Costello talks future targets

Future Fund chair Peter Costello has warned about going too far in attacking the banks. (Stuart McEvoy for The Australian)

Future Fund chair Peter Costello today warned the Federal Government about stepping in too far to attack the banks, noting that “banks are critical to our financial stability”.

Costello was talking after unveiling a 4.8 per cent return for the fund for the last year and its inaugural 10-year return of 7.7 per cent.

Last year, the fund dipped behind targeted returns of 5.5 per cent but, over the long term, it has easily beaten its target.

The former Federal Treasurer also urged the government to make some ground on structural reform, saying “no-one ever talks about it but clearly monetary policy is exhausted and there is a need for some other policy action.

“Structural policy changes to improve supply are necessary,” he said.

Costello said governments around the world found it too hard to make changes when legislation is involved, which explains why they have left it to central banks to do all the heavy lifting but the time has come for change.

The Federal Government has micro-economic reform on the agenda but Treasurer Scott Morrison has kept it on the back burner focusing instead on getting his budget through Parliament and cutting debt levels.

Micro-economic reforms, as outlined in the Harper review, could help boost the economy.

The Future Fund has dialled down the risk curve a touch over the last year, with cash holdings increasing from 19.7 per cent to 21.7 per cent of the fund and Australian equities falling from 6.8 per cent to 6 per cent.

The fund faces a deadline in four years with the Federal Government able to grab its money from 2020.

The government is limited to taking liabilities for the year which presently cost the government $8bn. Over the last year the fund earned $6bn.

Fund managing director David Neal said the fund had increased its holdings of debt securities from 9.8 per cent to 11.6 per cent, investing in funds which lend directly to small- and medium-sized companies who can’t access the banks.

Costello said “risk is not providing enough of a return now.”

Over its history, the fund has turned an initial $60.5bn investment into $123bn, earning $62.3bn in returns.

Costello made clear today that the fund is not a superannuation fund “it is a sovereign wealth fund” and he is trying to maximise its longevity by limiting the amount government can take from it.

Given the low-return environment, he also wants the legislation changed to lower the present target of 4.5 per cent plus inflation.

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