fibre‑to‑the‑premises, fixed wireless and satellite rollouts while it undertakes a series of reviews to assess current progress and ultimately re‑design the rollout of the NBN to Australian communities.

The Government has adopted the recommendation of its Strategic Review to pursue a multi‑technology mix rollout for the NBN. This approach incorporates fibre‑to‑the‑premises, fibre‑to‑the‑node, hybrid‑fibre coaxial cable, fixed wireless and satellite technologies in the rollout mix.

The Government is also in the process of re‑negotiating the Definitive Agreements with Telstra and Optus. These agreements secure access to existing fixed‑line infrastructure. Their revision will reflect the Government's changes to the NBN.

Reflecting these changes, NBN Co's equity requirements have been revised. Equity from the Government in 2013‑14 has reduced from $3.5 billion to $3.4 billion. Over the life of the project, the Government's equity contribution to NBN Co will be capped at $29.5 billion.

Higher Education Loan Program

The Higher Education Loan Program (HELP) comprises concessional loans to students that enable them to defer payment of fees for diploma level and above courses, which are paid back once earning an income above a certain level.

The value of HELP is estimated to be around $25.2 billion at 30 June 2014, which is $0.3 billion lower than projected in the 2013‑14 MYEFO. The value of HELP is projected to grow to $43.6 billion in 2016‑17, which is around $2.1 billion higher than estimated in the 2013‑14 MYEFO, and to reach $51.4 billion by the end of the forward estimates.

This growth is largely a result of the estimated underlying increase in university commencements over the forward estimates, deregulation of the higher education sector, and the reduction in subsidies for Commonwealth supported places.

From 1 January 2016, the Government will fully deregulate higher education by removing fee caps and expanding the demand‑driven system to bachelor and sub‑bachelor courses at all approved higher education providers. Supported students will continue to be able to defer the costs of their studies through HELP.

In addition, from 1 January 2016, the Government will rebalance student and Commonwealth contributions towards a new student's course fees by reducing subsidies for Commonwealth‑supported places by 20 per cent on average.

Clean Energy Finance Corporation

The Clean Energy Finance Corporation (CEFC) was established as a Commonwealth Authority in August 2012 through the Clean Energy Finance Corporation Act 2012 (CEFC Act).

The CEFC Act provides the CEFC with $10 billion over five years to invest in renewable energy, low‑emissions technology and energy efficiency projects.

Investment decisions are made by an independent board consistent with the CEFC Act and the CEFC's investment mandate.

The Australian Government has announced that it will abolish the CEFC.

Legislation to abolish the CEFC and transfer the CEFC's existing assets and liabilities to the Commonwealth is currently before Parliament. The Government will honour all payments that are necessary as part of meeting our contractual obligations to committed investments. These obligations will be met from the CEFC's existing funding, which will be transferred to a new CEFC transitional special account.

Liabilities

The Government's total liabilities are estimated to be $579.4 billion at 30 June 2014, increasing to $626.6 billion in 2014‑15 and $733.4 billion by the end of the forward estimates.

The Government's major liabilities are CGS on issue and public sector employee superannuation liabilities. For further information on CGS on issue, see the Debt Statement.

Public sector employee superannuation liabilities

Public sector employee superannuation entitlements relating to past and present civilian employees and military personnel are a financial liability on the Government's balance sheet. As set out in Box 1, the Government's superannuation liability is estimated to be around $157 billion at 30 June 2014 and $243 billion at 30 June 2050.

The Australian Government has never fully funded its superannuation liabilities in relation to defined benefit schemes. For civilian employees, the major defined benefit schemes are the Commonwealth Sector Superannuation Scheme (CSS) and the Public Sector Superannuation Scheme (PSS). These schemes were closed to new members in 1990 and 2005 respectively. The Public Sector Superannuation accumulation plan (PSSap) was introduced on 1 July 2005 and provides fully funded accumulation benefits for new civilian employees from that date.

For military personnel, the major defined benefit schemes are the Defence Force Retirement and Death Benefits Scheme (DFRDB) and the Military Superannuation and Benefits Scheme (MSBS). The DFRDB was closed to new entrants in 1991.

The Government has decided to close the MSBS from 1 July 2016 (see Box 1).

The Government has also decided to enhance the indexation of Defence Forces Retirement and Benefits (DFRB) Scheme and DFRDB benefit payments from 1 July 2014 for superannuants aged 55 and over. This has increased the unfunded liability by $5.1 billion at 1 July 2014.

Even though the civilian and military schemes will all be closed from 1 July 2016, the value of the Government's unfunded superannuation liability is projected to continue growing (in nominal terms) into the immediate future — although it is projected to decrease as a proportion of GDP — and is forecast to reach $181 billion by the end of the forward estimates. The increase in the liability partly results from the time value of money which recognises future benefits being closer to maturity each year. It also results from the accruing entitlements to current members of the civilian and military defined benefit schemes.

An actuarially determined discount rate is used to estimate the present value of future unfunded superannuation benefits. The long‑term nature of the unfunded superannuation liability requires the use of a discount rate that best matches the duration of the liability. The value recorded on the balance sheet is highly sensitive to the discount rate used. The use of a long‑term discount rate for budget purposes avoids the volatility that would occur by using current market yields on government bonds which continually change. Consistent with the latest Long Term Cost Reports for the civilian and military schemes, the discount rate currently applied is 6 per cent per annum. This rate is in the context of a long‑term assumed rate of CPI inflation of 2.5 per cent per annum.

Civilian defined benefit schemes

Changes in member behaviour, including members increasing their member contributions and increasingly taking more of their benefit as a pension rather than as a lump sum, have also increased the liability in 2013‑14 by around $3 billion compared to previous projections.

Box 1: Policy changes to military superannuation arrangements

The Government's decision to close the MSBS to new military personnel from 1 July 2016 will reduce the Government's unfunded liability by $126 billion by 2050.

Chart 5 below shows, without the policy change, the Government's projected unfunded superannuation liability would be $369 billion by 2050. As a result of the decision to close the MSBS, the Government's unfunded superannuation liability is projected to be $243 billion by 2050.

Chart 5: Decrease in projected defined benefit superannuation liabilities
as a result of the closure of the MSBS

This chart shows the Government's projected unfunded superannuation liability out to 30 June 2050.  The chart shows that the policy decsision to close the Military Superannuation and Benefits Scheme to new members from 1 July 2016 will decrease the Government's projected unfunded superannuation liability by $126 billion by 2050.

[View chart data]

As the superannuation liability is included in the Government's net worth and net financial worth aggregates, revaluations of the liability have an impact on these aggregates (see Note 1 in Statement 9: Australian Government Budget Financial Statements).