NSW to use $28bn Debt Retirement Fund to help reduce COVID-induced debt issuance

Christopher Joye

Coolabah Capital

There are several recent developments in this important story, which I originally covered here. On Friday I wrote in the AFR that the NSW Treasurer, Dominic Perrottet, appeared set to deliver on his promises to recycle the circa $28 billion in rainy-day funds he has set-aside to ensure future generations are not saddled with unnecessary debt. 

Recall Perrottet created the NSW Generations Fund, and its subsidiary Debt Retirement Fund, back in 2018 to act as a huge future fiscal shock-absorber in the event that a serious crisis hit, and NSW’s debt and deficits exploded.

At that time, the NSW budget was running a circa $4 billion surplus and net debt was negative. Following the 1-in-100 year pandemic, the budget has registered record deficits and public debt has erupted from $35 billion in 2018 to around $120 billion this year.

Perrottet set-aside some surpluses plus the proceeds of the sale of the first half of WestConnex in the Debt Retirement Fund. More than $13 billion of cash is expected from the sale of the second-half next month.

While there has been criticism that this plan was going to be hijacked by bankers and fund managers hoping to turn NSW’s balance-sheet into a huge leveraged hedge fund, NSW Treasury Secretary Mike Pratt repeatedly signalled in parliamentary estimates last Friday that he will recommend using the Debt Retirement Fund’s $28 billion to help reduce NSW’s deficits, slash taxpayers’ debt, and pay for infrastructure.

John Kehoe reported in the AFR on Monday that:

NSW Treasury Secretary Michael Pratt revealed on Friday that the “unique” unforeseen budget pressures caused by COVID-19 meant he would submit options to the Treasurer about adjusting the NSW Generations (Debt Retirement) Fund strategy, including using it for “debt clearance”.
Proceeds from the coming sale of 49 per cent of the WestConnex toll road – estimated at $13 billion – would be immediately paid into the fund as required by legislation, but some revenue could then be diverted to reduce the state’s rising debt.
“The government has choices,” Mr Pratt said, in response to questions from Labor shadow treasurer Daniel Mookhey at a parliamentary committee meeting.
“It will be time to reflect on what is the optimal size of the fund, should government actually retire some debt earlier or not. These are things I’ll be looking at,” Mr Pratt said.
NSW Treasury secretary Michael Pratt is preparing advice for the Treasurer.
“I would say the Treasurer obviously has ongoing options about those issues and also about whether future money could be used directly for debt clearance which is the purpose of the fund.”

Perrottet is expected to deliver on his commitment to recycle the $20 billion plus in total WestConnex sale proceeds to help fund the $108.5 billion in infrastructure spending that he has signed-up for over the next few years.

While this would draw-down on the Debt Retirement Fund to cauterise a once-in-a-century calamity, NSW's rainy-day buffer will be appropriately topped back-up by future budget surpluses and asset sales to aid the next one.

Perrottet could consider several specific solutions. 

First, the NSW budget has over $7 billion in commitments to investment funds this year, plus north of $12 billion over the next few years. These can be deferred until the budget is in a cash surplus. This follows Peter Costello’s principle of only diverting cash to sovereign wealth funds when you are producing surpluses.

Second, NSW was funnelling substantial income to the Debt Retirement Fund, which could be channelled back to the budget, which is where it belongs at a time like this. Finally, NSW can have the Debt Retirement Fund buy NSW-issued debt, which is permitted under its legislation. NSW can then use this money to pay for infrastructure, COVID stimulus, and to compress the large deficits that would otherwise accrue.

In this way, taxpayers in the past help taxpayers in the present, who will support taxpayers in the future when the Debt Retirement Fund is replenished.

Foreshadowing these moves, NSW's debt management agency, TCorp, highlighted in remarks to the AFR last week that in prior years NSW has actually materially downgraded its prior debt issuance forecasts.  

Access Coolabah's intellectual edge

With the biggest team in investment-grade Australian fixed-income and over $7 billion in FUM, Coolabah Capital Investments publishes unique insights and research on markets and macroeconomics from around the world overlaid leveraging its 14 analysts and 5 portfolio managers. Click the ‘CONTACT’ button below to get in touch.

........
Investment Disclaimer Past performance does not assure future returns. All investments carry risks, including that the value of investments may vary, future returns may differ from past returns, and that your capital is not guaranteed. This information has been prepared by Coolabah Capital Investments Pty Ltd (ACN 153 327 872). It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The Product Disclosure Statement (PDS) for the funds should be considered before deciding whether to acquire or hold units in it. A PDS for these products can be obtained by visiting www.coolabahcapital.com. Neither Coolabah Capital Investments Pty Ltd, EQT Responsible Entity Services Ltd (ACN 101 103 011), Equity Trustees Ltd (ACN 004 031 298) nor their respective shareholders, directors and associated businesses assume any liability to investors in connection with any investment in the funds, or guarantees the performance of any obligations to investors, the performance of the funds or any particular rate of return. The repayment of capital is not guaranteed. Investments in the funds are not deposits or liabilities of any of the above-mentioned parties, nor of any Authorised Deposit-taking Institution. The funds are subject to investment risks, which could include delays in repayment and/or loss of income and capital invested. Past performance is not an indicator of nor assures any future returns or risks. Coolabah Capital Institutional Investments Pty Ltd holds Australian Financial Services Licence No. 482238 and is an authorised representative #001277030 of EQT Responsible Entity Services Ltd that holds Australian Financial Services Licence No. 223271. Equity Trustees Ltd that holds Australian Financial Services Licence No. 240975. Forward-Looking Disclaimer This presentation contains some forward-looking information. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking statements. Although forward-looking statements contained in this presentation are based upon what Coolabah Capital Investments Pty Ltd believes are reasonable assumptions, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Coolabah Capital Investments Pty Ltd undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to place undue reliance on forward-looking statements.

Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 26 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.