Profound sighs of relief all round with Michael Pascoe’s report yesterday on the Future Fund – but…

Friends who were intelligent enough to go into the financial markets
and whose income outstrips mine by a factor of ten sometimes observe
that Australia’s economy has been powered along by compulsory
superannuation – by compulsory savings. Is the Future Fund an attempt
to do something similar, with the government making the decisions?

Unfunded public service pension liabilities are a very real problem for
governments which cannot readily control their tax policy. Governments
with sound taxing powers, however, have much less to fear.

Let’s run a little hypothetical. Suppose the Future Fund grows to the
point where it owns 5% of all companies in the economy – and
that these companies make profits totalling 100 Bloody Big Numbers
(BBNs, we’ll call them).

Currently, the feds would pocket 30 BBNs from company tax, and then
receive a further 3.5 BBNs in dividends – 5% of the 70 BBNs
after-tax profit for companies. The Commonwealth would end up with 33.5
BBNs as a total take from companies.

The same, though, could be achieved without a Future Fund by bumping
the tax rate for companies up to 33.5 per cent. That’s not a huge
increase – and while it would produce screams, it would also mean that
government fund managers weren’t taking punts with public money in the
market. An increase of that much mightn’t be needed, either. Capital
markets probably will operate more efficiently without the distorting
effects of a large scale government investor, and a better capital
market helps foster a more productive – read profitable – corporate

All of which creates the suspicion that the Future Fund is a bid to
establish a source of government income from places where it can’t take
it from taxation.

Basic risk management suggests that the Future Fund should have a high
proportion of its investments directed overseas. If the Australian
economy does well, we will be able to afford unfunded pension
liabilities from taxes, and if it dips, offshore investment income will
fill the gaps. But try explaining the idea that Australians’ tax
dollars should be invested overseas to the punters. They’ll want to
know why the money isn’t being lavished locally.

You’re left wondering if the only good reason for investing a Future
Fund in domestic companies is if the government realises that its
taxing power in the sector is weak, that the Fund will provide a
government with access to the profits generated by domestic companies
that they are unable to grab through the tax system. And that suggests
that the government has no faith in its ability to levy fair taxation
on the corporate sector. Not that any treasurer would ever admit that.

PS A subscriber writes:

Re. your article over the possibility of interference with
the Future Fund, you might like to have a look at the performance of
the heritage fund that was started some years ago in Alberta
Canada. It is a wonderful example of exactly what you wrote of.

Peter Fray

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