Risks of magic pudding thinking

Faced with stubborn inflation, high interest rates and social unrest over immigration, housing and electricity bills, the Albanese government is seeking diversions in magic pudding economics and politics. There is the too-good-to-be-true suggestion that renewable energy alone will provide cheap and reliable power. We are being told a government-funded jobs bonanza is the same thing as a healthy and growing productive economy. Add to this Jim Chalmers’ new strictures on the $230bn Future Fund that inevitably pull the investment powerhouse closer under government supervision.

There is a contradictory mishmash in the Treasurer’s ambitions. The new national priorities under the updated Future Fund mandate will be to increase the supply of residential housing, support the energy transition for the net-zero transformation, and deliver infrastructure projects that will improve domestic supply chains. At the same time, the Future Fund must continue to deliver an average annual return rate of between 4 and 5 per cent above inflation without taking on additional risk. The primary focus of the fund will remain on maximising its returns, Dr Chalmers says. But left unclear is what happens when the new impositions of social activism clash with the fiduciary obligations of directors to maximise investment profits. Peter Costello says it is being turned into a political slush fund, and similar demands may soon be made of superannuation funds more broadly. The age of Australian exceptionalism, Mr Costello says, is coming to an end. Under Mr Costello’s leadership, the Future Fund had an impressive investment track record with returns averaging about 8 per cent. The simple fact is if these returns are available on the government’s pet projects there would be no need to instruct the Future Fund to prioritise them. The worst outcome would be for the government to extend its subsidy-laden regime for renewable energy to other priority areas. As Judith Sloan has noted, this would be a case of “nonsensical circularity” unless the subsidies were subtracted from the rate of return.

Dr Chalmers insists his new Future Fund mandate is not a controversial change and that fund managers will still be independent of government. But the danger in government interference became immediately apparent when the Greens called for the mandate to go further and rule out any investments in fossil fuels. This illustrates that once the door is opened, who knows where it will lead. If a ban on fossil fuel investments was to become the new stricture, it would force the Future Fund to confront the lessons that have already been learnt by the world’s big private equity funds that were eager to embrace the once fashionable divestment cause. Most have now shelved their “woke” ambitions rather than miss out on the returns available from the strong global demand that still exists for the fossil fuel products that continue to power the world. The re-election of Donald Trump is only likely to hasten the return to investment norms and the retreat of social activist investing.

Dr Chalmers has made a big deal of his ambitions to reshape capitalism to become a better partner in the social expectations of government. It is a socialist bent that most often has negative results. Capitalism free of government interference is best suited to deliver the revenues that governments demand. Good intentions alone seldom pay the bills. Magic pudding thinking and economics can only ever end in tears.