Stuart Robert (Fadden, Liberal Party) Share 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.

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