Drawdown of government investment funds (excluding the future Fund)
The Government's investment funds (excluding the Future Fund which is addressed separately below) are reported on the Government's balance sheet as financial assets consisting of cash and investments.
These funds do not directly impact on the fiscal or underlying cash balance until a decision is made to make non-financial asset investments or grants outside the General Government Sector from the specific fund. Earnings from the funds have a positive impact on both the fiscal and underlying cash balance. Payments from the funds that are not classified as equity impact on both the underlying cash and fiscal balance. This is consistent with the budgetary treatment of other payments.
A decision to create a new fund involves increasing gross debt, with a corresponding negative impact on PDI; wholly or partially offset by fund earnings, which will depend on the investment mandate.
A decision to close one or more of the funds would not directly result in a reduction in the underlying cash balance or fiscal balance for the Budget as the relevant cash and investments would still be reported as assets on the balance sheet, except where the remaining funds are used to reduce the borrowing requirement. Indirectly, the underlying cash and fiscal balances will be impacted by closing the fund to the extent that any reduction in PDI is larger or smaller than the reduction in earnings from the Funds.
Where a decision is taken to close a fund, or reprioritise expenditure from a fund, the costing would consider the viability of effectively revoking grant payments that have been publicly committed or those set out in contractual arrangements. These projects are often very difficult and/or expensive to unwind and this may affect the quantum available, if any, as a save from the closure of the relevant fund.
Example 5: Implications for the Budget of a Government investment fund (hypothetical)
The Government decides to set up a $1 billion Fund to invest in a variety of projects across the country. The Fund is treated on the balance sheet as a distinct financial asset instead of being aggregated into cash reserves or other financial assets. There is no impact on the fiscal or underlying cash balance as no payment or flow of receipts results from this decision.
Any costs associated with the management of the Fund would be recorded as an expense and any interest earnings on the funds would be recorded as revenue/receipt inflows (noting that any borrowings required to establish a fund's balance would lead to an increase in public debt interest outlays). Both would therefore impact on the fiscal and underlying cash balance.
The next year the Government decides to spend $600 million over two years on projects. These grants would be recorded as an expense/payment in the relevant years, and would impact on the fiscal and underlying cash balance. The following year the Government decides to spend $300 million over three years on additional projects. These grants would also affect the fiscal and underlying cash balance.
The Government decides to close the fund with $100 million remaining. The $100 million will continue to be reported as a financial asset (assuming it is held in cash and not used to reduce borrowing), with no direct impact on the fiscal and underlying cash balance other than adjustments across the forward estimates to reflect a reduction in PDI and a reduction in the earnings of the Fund.
|Fund established — recorded as distinct asset||0.0||0.0||0.0||0.0||N/A||0.0||1,000.0|
|Commit to $600m of projects / 2yrs||N/A||-300.0||-300.0||0.0||0.0||-600.0||400.0|
|Commit to $300m of projects / 3yrs||N/A||N/A||-100.0||-100.0||-100.0||-300.0||100.0|
|Close Fund — assets reported in total assets but not separately||N/A||N/A||N/A||0.0||0.0||0.0||100.0|
Note: Depending on the timing of payments, fiscal balance and underlying cash balance may or may not be equivalent in individual years. This example does not include the costs of setting up the fund or any interest earnings in the fiscal and underlying cash balance numbers.
The general principles applying to the investment funds (above) also apply to the Future Fund. The total balance of the Future Fund is reported on the Government's balance sheet as financial assets consisting of cash and investments.
In terms of the Government's financial statements, it should be noted that the net Future Fund earnings are excluded from the underlying cash balance on the basis that the earnings are reinvested to meet future superannuation payments and are therefore not available for current spending. The earnings are, however, included in the headline cash balance and fiscal balance.
The operational costs of the Future Fund are met from the Fund and treated as payments for the purposes of calculating the fiscal and underlying cash balance.21
Loans, as financial assets, do not have a direct impact on the underlying cash balance. However, there will be an impact on the underlying cash balance and fiscal balance as a result of net interest costs.
Interest repayments on loans have a positive impact on the underlying cash balance and fiscal balance, which will either be partially, wholly or more than (depending on the relative interest rates of the loan and Commonwealth financing costs) offset by the PDI costs associated with raising debt to fund the proposal.
The repayment of loan principal will have no direct net impact on the underlying cash balance as it is replacing one financial asset (a loan) with another (cash).
If loans are made by the Government on terms equivalent to those that the borrower could obtain in the marketplace then these loans would be treated as commercial loans.
Such loans will typically have an overall positive impact on the underlying cash balance and fiscal balance as the PDI costs would be less than the interest repayments. Both the borrowing, or reduction in financial assets, and loan are included in the calculation of net debt so the measure of net debt is not affected.
As the loan is a financial asset transaction, the direct effect on the level of PDI will be costed with the proposal. The second round effects of such loans on public debt interest rates as a result of increasing risk on the Commonwealth's balance sheet would not normally be costed.
If loans are made by the Government at more favourable terms than the borrower could obtain in the marketplace, then these loans would be treated as concessional loans. The concession provided may be in the form of lower market interest rates, longer loan maturity or grace periods before the payment of the principal and/or interest.
The concessional component of these loans (that is, the opportunity cost of the value forgone in
providing the loan at a discounted rate) will have an upfront negative impact on fiscal balance and net debt. These impacts are unwound over the life of the loan.
Whether or not such loans have an overall positive impact on the underlying cash balance, fiscal balance and net debt will depend on the extent of the concession. In some cases, the PDI costs (or reduction in interest earnings) associated with the financing of these proposals will exceed the total amount of the interest repayments.
The non-concessional component of the loan will be treated as a financial asset on the Government's balance sheet. Both the borrowing, or reduction in financial assets, and loan are included in the calculation of net debt and net debt will be increased by the concessional component of the loan. As with commercial loans, the effect the concessional loan has on the level of PDI would be included in the costing.
Investments in entities outside the general government sector
The Government may also make investments in entities outside the general government sector. Government owned commercial corporations that produce goods and services are referred to as a Public Non-Financial corporations while corporations mainly engaged in financial intermediation and provision of auxiliary financial services are referred to as Public Financial corporations.
An entity is a corporation if it meets all of the following criteria:
- It operates under the Government's control. Control is defined by the ability to determine general corporate policy by appointing appropriate directors. This is generally determined by holding more than 50 per cent of the shares of the entity. However, the Commonwealth may also obtain control of an entity with less than a 50 per cent holding by way of legislative or regulatory powers;
- It produces goods and services or provides financial services for sale in the market; and
- It provides such goods and services on a commercial basis, and is funded largely by the sale of these goods and services.
Investments into these corporations can take the form of an equity injection or a loan.
An investment would be regarded as an equity injection if the Government exercises control over the investment, such as being able to sell its investment without unreasonable impediments and there is reasonable expectation of recovery of the investment. Therefore, the entity must be able to generate a revenue stream that at least covers its costs and generates a positive rate of return.
An equity injection from the Government to a corporation would have no direct impact on the underlying cash and fiscal balances. There would be an ongoing indirect impact on the underlying cash and fiscal balances reflecting the difference between dividends received from the corporation and the interest paid by the Government on borrowings to finance the equity injection (or forgone interest if financed from an asset). The equity injection would be treated as a financial asset on the Government's balance sheet. As equity is not a net debt asset, net debt will increase reflecting borrowings or lower cash reserves.
A loan would be treated in the way as discussed above. A payment to a corporation would only classify funding as a loan where there is a reasonably expectation that the funds would be repaid and the corporation can service the loan, otherwise it will be classified as a grant. A grant from the Government to the corporation would reduce fiscal balance and the underlying cash balance directly when paid.
21 The Government has decided to include net future fund earnings in the calculation of the underlying cash balance from 2021.