The Future Fund as Revenue Laundering Operation
The government’s Future Fund, a massive proprietary trading operation being established at the expense of taxpayers, is a thinly disguised revenue hoarding scheme on the part of a government that has more money than it knows what to do with. The Minister for Finance has now all but confirmed that the Future Fund’s earnings will be subject to taxation, siphoning the Fund’s earnings directly into consolidated revenue. Of course, paying taxes on the Fund’s earnings is no less absurd that than the government using the Fund to purchase its own liabilities in the form of government securities. It just serves to highlight the fact that the Fund has been explicitly designed to launder the proceeds of privatisation and protect them from being returned to taxpayers.
posted on 21 July 2005 by skirchner
in Economics
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“…is a thinly disguised revenue hoarding scheme on the part of the government…”
‘Revenue horading’ is one description, but I don’t think it captures the prudential nature of the scheme. Generally Accepted Accepted Accounting Principles (GAAP) require financial cost be brought to account on an accruals basis, rather than a simple cash basis. This is an accepted part of ordinary economics since Gross Operating Surplus in the National Accounts is calculated on a similar basis (ie accruals not cash).
Where massive unfunded liabilities (of public servants superannuation or anything else) exist in the General Government sector, it is necessary to sterilize these via an appropriate asset accumulation, which sometimes can superficially be seen as mere ‘revenue hoarding’. This is necessary to maintain Public Finance/ National Accounts integrity and prevent intergenerational cost shifting.
The particulars of ‘how’ to achieve this can be complex, but adverse market consequences (real ot perceived) can be eliminated by private sector resource allocation and governance. Norway and New Zealand are more advanced than Australia in this public finance architecture.
Craig Stevens
Posted by .(JavaScript must be enabled to view this email address) on 07/27 at 06:19 PM
Craig, I agree with this as a general principle. The problem in Australia is that the government is very selective in its use of accruals accounting, so we have the worst of both worlds. As you suggest, NZ has takes public sector accounting principles much more seriously and I would welcome moves in that direction in Australia.
However, I would distinguish between the question of how we account for these liabilities and how we should pay for them. It seems to me that we should be indifferent between current and future taxes in meeting these liabilities, except that the welfare costs of high marginal tax rates today might reduce our future capacity to meet these liabilities.
Posted by skirchner on 07/28 at 02:52 PM
There’s no doubt about the govts ‘selectivity’ in its application. Ex-auditor NSW General Tony Harris has exposed this publicly to an inert beauracracy.
However, there is no dichotomy between ‘accounting’ for the liabilities and ‘paying’ for them under an accrual system. Indeed, the very recognition of them (ie recognising the Expense and the respective contra-liability Provision) works to a reduce both fiscal balance and underlying cash balance, meaning that politicians are at liberty to waste less tax payers money before driving the Budget into deficit.
Apart from the prudential and National Accounts integrity reasons for such recognition, it is important to contemporaneously recognise ‘ALL’ factor input costs (including General Govt sector superannuatiion liabilities when they are incurred to produce services) in order to assess true underlying economic performance. This is especially true as we have the increased economic-fiscal impost of structural ageing of the population.
Bottom line (in my opinion)—> recognise all costs as and when incurred, not simply when they are paid out in cash by the next generation. We can’t wait, especially as costs (dis-saving) continues to accumulate at a third-world rate;
ie rising Net Income Deficit servicing (the J-curve is baloney), continued salination and decalcification of arable soil, growing unfunded liabilites (including under-provisioning for General Government sector fixed capital stock), ever increasing social welfare burden dis-saving, consumption of non-renewable natural assets (without converting them to income producing assets), etc, etc.
Regards,
Craig Stevens.
Posted by .(JavaScript must be enabled to view this email address) on 07/28 at 08:22 PM
If we were to properly account for all future unfunded contingent liabilities and reconcile this with the government’s net financing requirement, then the issue of having to warehouse cash surpluses via the Future Fund would not arise. What you call the ‘prudential’ nature of the scheme would be built into the accounting framework, as you suggest. In the hybrid accounting framework in which the government actually operates, I think the Future Fund is just a vehicle to rationalise large cash surpluses and defuse pressure for tax and spending reform.
Posted by skirchner on 07/29 at 02:31 PM