The Future Fund is Australia’s rainy day fund. It has now become a political football

The federal government’s decision to direct the Future Fund to invest more in housing and green energy was always going to ruffle feathers.

Specifically, Liberal feathers. The fund is a legacy of former treasurer Peter Costello, who is fiercely protective of his brainchild, even more so after a decade as its chair.

Treasurer Jim Chalmers insists it is a refresh, not a redesign. He spent a large part of Thursday’s press conference downplaying the significance of the change.

“I pay tribute to treasurer Costello for setting up the Future Fund. I see it as one of the big, national, economic advantages that we have … I want to make it really clear that we are not changing [its] fundamental focus.”

But he has broken a bipartisan practice that had lasted 18 years: resisting the temptation to ask the fund to do anything other than chase financial returns.

It opens up a debate about what Australia does, and should do, with the hundreds of billions of dollars it has squirrelled away.

What exactly is the Future Fund?

It’s Australia’s rainy day fund.

Costello set it up in 2006 at a time when the budget was in surplus and had little debt.

A few years earlier, Treasury had published the first Intergenerational Report, telling a story about future pressures on the budget from an aging population, which would see a smaller pool of workers funding greater care needs.

The government put $60.5 billion into a fund, the Future Fund, in part to ensure it could meet financial obligations like the payment of public service pensions, but also broadly so that it would have money saved to help future taxpayers with the aging challenge.

But that dangles two questions: when is the right time for the government to take money out of the fund, and what should be done with it while it is there?

On the second question, the answer has essentially been: invest it to make a return. It’s not quite as simple as that. The fund operates much like a private investor, but must not take on undue risk, bring the government into disrepute, or own so much of a company that it triggers takeover laws.

But apart from that, it is free to invest as it sees fit, to meet its target of a return 4-5 percentage points above inflation each year (originally 4.5 to 5.5 but lowered in 2017).

The fund has well exceeded that target and is now worth $230 billion. It invests in banks, mining companies, airlines, supermarkets, pharmaceutical companies, fossil fuel companies, global tech giants, and pokies manufacturer Aristocrat.

Satellite funds worth a collective $60 billion have also been established, with dividends invested in policies such as social housing and medical research.

But the fund itself has never been drawn down on — and still won’t be with the new announcement, which commits not to draw down until 2032-33 at least.

There have long been calls to change this, and to use the weight of the government investor and its enormous wealth to achieve policy outcomes.

Against that, Costello and others have argued that any dilution of the fund’s purpose opens the gate to undermine its usefulness, jeopardising returns and leaving it open for governments of all stripes to pursue “pet projects”.

What is actually changing?

The government’s new directions to the fund are to invest more in residential housing, the net zero transition, and infrastructure that can boost Australia’s economic resilience or security.

Those instructions will be subordinate to its aim to deliver a return, with an unchanged benchmark of 4-5 per cent above inflation each year.

And the government and its hand-picked Future Fund chair, ex-Labor minister Greg Combet, have been quick to point out that the fund already invests in things that fit that description.

That is part of why Labor argues it won’t change much. It imagines the fund will enact the direction by choosing a housing or climate-related investment over another investment with the same expected returns.

For its part, the Coalition argues that is a slippery slope and has promised to reverse the direction in government.

That would be easy to do, since the directions are simply made by the treasurer and the finance minister of the day without requiring legislation.

That’s because those two ministers are the fund’s only shareholders, acting on behalf of the Australian people and reflecting the fact that the fund’s money is ultimately taxpayer money.

The use of that taxpayer money is now a matter of political debate, and will ultimately be weighed by taxpayers themselves at the next election.