What is a fund?

There is no singular definition for a “fund”; governments regularly refer to a lot of very different things as “funds”. What they have in common is allowing governments to announce big numbers (“we will create an $20 billion fund!”) without spending that amount of money.

I’ll explain why by looking at two categories of funds that governments create: investment funds and investment vehicles. There are overlaps between these categories and all sorts of financial shenanigans, but I’ll keep it simple (ish).

Investment funds

An investment fund is a government investment account, usually involving investments in something like the stock market. Let’s think of it as a bank account that earns interest. Creating an investment fund generally doesn’t have much effect on the budget balance (deficit or surplus): if I take out a $1,000 loan and put it in a bank account, my financial position hasn’t changed (I have $1,000, I owe $1,000, netting out to $0).

Sometimes, governments design funds so that the interest (investment returns) they earn goes to something specific. An example of this type of fund is the Albanese Government’s $10 billion Housing Australia Future Fund. Despite constant mentions in the media, this did not directly spend $10 billion on housing; the government basically created a bank account, labelled it “housing”, and then (after negotiations) committed to spend about $0.5 billion each year, a small fraction of $10 billion initially deposited in the account.

There are lots of problems with this approach to public spending. Firstly, if spending on something like housing or infrastructure is important now, spending now is better than waiting for a future investment return. If we want more houses, then the quicker we start building them, the quicker we will have them. Similarly, if a new infrastructure project (such as a road or railway) will bring huge economic and social benefits, then waiting means we stay in a holding pattern instead of helping communities and benefiting the economy.

Secondly, these funds are sometimes defended as “ongoing”, “secure”, and “long-term” investments; this is nonsense. Funds can and have been wound up or amalgamated when the other party wins government. If a government wants something built, the most secure way of ensuring this is by actually building it.

Thirdly, funds are confusing and potentially misleading to voters. Governments keep touting the size of these funds (“$20 billion!”) because they sound big. Sometimes, they will even re-announce the funds by combining them with other programs calling it a package (“our $25 billion package!”). Meanwhile, oppositions keep saying they will “cut” these funds (“$20 billion wasted!”). All of this makes it seem like things are happening while not a lot of actual money is being spent on issues that seriously need it.

Investment vehicles

These sorts of funds are essentially another account that is then used to facilitate investments, for instance, through grants (direct money) and loans. Again, imagine this as a bank account that is now available to provide these forms of assistance. I could have a bank account of $10,000, then loan $2,000 to Henry, give $1,000 to Alice, with $7,000 remaining in the account.

Importantly, the size of the fund (which is constantly mentioned in announcements) is not the same thing as the actual size of its current investments or its cost to the budget. A fund might be barely used, or it might only loan money at close to market rates (the fund expects to get nearly all its money back, meaning the government takes almost no loss).

While some funds are quite active, others are not. The Albanese Government described the $ 15 billion National Reconstruction Fund as driving a recovery similar to the post-war manufacturing boom but barely made any investments in its first couple of years. As with investment funds, these funds can also be wound up relatively easily by unsympathetic future governments.

Another concern with these sorts of funds is when politicians have unrestrained control over their dispensations, meaning money can be directed predominantly to marginal seats or electorates that support the government, as was alleged in the sports rorts saga.

See past the spin

Investment funds and investment vehicles are just two kinds of funds that governments use, there are all sorts of further complications and technicalities. This is probably intentional; by keeping things complicated, politicians hope you will keep your eye on the big number without noticing that nothing big is actually happening. None of this means that funds are always ‘dodgy’; there are legitimate reasons why governments use all sorts of financial instruments, but when you see someone announce ‘billions’ and spot the word ‘fund’, then keep a pinch of salt handy.