14 March 2019


When parliamentarians, journalists, and other interested members of the community look to the budget for a longer term indicator of the sustainability of the government’s financial position, they often look to net debt. Indeed, this is a figure that successive Commonwealth governments have referred to when discussing the fiscal position.  This paper examines the impact of growth in government investment funds on net debt. 

The gap between gross debt and net debt has widened considerably over the past decade, largely due to growth of government investment funds, especially the Future Fund. 

This widening gap illustrates how government investment funds have strengthened the balance sheet. Almost all of the increase in the gap between gross and net debt is explained by increases in assets classified as ‘investments, loans and placements’. These are primarily Future Fund investments made through investment structures called ‘collective investment vehicles’.

Estimates of net debt are increasingly sensitive to both the investment strategies and the particular investment structures adopted by these funds.

As the value of investment fund assets increases, changes in the share of assets held in debt securities rather than listed equities have more significant impacts on net debt. Furthermore, increasing use of investment structures such as collective investment vehicles affect estimates of net debt. This is because investments made through such structures are treated as debt-like assets in the calculation of net debt. This is despite a significant share of the underlying assets in collective investment vehicles appearing to be equity-like in nature. If these equity-like assets were held directly by the investment funds, measures of net debt would be higher.

Conceptually, an alternative approach would be to focus on the underlying assets held in investment funds when defining net debt.

This approach would ‘look through’ investment structures to the underlying assets and would mean measures of net debt would not be affected by whether assets are held directly or through particular investment structures. Calculated in this way, net debt could be up to around $70 billion (just under 4 per cent of GDP) higher in 2017–18. 

This is a matter of budget reporting and transparency; not accounting treatment.

The accounting treatment of these assets in the Commonwealth Financial Statements has been reviewed by the Auditor-General and is not in question here. The focus in this report is conceptual—whether the long-standing frameworks that define net debt would benefit from review in light of the growing use of investment funds. Either way, additional transparency around the treatment of these investment fund assets would aid public understanding given their size and growing impact. Currently over 50 per cent of the assets that offset the liabilities in the net debt calculation are classified as ‘Other’ in the budget papers. 

Net financial worth, which is also published in the budget, is a broader measure of fiscal sustainability that includes all financial assets and liabilities.

Over the period ahead, broader measures of the fiscal position, such as measures of net financial worth, will arguably provide a more comprehensive and consistent indicator of the Commonwealth balance sheet position because they include a wider range of assets and liabilities. 

Download the full report above.