On Q+A this morning Guyon Espiner interviewed Bill English. Guyon had received papers from a treasury official that apparently show the cost of cancelling the government’s contributions to the Cullen Fund for 10 years will be $8 billion over and above the cost of borrowing to fund the contributions. $3.5 billion from lower value of the Fund and $4.5 billion from lower tax take. The Cullen Fund is one of the largest tax-payers.
Which makes a lot of sense. The long-run cost of borrowing government is 6% a year according to Treasury. That’s lower than the long-run return on the Cullen Fund of 6.57%, after tax (and on top of that there’s the tax that flows to the government). Even if the exact numbers are different in the end, the long-run return for a managed fund like the Cullen Fund is going to be higher than the interest rate on essentially risk-free debt issued by a government.
Put on the spot English couldn’t just say ‘Treasury’s wrong’ so his response was ‘well, the Cullen Fund lost money last year and was making 14% a year when it started’. Yeah, as Guyon pointed out, that’s why it’s called a long-run average. Some years are good, some are awful. The long-run is going to be better than the cost of government borrowing.
So, English had to try another angle. ‘If you have a mortgage and hire purchase and credit card debt , and you go to your bank manager and say ‘I want a hundred grand to play on the stockmarket’, see what kind of answer you get’.
Firstly, the government is not heavily indebted like English describes it. Our debt is actually very low by international standards (Ireland’s is over 45% of GDP, UK and US even higher, many OECD countries have more than 100% of GDP debt).
Secondly, the argument is basically that you shouldn’t have savings on borrowed money (as English said in his speech on Friday). Well, that’s plainly dumb. Anyone who has a mortgage and savings effectively has savings funded by borrowing. What’s more, if you extend English’s argument we should liquidate the Cullen Fund altogether, along with the ACC Fund, the EQC Fund, and any other financial assets we have to pay down our debt. Sometimes having an asset while also having debt makes sense. Especially when, like the government with the Cullen Fund, your expected return is greater than your cost of borrowing.
English is going to need to come up with a better excuse for starving the Cullen Fund to death and quick. Because right now it looks like he’s ripping off our country to the tune of $8 billion because of an ideological opposition to ensuring the future of superannuation.