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Australian Government Balance Sheet Management

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Author Info
Wilson Au-Yeung
Jason McDonald
Amanda Sayegh
Abstract

Since almost eliminating net debt, the Australian Government%u2019s attention has turned to the financing of broader balance sheet liabilities, such as public sector superannuation. Australia will be developing a significant financial asset portfolio in the %u2018Future Fund%u2019 to smooth the financing of expenses through time. This raises the significant policy question of how best to manage the government balance sheet to reduce risk. This paper provides a framework for optimal balance sheet management. The major conclusions are that: %u2013 fiscal sustainability depends on both the expected path of future taxation and the risks around that path; %u2013 optimal balance sheet management requires knowledge of how risks affect the balance sheet (and therefore volatility in tax rates); and %u2013 the government%u2019s financial investment strategy should reduce the risk to government finances from macroeconomic shocks that permanently affect the budget. Based on this framework, we find that a Future Fund portfolio that included (amongst other potential investments) domestic nominal securities and equities of selected countries would reduce overall balance sheet risk.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12302.

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Date of creation: Jun 2006
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Handle: RePEc:nbr:nberwo:12302

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H5 - Public Economics - - National Government Expenditures and Related Policies
H6 - Public Economics - - National Budget, Deficit, and Debt

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  1. Dungey, Mardi & Pagan, Adrian, 2000. "A Structural VAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 76(235), pages 321-42, December.
  2. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October. [Downloadable!] (restricted)
  3. Alan J. Auerbach, 2004. "How Much Equity Does the Government Hold?," NBER Working Papers 10291, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December. [Downloadable!] (restricted)
  5. Missale, Alessandro, 1997. " Managing the Public Debt: The Optimal Taxation Approach," Journal of Economic Surveys, Blackwell Publishing, vol. 11(3), pages 235-65, September. [Downloadable!] (restricted)
  6. Nick Davis, 2001. "Does Crown Financial Portfolio Composition Matter?," Treasury Working Paper Series 01/34, New Zealand Treasury. [Downloadable!]
  7. Robert J. Barro, 1995. "Optimal Debt Management," NBER Working Papers 5327, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Arrow, Kenneth J & Lind, Robert C, 1970. "Uncertainty and the Evaluation of Public Investment Decisions," American Economic Review, American Economic Association, vol. 60(3), pages 364-78, June.
  9. G. Andrew Karolyi & Rene M. Stulz, 2002. "Are Financial Assets Priced Locally or Globally?," NBER Working Papers 8994, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Eduardo Borensztein & Paolo Mauro, 2002. "Reviving the Case for GDP-Indexed Bonds," IMF Policy Discussion Papers 02/10, International Monetary Fund.
  11. Arthur Grimes, 2001. "Crown Financial Asset Management: Objectives and Practice," Treasury Working Paper Series 01/12, New Zealand Treasury. [Downloadable!]
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