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NSW Generations Fund: delivering for the future

12 Aug 2021

To the question, “what is the business of government?” most will answer: roads and rail, health and education services, economic regulation and the like.

All true, but that’s only part of the picture.

This isn’t the Wolf of Wall St. There’s no conspiracy and no deception.

It’s not enough to deliver for the people of today. Governments have to deliver for future generations too, when usually all they end up leaving is a hefty bill.

The NSW Generations Fund (NGF) is about changing that: getting away from hand-to-mouth, tax-and-spend government, and actually doing something concrete to benefit future generations.

The commentary this week has mirrored the heated debate around the federal government’s policy last year to allow early access to superannuation.

For the debate to be constructive, we should keep the Hollywood hyperbole to a minimum.

For one side, the issue was not letting people access their super in a time of need. For the other side, the policy meant gutting people’s savings and leaving them worse off in a future time of need.

As with the super policy, debate on the NGF is good. That’s how you get good policy, and too often financial policy is relegated to the back pages.

After three years of trying to promote the virtues of the NGF, it’s nice to finally see it on page one.

But for the debate to be constructive, we should keep the Hollywood hyperbole to a minimum.

This isn’t the Wolf of Wall St. There’s no conspiracy and no deception.

And the NGF is emphatically not a vehicle for high-stakes punting on equity markets, roulette wheels or any other breathless casino cliches.

The reality is much more mundane, but also much more important.

The NGF was established in 2018 as an intergenerational sovereign wealth fund. It was modelled on the Quebec Generations Fund, and its purpose is to help retire debt and guard against intergenerational budgetary pressures.

Its strategy is carefully considered and subject to ongoing review based on a wealth of expert advice and input from NSW Treasury, the eminently qualified NSW Treasury Corporation Board (which includes a former Reserve Bank Governor), and a host of other sources.

It’s true that ex-bankers have been involved in its setup and operation, and that’s good. One of the failings of public policy in Australia has been the segregation of public service and private enterprise, which is how government services can get stuck in the past, lacking innovation and failing to meet people where they are.

Ideas such as the NGF are rarely even tried because they can’t be found in the dusty and web-covered manuals of “what government should do”.

Like superannuation, the NGF has a long-term investment horizon, and profitability is expected to vary from year to year. To date, growth sits at an average 9.4 per cent (adding a healthy $2.8 billion to the fund), including small losses in 2019-20 and strong gains before and after.

But short-term profit isn’t the point, and short-term, opportunistic “punts” are antithetical to the fund’s nature. Unlike a fund shopping its services to profit-seeking clients, our measure of success is different: long-term growth to benefit future generations.

To achieve that growth and minimise the impact of market fluctuations, the NGF is well diversified across a range of geographies and asset classes (including equities, property and infrastructure), and risk is carefully managed.

All of this has been covered at length in the past four Budgets and three Half-Yearly Reviews, in NSW Treasury and TCorp annual reports, and in the NGF’s own annual report. NGF legislation even passed through both houses of the NSW Parliament.

One of the suggestions this week has been that the government is “effectively” investing cheap borrowed funds in the NGF in the hope of getting a higher return because we are borrowing more while at the same time growing the NGF.

But even the argument of “effective” investment of borrowed funds doesn’t hold. By that logic, anyone who borrows money to buy a house while topping up their super is also “effectively” borrowing to invest in the stock market.

The argument fails to recognise what the fund is for. Just like super, the NGF is supposed to be a quarantined pool of funds set aside for the future. And despite the present challenging circumstances, our aspiration is to refrain for as long as possible from tapping into our children’s inheritance.

Our view last year was that if we can manage the pandemic-induced fiscal and economic pressures without abandoning our NGF strategy, then that is what we should do.

That has meant increasing government debt, and that’s no different to governments around the country and around the world. Yet as a percentage of gross state product, NSW’s debt position is among the lowest of all states.

Contrary to reports, the November 2020 commitment we made remains intact, namely that proceeds from any potential sale of the government’s remaining stake in WestConnex “will be invested into the NSW Generations Fund and allow us to continue to build world-class infrastructure”.

But in light of the mounting challenges faced by the NSW economy and budget, we’ll continue to review our NGF strategy – including with respect to the investment strategy, optimal fund size and debt clearance – to make sure it is working to the benefit of current and future generations.

That is the business of government.

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