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House of Assembly - Fifty-First Parliament, Second Session (51-2)
2008-04-01 Daily Xml
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STATE BUDGET

Mr KENYON (Newland) (16:12): My question is to the Treasurer. Can the Treasurer advise the house of the effects of the recent share market performance on the state budget?

The Hon. K.O. FOLEY (Port Adelaide—Deputy Premier, Treasurer, Minister for Industry and Trade, Minister for Federal/State Relations) (16:12): Members would be aware that the local and international share markets have, to say the least, suffered significant financial losses for the year. Many very wise people say that this is one of the most significant financial crises we have seen for many decades and, in fact, the performance of the Australian stock market, particularly the superannuation funds, was last night reported to be one of the worst periods for some 20 years.

At the end of February, the commonly-used Australian sharemarket indicator, the ASX 200 was down some 11.2 per cent. This downturn has been attributed to negative investor sentiment following the subprime mortgage crisis in the United States and associated market conditions. What we are seeing is the rollout of this subprime problem right through financial markets.

What concerns me is that I met with a number of financial advisers, stockbroking firms, various merchant banks and investment banks when I was in New York after Christmas and what surprised me then was that many of these people advised me that they felt that the market was reasonably contained within the housing/lending sector of the economy and it is now proven how wrong they were at that time. Clearly, many people in Wall Street have underestimated the impact of the subprime and the rollout and contagion effect.

Australian superannuation funds, which hold the vast majority of their investment in shares, equities and bonds, have not been immune to the share market downturn. This extends to superannuation funds held by the state government and, more broadly, to funds held by government authorities through Funds SA. In comparison with the local sharemarket performance at minus 11.2 per cent, as measured by the ASX 200, Funds SA has returned minus 7.9 per cent on its growth product over the same period.

We will make a decision about the full-year effect of that in the lead-up to the budget. It is a little less than that because we had some strong periods prior to those bad months that we have had pretty well since the end of last year. As we know, superannuation and equity investments are long-term investments, and we need to look at investments of this order over a 30-year period. In particular, we should look at the funds that we have invested over about an eight year period.

Funds SA is chaired by Helen Nugent, a board member of Macquarie Bank, chairperson of Swiss Re (from memory) and a member of the Origin Energy board. She is one of the nation's top corporate directors, an outstanding director, with enormous skill and experience in financial markets. As our chair, Helen has provided steady advice to government. When I first came into office in the 2001-02 financial year we saw a negative return, and her advice to government then was to hold firm, and that is her advice at this point.

As to its gross product, we need to put Funds SA's negative performance now into the context of its recent performances, as follows: in 2003-04, plus 17.3 per cent in its gross product; plus 15 per cent in 2004-05; plus 19.2 per cent in 2005-06; plus 19.5 per cent in 2006-07. They are quite extraordinary results. I guess, as they say, what goes up must come down, but between 15 per cent and 20 per cent per year compound for the past four years, I think, is an outstanding result for Funds SA.

The average earnings over the past five years is 14.2 per cent—0.6 per cent above the industry benchmark. Since the inception of the Growth Fund in 1995, it has averaged some 9.75 per cent per annum—0.41 per cent above the industry benchmark. It is a well-managed fund. However, it should be noted that the effects of the sharp downturn in the sharemarket will have a significant monetary effect on this year's state budget and future state budgets through the impact on the state's unfunded superannuation liability.

As we know, for many decades previous governments have done nothing to fund the unfunded liability component of our defined benefit and pension funds. The then Liberal government, in the 1990s when it was in office, in a correct decision decided under then treasurer Stephen Baker that we would fully fund this scheme over a 40-year period. I think we are in about year 12 of that funding process (I could be wrong on the exact year), but we put in a lump of money each year to ensure that over 40 years we have that fund fully funded.

We work on a long-term benchmark; from memory, it is 7 per cent or 7.5 per cent. I should have the correct figure, but I do not. We expect the fund to be earning either 7 per cent or 7.5 per cent on average over the life of the fund. So, if we perform better than what we allow, that budget benefit goes and that means we have to put in less money for that particular year. Obviously, when it nosedives, as it has now, we have to put in more. We have also had recent valuation of the unfunded liability because of the ageing of the workforce and the fact that people are living longer. Those two measures combined have meant that we have a significant budget shortfall this year.

The 2007-08 budget provided some $282 million to the unfunded liability. This year in excess of $100 million in increased money will be required from the budget to make up for the shortfall. So, the collapse in equity markets is having a budget impact together with a revaluation of our liability, because people are living longer and the shortfall is in excess of $100 million, possibly closer to $120 million. It is yet to be determined what that final figure shall be, but clearly South Australia's budgetary position, as is the case for all state governments that are still in a position of funding their unfunded liabilities, is faced with this and what it must signal, and I say with all sincerity to my side of the house and those opposite that this budget year will be a very tough budget; a very tight year. You cannot be required to put in an extra $100 million to $120 million to superannuation because of the—

Mr Williams: You are wrecking the state's finances.

The Hon. K.O. FOLEY: Sorry?

Members interjecting:

The SPEAKER: Order!

The Hon. K.O. FOLEY: Sir, I wish I had the ability to stop the stock market dropping to the extent that it has. You might be better at picking stocks—perhaps the leader is. I leave it to others.

Mr Williams interjecting:

The SPEAKER: Order!

The Hon. K.O. FOLEY: As I said to the member, sir—

Members interjecting:

The SPEAKER: Order!

The Hon. K.O. FOLEY: —he's wrong. Have you had that Treasury briefing yet?

Mr Williams: No.

The Hon. K.O. FOLEY: Well, get in there and get briefed; stop making a goose of yourself in this place. I keep offering to brief the member opposite so that he stops making inaccurate, misleading statements in this house, but he just will not get briefed. Get into Treasury and get briefed.

Mr Williams: They won't brief me.

The Hon. K.O. FOLEY: Of course they will.

Mr Williams: They told me that last time.

The Hon. K.O. FOLEY: No, they will brief you when ever you want. Sir, the important point is that this will be a very difficult budget year. Our state is not immune from the financial crisis that we are seeing globally. For that reason, it is imperative that this government delivers a very strong budget in terms of budget surpluses, that we deliver a very tight budget, that we are controlled in our spending, and that, if necessary, we position ourselves for the unknown. We have been very fortunate in previous years—

Mr Williams interjecting:

The SPEAKER: Order!

The Hon. K.O. FOLEY: We have been very fortunate in previous years, but what did alarm me about the statistics in advice that I received on Monday was that we are seeing the effect of interest rates starting to bite. Auction clearance rates in Adelaide fell from 73 per cent this time last year to 44 per cent the same time this year—this last weekend. I think that, prior to Easter, clearance rates in South Australia, in Adelaide in particular, were very strong, but there has been a sharp decline. We will start to monitor those, but my advice from Treasury is that revenue from property transactions is still tracking as we expect it to, but we do not know what will happen with the interest-rate hikes that have occurred.

We do not know what will happen with the financial contagion effect of the subprime crisis, and it is clearly making it very difficult for banks to interloan to each other; it is making it very difficult for businesses to borrow; and it is making it very difficult for private sector financial players to access money. This is at a time when we have a very dynamic private sector. There is a real liquidity squeeze on. I just want to make a point to the house that it is not about trying to put my chin out for cheap political shots opposite: it is an unknown period of financial management that we are going to have to go into. I urge all members to be aware of that.

The government will have to make sure that it brings down a tight budget that is right for the times. This is not a time for us to be expanding expenditure beyond what we can reasonably expect to be able to service.

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