In my first post on Labor’s $10 billion housing fund, I pointed out that the $10 billion number is misleading. The key idea is to borrow $10 billion at the low rate of interest payable on government debt, invest it in higher-yielding assets and use the profits (maybe $400 million a year, based on historical average returns) to finance social housing. The same model has been used by the LNP government to set up funds for a variety of purposes. There’s a total of $50 billion across five funds, the biggest of which is the Medical Research Future Fund of $22 billion, twice the size of Labor’s housing fund.
All of these off-budget funds are managed by the Future Fund, which was established to offset the government’s unfunded superannation liabilities, and is currently just below the target level ($200 billion in the fund vs target of $215 billion). The Future Fund can be seen as matching off-budget assets and liabilities
I’ll look at the general idea of sovereign wealth funds in a later post. A separate question is whether it makes sense to allocate the proceeds of a particular source of revenue (the fund) to a particular policy objective (social housing). In the jargon, this is called hypothecation.
Economists generally dislike hypothecation, but it’s often a harmless way of making the link between revenue and expenditure clear. For example, some road projects in Queensland are funded by the revenue from speed and red light cameras. That encourages law-abiding motorists to think positively about the idea, and weakens the position of dangerous drivers complaining about ‘revenue raising’.
But the housing fund has no such merit. To the extent that the hypothecation is genuine, it means that the money available for social housing depends on the performance of the share market. And this dependence is the wrong way around. The case for public spending on social housing is strongest, both in terms of need and the availability of resources, when the economy and the share market are doing badly.
The Housing Fund is, quite simply, a poor substitute for direct public expenditure.