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Australian Government Balance Sheet Management

  • Wilson Au-Yeung
  • Jason McDonald
  • Amanda Sayegh
Registered author(s):

    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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    File URL: http://www.nber.org/papers/w12302.pdf
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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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    Publication status: published as Ito, Takatoshi and Andrew K. Rose (eds.) Fiscal Policy and Management in East Asia, NBER-East Asia Seminar on Economics series, vol 16. Chicago and London: University of Chicago Press, 2007.
    Handle: RePEc:nbr:nberwo:12302
    Note: PE
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    1. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
    2. Alan J. Auerbach, 2004. "How Much Equity Does the Government Hold?," NBER Working Papers 10291, National Bureau of Economic Research, Inc.
    3. Arthur Grimes, 2001. "Crown Financial Asset Management: Objectives and Practice," Treasury Working Paper Series 01/12, New Zealand Treasury.
    4. Hana Polackova, 1998. "Contingent Liabilities : A Threat to Fiscal Stability," World Bank Other Operational Studies 11522, The World Bank.
    5. Theodore M. Barnhill & George Kopits, 2003. "Assessing Fiscal Sustainability Under Uncertainity," IMF Working Papers 03/79, International Monetary Fund.
    6. 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.
    7. G. Andrew Karolyi & Rene M. Stulz, 2002. "Are Financial Assets Priced Locally or Globally?," NBER Working Papers 8994, National Bureau of Economic Research, Inc.
    8. Kerryn Fowlie & Julian Wright, 1997. "Optimal currency denomination of public debt in new zealand," New Zealand Economic Papers, Taylor & Francis Journals, vol. 31(2), pages 137-151.
    9. Nick Davis, 2001. "Does Crown Financial Portfolio Composition Matter?," Treasury Working Paper Series 01/34, New Zealand Treasury.
    10. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
    11. Robert J. Barro, 1995. "Optimal Debt Management," NBER Working Papers 5327, National Bureau of Economic Research, Inc.
    12. Eduardo Borensztein & Paolo Mauro, 2002. "Reviving the Case for GDP-Indexed Bonds," IMF Policy Discussion Papers 02/10, International Monetary Fund.
    13. 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.
    14. Missale, Alessandro, 1997. " Managing the Public Debt: The Optimal Taxation Approach," Journal of Economic Surveys, Wiley Blackwell, vol. 11(3), pages 235-65, September.
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