Malcolm Turnbull (Wentworth, Liberal Party, Shadow Treasurer) Share this | Link to 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.

Shayne Neumann (Blair, Australian Labor Party) Share this | Link to this | Hansard source

The contribution by the member for Wentworth in relation to the previous government’s alleged payment of public debt was interesting. It is very easy to reduce debt when you privatise public assets, when effectively you de-fund the stock of public housing, you fail to adequately invest in public education, you to fail pull your weight on public health and hospital funding and you de-fund wonderful programs like the Commonwealth dental scheme. That is the legacy of the previous government on economic management.

I support the Commonwealth Securities and Investment Legislation Amendment Bill 2008, which strengthens the efficient operation of the treasury bond market and allows for the issuing of more treasury bonds and the extension of collateral for lending. The bill amends various pieces of legislation and confers additional borrowing authority on the Treasurer to issue Commonwealth government securities. It provides legislative authority to increase future issuance by up to $25 billion. It broadens the scope of the Treasurer’s power to invest and extends the range of assets in which the Treasurer may invest. It gives authority to the Treasurer to enter into securities-lending arrangements and further extends the range of assets that are considered acceptable as collateral on a securities-lending-arrangement basis. It allows for the Treasurer to delegate these powers to the relevant government officials.

The bill is part of the Rudd government’s package to strengthen our financial markets. I speak in support of the bill because the measures therein will serve to strengthen our treasury bonds market and our futures market. It will provide for the safe investment of the proceeds of increased issuance, in conjunction with the management of the government’s cash balances, using a wider range of high-quality investment instruments. The bill is essential to the government’s commitment to ensure the effective operation of our nations’ financial markets. As the Assistant Treasurer, Minister Chris Bowen, has already said in the House, the measures in this bill will:

... help maintain the role played by Treasury bonds in the smooth functioning of Australia’s financial markets.

An efficient government bond market is key to enhancing the operation of the broader Australian financial system and reducing our vulnerability and exposure to adverse shocks. As many in the House will be aware, the strong Australian economy and exchange rate on the one hand and global credit anxiety on the other have intensified demand for treasury bonds. As a consequence, bonds on issue have become more tightly held and strong demand in the face of fixed supply has significantly reduced liquidity in the treasury bond market. This bill will permit the Commonwealth government to issue more treasury bonds freeing up an increasingly tight market in securities.

A liquid treasury bond market is an important component to ensure a strong Australian financial market. Currently, the treasury bond and treasury bond futures markets are used in the pricing and hedging of a wide range of financial instruments and in the management of interest rate risks by market participants. Treasury bonds are used as the benchmark to set interest rates beyond the short end of the yield curve because of the risk-free nature of security. This capacity to hedge reduces risk premiums and consequently reduces capital costs in the economy. This is good to reduce inflation. These markets are critical to ensuring that Australia’s financial system is resilient to the market shocks that inevitably emerge and that we have seen recently overseas. As Treasurer Wayne Swan stated on 20 May:

The existence of an active and efficient bond market alongside the banking system strengthens the robustness of Australia’s financial system and reduces its vulnerability to adverse shocks.

A lack of liquidity in the treasury bond market due to short supply can make it difficult to accurately price contracts in the bond futures market. To this end, it can lead to reduced confidence in the pricing process and undermine the value of the futures market. This can increase the costs associated with managing financial risks, ultimately leading to higher costs and we do not want more inflationary pressures. An efficient treasury bond futures market allows market participants to hedge their interest rate risk and ensure lower and less volatile costs of capital. Recently our financial markets have been exposed to the impact of the credit and liquidity concerns sparked by the US subprime housing crisis. We have all witnessed events over there where the durability and vibrancy of the Australian financial markets have assisted our financial system to weather the turbulence associated with the problems in the US subprime market.

In many respects, the subprime crisis has provoked a shift in financial markets to less risky, higher quality financial instruments in global financial markets. It is this financial environment which has encouraged investment in Australia. It has also seen an increased demand for Australian treasury bonds and this has proved beneficial to the Australian economy. The Rudd government are committed to strong fiscal discipline and that is why we are introducing this bill—to ensure the treasury bond market continues to operate effectively and play a crucial role in Australia’s financial market.

We do not live in isolation, neither do our financial markets. We live on a continent wedged between the Indian and Pacific oceans—at the foot of Asia. As far as finance is concerned, we may as well be in London, New York or Hong Kong. We are not an island financially. We operate in a global community. We need to do everything we can to be an important player in the world financial system and to grow our financial markets to become an even more vital participant.

Currently, the ceiling on fixed coupon treasury bonds on issue is $50 billion. It has been at that level for the past five years. While the volume of bonds on issue has remained fixed for the past five years, other Australian financial markets have grown substantially over this period, and so has our economy. We have moved on.

As I said, as far as the global credit concerns are impacting on Australian treasury bonds, it has become a tighter market. It is now estimated that three-quarters of the $50 billion of Australian treasury bonds on issue are held offshore, predominantly by very large institutions which do not often trade these securities. The demand for high-quality securities has increased with the demand for bonds. As a direct consequence, treasury bonds remain available on issue but they become more tightly held. It is increasingly difficult for dealers in some lines of stock to get hold of those treasury bonds and maintain an active market in them, and we do not want our markets corrupted.

To ensure the market continues to operate effectively, it is clear that we must issue more treasury bonds. The bill before us seeks to raise the ceiling to $75 billion, with the amount and the timing of new issuances depending on market concerns and needs. This will allow an increase in the volume of fixed coupon treasury bonds on issue by about $25 billion over their current level, and this cap will provide the government with flexibility to sustain liquidity in the treasury bond market and respond to shocks in global financial markets while concurrently ensuring an appropriate limit is placed on the maximum amount which can be issued.

Currently, except for short-term borrowing needs, there is no authority for the Treasury to borrow money in a manner which increases the amount of outstanding debt issued by the Treasurer. The new borrowing authority will permit the Treasurer to borrow money by issuing Commonwealth government securities up to $75 billion on the face of Commonwealth government securities on issue. As stated in the May budget, the government intends to add $5 billion to the treasury bond issuance of $5.3 billion, with market conditions monitored to determine whether future issuance is required. This will take the total stock on issue to $54.6 billion.

The funds raised by the additional issuance of Commonwealth government securities are not for spending. The proceeds from the increased issuance will be managed and invested by the Australian Office of Financial Management, which invests surplus Commonwealth cash in term deposits with the Reserve Bank. The bill will extend the range of permitted investments to include investment-grade debt securities and widen the collateral requirements when bonds are borrowed by market players for short periods of time.

Under the current legislation, only Commonwealth government securities are accepted. The reforms in this bill will better align the range of assets accepted as collateral with those accepted by the Reserve Bank in its market machinations. Those on the opposite side of the House should be firmly in support of this bill because it is consistent with the former coalition government’s decision made in the 2003-04 budget to maintain the market for Commonwealth government securities. At that time, the former government noted that it should issue further securities to support the treasury bond futures market but did not do anything about it.

In keeping with the government’s commitment to sound fiscal management, the increased issuance of treasury bonds will not negatively impact the government’s financial position overall. This is principally because the issuing of bonds on issue and the increase thereof will be offset by the increase in financial assets on the government’s balance sheet from the proceeds of the additional issuance. The budget surplus which the Treasurer announced in May this year will in fact mean the government does not need to issue securities to finance spending. This is yet again a demonstration of the economic responsibility of the Rudd government.

The bill before us today amends the Financial Management and Accountability Act 1997 to broaden the Treasurer’s investment powers by removing the restriction of only being able to invest for the purpose of ‘managing the public debt of the Commonwealth’ and extending, of course, the range of authorised investments in relation to which the Treasurer may invest public money. This aligns the Treasurer’s investment powers with those of the finance minister under the Financial Management and Accountability Act 1997.

The bill extends the range of eligible investments which the Treasurer can make under that act to include the investment-grade securities and allow the Treasurer to give directions to delegates on classes of authorised investments and matters of risk and return. The bill provides for the delegation to Treasury officers of the Treasurer’s investment powers. It provides that the Treasurer may give directions on the classes of authorised investment in which the investments may be made and on matters of risk and return. This will allow the Treasurer to set limits and provide guidance on the exercise of the investment powers by delegated officials.

A safeguard the bill provides is that the Treasurer must not give a direction which has the purpose or will have the effect of requiring delegates to invest in a particular company, business or entity. This provision will ensure investment decisions are made on appropriate investment criteria and are beyond reproach.

The bill outlines any assets which may be required to be high-quality, investment-grade securities. These include state government securities, securities issued by banks and other deposit-taking institutions, and Australian-dollar-denomination, AAA-rated, asset backed securities.

I do not share the member for Wentworth’s concern about temptation. I do not share his anxiety in this matter. I think the bill is appropriate on this particular issue and I think the safeguards are adequate. Under the proposed bill, proceeds from the increased issuance will be managed and invested by the Australian Office of Financial Management in conjunction with its present cash management activities. Essentially, under the proposed bill, the Treasurer may invest public money on behalf of the Commonwealth in a broad range of authorised investments. Debt instruments denominated in Australian currency with an investment-grade credit rating are included on that list of authorised investments.

The bill seeks to allow a wide range of collateral to be accepted. Since 2004, the Australian Office of Financial Management has operated a securities-lending facility on behalf of the Treasurer which allows financial market participants to borrow treasury bonds for short periods when they are not readily available from other sources. Currently, when financial market participants seek to borrow, other Commonwealth government security is required as collateral. This facility is designed to enhance the liquidity and efficiency of the treasury bond market by improving the capacity of bond market intermediaries to make two-way prices. Currently, only Commonwealth government securities are accepted as collateral. This has had the effect of constraining access to the facility when such securities have been in short supply. Under the current legislative arrangements, the securities-lending facility operates using the Treasurer’s investment powers under the Financial Management and Accountability Act.

In the bill, a separate authority is provided for the Treasurer to enter into a securities-lending arrangement concerning Commonwealth government securities. The bill stipulates that collateral must be received for any securities lending and outlines the list of collateral that may be accepted, including cash and investment-grade securities. A requirement of the bill is that the Treasurer provides a direction on the kind of collateral which may be taken from the categories listed in the bill. The list is sufficiently wide as to cover the same assets as the Reserve Bank of Australia accepts as collateral in its market operations. Hence my disagreement with the member for Wentworth on that issue as well.

However, under the bill a new standing borrowing authority would permit the Treasurer to borrow money by the issuing of Commonwealth government securities denominated in Australian currency, subject to a limit of $75 billion on the total face value amount. Under the proposed legislation, explicit legislative powers are prescribed for the Treasurer, specific classes of collateral are outlined and a maximum amount of Commonwealth government securities is capped.

In addition, there are interest withholding tax arrangements in the bill. The final element of the package is to change the interest withholding tax arrangements for state government bond issuance. Under the bill, bonds issued by state governments will be eligible for exemption from interest withholding tax. This will act as an encouragement to investment in state government bonds. It is predicted that certain changes in this regard will increase the liquidity and improve the depth of state government bond markets. It could result in a small reduction in revenue received by the Australian government, but it will add to the attractiveness of state government bonds and allow them to make a greater contribution to financial market stability.

The Rudd government is committed to making Australia the financial services hub of Asia. Reducing withholding tax rates is important and I urge those opposite not to hold up the legislation that is being dealt with by this House and the Senate. Labor governments are reformist by nature. We believe in free enterprise. Those on the opposite side of the chamber purport to do so, but we have proved to be the party of free enterprise. We are the party which will build the long-term future of this country. All too often, those on the opposite side of the House have been on the side of oligopoly. They have all too often been in favour of socialisation of losses and privatisation of profits. All too often, those on the side of those who manipulate prices are not on the side of the consumer. Witness their opposition to Fuelwatch and their unwillingness when in office to empower the ACCC concerning price gouging. It was a Labor government which gave us the Trade Practices Act, which has so helped consumers, has promoted free and fair markets and has enhanced competition across a whole range of industries. It was the reformist Hawke and Keating governments which internationalised our economy. It was those governments which deregulated the financial sector in the 1980s and 1990s. It was a Labor government which lowered tariff barriers. We floated the dollar and we built the highly successful superannuation industry in this country. We set the foundation for the economic growth which we have enjoyed for most of the last two decades.

The Rudd government are committed to ensuring that our financial markets continue to perform solidly. This is why we are introducing this bill which is so reformist at its core. The measures in this bill will prove to strengthen the markets for treasury bonds, contribute to the effectiveness and efficiency of Australia’s financial markets and, most importantly, contribute to the resilience and robustness of our financial system. It is for these reasons that I commend the bill to the House.

Stuart Robert (Fadden, Liberal Party) Share this | Link to this | Hansard source

The government is looking to amend the Commonwealth Inscribed Stock Act 1911, amongst others, to allow the Treasurer, on behalf of the Commonwealth, to issue Commonwealth government securities in Australian currency up to a maximum amount of $75 billion, an increase of up to $25 billion. Furthermore, the Commonwealth Securities and Investment Legislation Amendment Bill 2008 will remove some limitations on what the Treasurer can invest the proceeds of the bond raising in, allowing BBB securities to be acceptable investments.

The bill is supported, although there are a range of possible concerns that warrant the parliament’s attention. It is interesting to reflect—especially after what the member for Blair had to say as he sought a revisionist version of history—that the volume of government bonds reached a staggering $114 billion in 1997 due to the previous Labor government’s profligate spending and typical Labor poor economic management. It is a fact that, because they could not balance a budget, $114 billion in cash was raised to fund debt, debt payments—which reached as high as $8 billion per annum—and Commonwealth cash flow. So you will forgive my hearty chuckle when the member for Blair has the hide, effrontery and blatant audacity to walk in here and lecture this parliament on how the Labor Party is apparently the party of free enterprise, the party of responsible economic management and the party that has invested in and built the nation. Plunging the nation into recession, causing the nation, through the Commonwealth, to have to raise $114 billion in bonds to fund their massive debt and causing a banana republic does not sound like responsible nation building, free enterprise or sound economic management to me.

In vast and absolute contrast, in the last 12 years the $114 billion in bond issuance was slowly reduced to $50 billion as the Howard government stopped Labor’s policy of Australia living beyond its means, paid off Labor’s staggering $96 billion of debt, reduced the interest payments that were $8 billion per annum and, of course, put in place the $60 billion Future Fund to account for unfunded liabilities.

In 2002 the Treasurer, the member for Higgins, undertook a study as to whether the Commonwealth should continue with a Commonwealth government securities market, as the Labor debt was almost paid off and bond issuance for the purpose of raising cash for government purposes was no longer required. In the 2003-04 budget it was agreed that the Commonwealth government securities market would remain, in response to the market need for liquidity, especially for AAA rated securities. Thus $50 billion was kept as the bond market, though the bond market changed from raising cash to fill budget holes brought on by the previous Labor government to providing tradeable commodities and ensuring adequate and diverse liquidity in the financial markets. The Australian Office of Financial Management manages the bond issuance and long-term investments of bond-raising proceeds and to date has only really invested in cash on deposit with the Reserve Bank.

It is important to realise that the only reason that this Labor federal government can move to increase the bonds on issue is that the Commonwealth government currently enjoys a AAA rating put back in place by the previous government after the rating was downgraded twice by the previous Labor government. The previous Labor government, the member for Blair had the hide to say, was nation building, believed in free enterprise and had put the nation on the right path. I am not too sure what path the nation was on at the time, but may I suggest it was not the right one. Now the government is looking to increase the securities, the bonds on offer, by up to a further $25 billion, though it is noted that the Australian Office of Financial Management believes the market needs only a further $5 billion in liquidity. There are no plans to issue the other $20 billion in bonds, though of course this bill will allow the Treasurer to issue those if and when the liquidity of the market requires it.

The purpose of treasury bonds, of course, is that they are a medium- to long-term debt security that carries an annual rate of interest fixed over the life of the security and generally payable six monthly. They continue to be issued in order to maintain an active treasury bond market and to support the market in treasury bond futures contracts. These two markets are used in the pricing and hedging of a wide range of financial instruments and in the management of interest rate risks by market participants. They therefore contribute to a lower cost of capital in Australia, as the absence of a Commonwealth bond market could make financial markets less diverse and less resilient to the inevitable international and domestic shocks that come around. Treasury bonds therefore provide important anchors for Australia’s financial systems, principally to provide liquidity.

The intent of the bill is in effect to allow the Commonwealth to borrow up to $25 billion more through bond issuance—funds the Commonwealth does not need—using the Commonwealth’s AAA status and invest these funds in debt instruments with status as low as BBB, thereby taking a margin in the process. Discussions this morning with the Australian Office of Financial Management indicate that the investment strategy will be conservative, with a yield in the order of a quarter to a half a per cent—enough, apparently, to cover the cost of the bond-trading apparatus. They have ruled out that this is a yield-chasing exercise. The government is stating that it will ensure the Commonwealth’s balance sheet remains neutral, as cash or securities raised through the bond issue are liabilities—that need to be paid back—though the cash or security invested as a result of the proceeds of the bond issuing are of course assets.

The government is also looking to change the parameters to allow investment-grade credit-rating debt instruments. This effectively allows BBB or above investments. The ASX website defines investment-grade credit-rating debt instruments as ‘adequate capacity to meet financial commitments with adverse economic conditions or changing circumstances more likely to lead to a weakened capacity of the obligor to meet its financial commitments’. Changing the type of debt instruments opens the Commonwealth to higher levels of risk, though investment-grade credit rating debt instruments are almost wholly issued by either governments or financial institutions such as major banks like Westpac or NAB.

The bill does require the Treasurer to provide an investment direction to the Australian Office of Financial Management, which exists within the Treasury, under the proposed changes to the FMA Act in section 62A(6). This direction, as well as the maximum total face value of stock and securities that may be on issue, must be presented to the parliament. It is understood that this investment direction is currently being drafted and is not available for the parliament to pursue as this bill moves through the lower house. It is difficult to be wholehearted in support for a bill without seeing what advice the Treasurer will provide on how the potential total, $75 billion of taxpayer funds raised from a bond issuance, may be invested in BBB rated investments. In that respect, I join the member for Wentworth in calling on the Treasurer to ensure that investment direction is available prior to the Senate passing the bill.

It is acknowledged that the bill does provide a range of safeguards preventing the Treasurer from allocating financial assets to any particular company, partnership, trust, body politic or business. It is important, though, that the parliament keeps in mind and uses it as a form of caution that much of the money lost in investment products through the subprime crisis around the world had BBB or higher status. They were investment-grade products. Hundreds of billions of dollars have been lost by investment-grade products being found wanting. This concern is further exacerbated by the fact that there is no overarching investment strategy or return required for the $40 billion Labor slush fund and no requirement that the fund be managed by the Future Fund guardians.

The other concern is that bonds will likely be used to fund the Labor state borrowings—borrowings that, on face value, it would seem difficult for some states to ever repay. Queensland currently is $30 billion in debt, rising to $55 billion by 2010. Interest payments are currently $1.78 billion for 2007-08 and Treasury estimates are that interest payments will be $3.2 billion for the Queensland state government in 2010-11.

Queenslanders are currently paying $5 million a day in interest alone. As Queensland continues to borrow heavily, because of their lack of saving and lack of economic management, it looks as if that state is heading down the same path that the Hawke and Keating governments took the nation down—towards a banana republic. With little signs of fiscal restraint evident anywhere in the Queensland state Labor government, it is difficult to see how Queensland will ever repay this ever-increasing debt burden being left to the children of today. If the Commonwealth provides loans to the states via the proceeds of the bond issuance, as is likely, there is a risk that Queensland and other state Labor governments may never be able to repay them, short of significantly increasing tax on the various men, women, boys and girls who live within those respective states.

In supporting the bill and in calling on the Treasurer to ensure that the investment mandate is presented to the Senate prior to the passing of the bill, I urge the parliament to be cautious. This bill should not be used to chase yield. The bond market is about liquidity. The concept of the Australian Office of Financial Management enjoying a yield of one-quarter per cent to half a per cent to cover the cost of the bond market apparatus makes some sense, yet issuing bonds to raise funds at AAA status to invest in BBB status—the same status that saw hundreds of billions of dollars disappear in the subprime debacle—needs to be done cautiously. We must maintain a bond market in terms of market liquidity; we must not move towards chasing yield as opposed to ensuring liquidity.

Wayne Swan (Lilley, Australian Labor Party, Treasurer) Share this | Link to this | Hansard source

I would like to thank all those members who have taken part in the debate on the Commonwealth Securities and Investment Legislation Amendment Bill 2008. This bill will strengthen the efficient operation of the treasury bond market by increasing treasury bond issuance and extending the collateral accepted for securities lending of these bonds. These measures will help maintain the role played by treasury bonds in the smooth functioning of Australia’s financial markets.

The treasury bond and treasury bond futures markets are used in the pricing and hedging of a wide range of financial instruments and in the management of interest rate risk by market participants. They thereby contribute to the lower cost of capital in Australia. That is why this is quite an important bill. Without these markets the financial system would also be less diverse and less resilient to the shocks that can emerge from time to time. This has been demonstrated particularly over the last six months when markets in this country provided important anchors for Australia’s financial system as it responded to the impact of credit and liquidity concerns sparked off by the subprime housing crisis in the United States. The government is committed to ensuring that the treasury bond market continues to have sufficient liquidity to operate effectively and therefore play this important role in the Australian financial system. There could be no time when it is more important than now.

This bill provides a new standing authority for borrowing through the issuance of Commonwealth government securities subject to a limit on the total volume of securities on issue at any time not exceeding $75 billion. This bill will allow an increase in the volume of fixed coupon treasury bonds on issue by around 25 billion over their current level. In 2008-09 the government will add around $5 billion to the treasury bond issuance of $5.3 billion that was already planned and detailed in the 2008-09 budget.

The increased issuance of treasury bonds will not adversely affect the government’s overall financial position since the increase in the bonds on issue will be offset by an increase in the financial assets on the government’s balance sheet. The returns on these assets also offset the interest costs for the increased issuance.

The bill will also provide for a modest extension in the range of eligible instruments—which the previous member was talking about before—that the Treasurer can make under the financial management to include investment-grade debt securities and provide for the Treasurer to give directions to delegates on the classes of authorised investments and matters of risk and return.

This will enable the Australian Office of Financial Management to improve the returns on Commonwealth assets whilst also better managing costs and risks. But I do take on board the comments of the shadow Treasurer and the honourable member opposite. It has been suggested that these proposals could lead to a significant increase in risk being taken on by the Commonwealth. This is simply not correct. The proposals contained in this bill were strongly recommended to the government by the Treasury secretary. They will support the efficient functioning of the Australian financial market. They will provide for a modest extension in the range of eligible investments that the Treasurer can make under the Financial Management and Accountability Act. This will allow the Australian Office of Financial Management to invest in grade debt securities in addition to RBA deposits—that’s true.

Investments in grade debt securities are considered by financial markets to be of high quality. This will enable the Australian Office of Financial Management to improve the returns on Commonwealth assets whilst also better managing costs and risks. The point—and this responds to the point made by the honourable member opposite and the shadow Treasurer—is that the policy of the government of investing in high-quality assets is more conservative than the mandate given by the previous government to the Future Fund—and that is deliberately so.

In conclusion, these various measures will strengthen the markets for treasury bonds and the futures contracts that depend upon them. They will therefore contribute to the effectiveness and efficiency of Australia’s financial markets more broadly and to the resilience and robustness of our financial system. So these measures demonstrate the government’s determination to ensure the efficient operation of Australia’s financial markets. I commend this bill to the House.

Question agreed to.

Bill read a second time.

Message from the Governor-General recommending appropriation announced.