Malcolm Turnbull (Wentworth, Liberal Party, Shadow Treasurer) Share this | Hansard source

The Commonwealth Securities and Investment Legislation Amendment Bill 2008 will enable the Commonwealth to increase the stock of Commonwealth government securities on issue by $25 billion to $75 billion. The government has announced its intention to increase the stock of Commonwealth government securities in 2008-09 by $5 billion on top of the current planned issuance of $5.3 billion that replaces maturing stock. The bill will also widen the investment mandate to enable the government to invest the proceeds of Commonwealth government securities in Australian dollar denominated debt instruments of investment grade. Consistent with that, it will also enable the Australian Office of Financial Management to accept a broader range of collateral when lending Commonwealth government securities.

It is important in the context of considering this bill to remember that we would not be having this discussion today were it not for two great achievements of the previous government. It was the Howard government that paid off Australian federal government debt. That is why there was a debate back in 2002 about whether Commonwealth government securities should continue to be issued, because, plainly, the Commonwealth, in terms of its own activities, did not need to be borrowing money anymore—and the Commonwealth, of course, is now a very substantial net lender. But, as we all know, the discussion and the debate, both within the industry and within government, came down with the correct conclusion that it was important to maintain an issuance of Commonwealth government securities so that, among other things, it was possible for the financial markets to have that risk-free benchmark of Commonwealth government securities against which other rates and risks were assessed and calculated.

The fact that we are having this debate is the consequence of that great achievement. It is very, very rare in the developed world today to have a government which has paid off all of its debt, and that was done through prudent financial management over a long period of time—with solid surpluses paying off the $96 billion of debt that was left to us by the Labor Party.

Of course, the previous government did not just pay off that debt. It also looked into the future and asked: what are the liabilities of the Commonwealth that are borne upon the shoulders of future generations for which provision has not been made and for which an assumption has just been made that they will be paid out of the tax revenues, by people who are at school today or who are even as yet unborn, in the years and the decades to come? At that time there was around $96 billion of unfunded superannuation liabilities to Commonwealth public servants and defence personnel. Peter Costello then put $40 billion, ultimately—it is now well over that—into the Future Fund so that there was a solid base providing a source of finance to pay for all of those liabilities into the future. We took that burden off the shoulders of future generations. We took off the shoulders of the current generation the burden that Paul Keating had left us with and took off the shoulders of future generations the unfunded liability. That is the context in which we are having this discussion today.

It is also salutary to recall 17 February 2003. That was the day that Australia’s AAA credit rating was restored by Standard and Poor’s. That closed the chapter on Paul Keating’s ‘banana republic’. We remember when our foreign currency credit rating was downgraded in 1986 and 1989. It was restored to AAA under the leadership of the previous government. So we have a very benign challenge at the moment before us with this bill, because we have a government with no net debt, a government that does not need to borrow for its own purposes and a government that, because of the work of its predecessors, has funding available to cover the hitherto unfunded liabilities to public servants’ superannuation in the future.

And so we now ask ourselves whether the parliament should approve this bill, which will expand the amount of Commonwealth government securities that can be issued from $50 billion to $75 billion. It is, in the view of the opposition, a reasonable expansion. The financial markets have expanded greatly since 2002. Naturally the economy has expanded greatly and there is a need voiced by all of the participants in the debt market for this measure. So we have no objection to the expansion in the amount of Commonwealth government securities that can be issued.

However, there is a very important change that we do need to discuss at some length. At the moment the proceeds of our bond issuance is managed by the Australian Office of Financial Management, part of the Treasury. Since 2003 those proceeds have been invested in deposits with the Reserve Bank of Australia. That remains the practice today. There is no formal delegation or instrument, but that was the government’s policy, stated in the budget at the time by the then Treasurer, and that is what the AOFM does today.

Under the current provisions of the Financial Management and Accountability Act 1997 there is a list of authorised investments in which the Treasurer is entitled to invest the funds of the Commonwealth. That includes debt instruments issued by foreign countries, by state governments and by financial institutions—like the World Bank, whose members consist of foreign countries—but it notably does not include debt instruments issued by private sector participants. The substance of the change in this bill is to amend section 39(10) of the Financial Management and Accountability Act to enable the Treasurer to invest in, in addition to the other types of securities—and I am referring now to new subparagraph (b)(iv)—‘debt instruments denominated in Australian currency with an investment grade credit rating’.

The bill also provides, in new section 62A of the Financial Management and Accountability Act, that the Treasurer will delegate to the relevant officials in the Treasury to undertake his powers and functions and investment under this act. Under proposed section 62A(2) of the bill, a new section in the Financial Management and Accountability Act:

The Treasurer may, by signed instrument, give directions in relation to either or both of the following:

(a)

the class or classes of authorised investment in which public money may be invested;

(b)

matters of risk and return.

It goes on in new section 62A(3) to say:

The Treasurer must not give a direction ... that has the purpose, or has or is likely to have the effect, of directly or indirectly requiring a delegate or delegates to allocate financial assets to a particular company, partnership, trust, body politic or business.

The delegation must be tabled in each house of parliament no later than 15 sitting days after it is given. That is referred to in subsection (6).

The concern that many people will have—and it is a concern that the opposition has—is that the consequence of this element in the bill is to expand the range of debt instruments in which the Australian Office of Financial Management can invest to include debt instruments which are by definition riskier, and indeed significantly riskier, than Commonwealth government securities, which are by definition risk free. There is a considerable temptation here for the government or, indeed, for any government—with this expanded range of opportunities to invest—to borrow, as it can do, at the risk-free rate that is available to the Commonwealth as the sovereign government and to then invest in riskier debt instruments which will deliver a significantly higher yield. One needs to look only at the wide range of publicly traded debt instruments in Australia at the moment to see that between the Commonwealth government’s cost of borrowing and what it could earn by investing in debt instruments that fall within the new provisions proposed herein—a spread of 150, 200, 300 basis points—is a very significant spread and a very significant moneymaking opportunity. It is of considerable concern to us that this temptation could lead a government—this government in particular—into using this exercise to chase yield and, therefore, to take on substantial risk.

Plainly, if the government takes this on, engages in risky investment and loses money, it will be held to account—and it will be held to account by the opposition. We caution the government very soberly, and without any hint of political rancour or rhetoric, that this is taking on significant additional financial risk—or, at least, potentially taking it on. It is important in our view that before this bill is dealt with in the Senate the investment mandate—that is, the direction under new section 62A(2), which sets out the class or classes of authorised investment in which public money may be invested and the matters of risk and return—should be tabled prior to this bill being debated in the Senate. It is very important that the government lets us know—which it has not done—what its intentions are. We know exactly what the status quo is and exactly what the policy of the previous government was, which was that these funds should be invested on deposit with the Reserve Bank of Australia. There is clearly no credit risk there, but there is also no mark-to-market risk. We have seen in Australia in recent times, and around the world in fact, extraordinary volatility in terms of yields and spreads for debt instruments of all issuers, and in particular many issuers that would fall into this category—bank debt, for example, has seen incredible volatility compared to the experience of only a year or so ago. That volatility is reflected in the mark-to-market value of the bonds concerned, and that will have a very significant impact on the mark-to-market balance sheet of the Australian Office of Financial Management, and losses—and, indeed, gains—can be equally volatile.

It is very questionable whether that is an appropriate way to be investing these Commonwealth government funds, given the historically conservative and prudent nature in which they have been invested to date. There is a temptation to chase yield and incur greater risk and it is a temptation that we trust the government will resist in the interest of a prudent and conservative management of these assets of the Commonwealth. In order to enable the parliament to consider this bill in a fully informed fashion, I ask the Treasurer to table the proposed direction under new section 62A in the Senate before the legislation is considered. His preparedness to do that will obviously have considerable influence on the attitude of the opposition and senators in the other place. With those reservations, we commend the bill to the House.

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