Dodgy accounting treatment of $10 billion Clean Energy Finance Corporation

As part of its deal with the Greens on the carbon tax, the Gillard Labor Government announced the Clean Energy Finance Corporation – into which $10 billion of taxpayers’ money will be ploughed.

Almost all of this money, however, is excluded from the headline budget number that the government reports each year.  The headline budget number is known in public accounting jargon as the ‘underlying cash balance.’  Wayne Swan told us on budget night, May 10 2012, that this number would be positive $1.5 billion for the 2012-2013 financial year.

When I recently asked the Treasurer a question in Parliament about the accounting treatment of the CEFC, he responded that the estimated underlying cash balance impact of the CEFC across the forward estimates was $312 million.  “Forward estimates” here means the four years beginning in 2012-13 and finishing in 2015-16.  

In effect, most of the money to be spent is not included in the headline budget number on the theory that the CEFC is going to make commercial investments .  In his answer the Treasurer claims that “to the extent that the transactions are commercial there will be a limited impact on the underlying cash balance because they are largely balance sheet transactions changing the composition of financial assets.”

Essentially the Treasurer seems to be arguing that if the Commonwealth puts in one hundred dollars, it will get an investment (say, shares) worth one hundred dollars.  So no money has been spent, it has simply been changed from one form (cash) into another form (shares in a company.)

There’s a huge problem with this theory: the likelihood of a government owned company making good investments is very low.  There is every chance the money will be wasted – and in exchange for the one hundred dollars invested taxpayers will be left with ‘assets’ worth only a fraction of what was put in.

The real explanation for this dodgy treatment, I would suggest, is that if Wayne Swan was more intellectually honest and accounted for the $10 billion as expenditure, it would make the budget position look much worse.  It certainly makes no difference to where the money comes from – this is all borrowed money because the claimed budget surplus is so slender. 

Interestingly, there is a very similar fund already in existence: the Renewable Energy Venture Capital Fund.  It “provides early-stage equity investments to encourage the development of Australian companies that are commercialising renewable energy technologies.”

But its accounting treatment is different.  The money spent is included within the underlying cash balance.  In Wayne Swan’s answer, he says the reason is that “Early-stage investments generally involve a higher degree of risk (and are, therefore, essentially treated as a grant for budget accounting purposes.)”

Despite the clouds of bureaucratic jargon in the Treasurer’s answer to my question, the reality is pretty clear.  There is no meaningful difference between what the REVCF and the CEFC do – but the spending on one is included in the budget, while the spending on the other is not.

Excluding almost all of the $10 billion to be spent on the CEFC from the underlying cash balance is nothing more than the fairly desperate use of an accounting trick.  The Gillard Government is simply trying to paper over the fact that it is spending money it does not have.

To see the question I asked, and the answer Wayne Swan gave me, see below.