Shayne Neumann (Blair, Australian Labor Party) Share 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.

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