In a move that has sparked fierce debate, Treasurer Jim Chalmers recently announced that Australia’s $225 billion Future Fund would be directed to prioritize investments in areas of national interest rather than focusing solely on maximizing commercial returns. The decision has drawn strong reactions from the fund’s architects, former Prime Minister John Howard and Treasurer Peter Costello, who established the Future Fund back in 2006.
The intensity of their pushback against the new mandate is a stark reminder of just how much the global economic landscape has shifted since the fund’s inception nearly two decades ago. Born at the zenith of neoliberalism, the Future Fund was originally seeded with proceeds from the privatization of Telstra, reflecting the prevailing faith in financial markets and disdain for public ownership that characterized the era.
Changing Times, Shifting Priorities
However, the world has changed dramatically since 2006. The global financial crisis dealt a severe blow to the once-dominant “efficient markets hypothesis”, which held that asset prices in financial markets always reflected the best available information about investment returns. Today, few take this theory seriously, as evidenced by the speculative frenzy surrounding cryptocurrencies – assets with little practical utility.
Moreover, the privatization of Telstra, which initially funded the Future Fund, ultimately proved to be a costly mistake. When the privatized entity demanded exorbitant terms to build out Australia’s broadband network, the government had no choice but to establish the publicly-owned NBN, effectively reversing the privatization at great expense to taxpayers.
Sovereign Wealth Funds Embrace National Goals
While the Future Fund has undoubtedly delivered strong investment returns over the years, both its underlying rationale and hands-off approach to investing have become increasingly anachronistic. Sovereign wealth funds, which were a relatively new concept when the Future Fund was established, have since become a mainstream fixture of the global financial system. Crucially, it is now the norm, rather than the exception, for these funds to consider national policy objectives alongside pure financial returns.
The largest sovereign wealth fund, Norway’s Government Pension Fund Global, has an explicit commitment to promoting sustainable economic, environmental and social development, including a climate action plan aligned with the Paris Agreement goals.
– Sovereign Wealth Fund Institute
Similarly, the China Investment Corporation, another major sovereign wealth fund, aims to balance robust investment performance with contributing to national carbon reduction targets. The success of such fund has spurred the creation of numerous special-purpose public investment vehicles in Australia under both Labor and Coalition governments, such as the Clean Energy Finance Corporation and the Northern Australia Infrastructure Facility.
Adapting to New Realities
The Future Fund’s shift away from a purely market-driven investment approach does not mean it should fund commercially unviable projects like high-speed rail or nuclear power. Such initiatives, if pursued, should be funded transparently through the regular budget process and subject to democratic scrutiny.
Instead, as a mature sovereign wealth fund whose value now exceeds the pension liabilities it was created to cover, the Future Fund must adapt to new realities. It should continue to seek the best risk-adjusted returns available in global markets, but with a heightened emphasis on advancing the long-term interests of its ultimate shareholders – the Australian people.
When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.
– John Maynard Keynes
In an era of mounting challenges like climate change, geopolitical instability, and technological disruption, Australia cannot afford to have its largest pool of public capital remain wedded to outdated ideological dogmas. Treasurer Chalmers’ new mandate for the Future Fund reflects a belated but welcome recognition of this reality. The fierce reaction it has provoked from the fund’s original champions is a throwback to a bygone era – one that Australia must leave behind as it navigates an increasingly uncertain future.
