Helen Coonan (NSW, Liberal Party, Shadow Minister for Human Services) Share this | Hansard source

I am grateful to Senator Murray for speaking before me on the Commonwealth Securities and Investment Legislation Amendment Bill 2008. The opposition will not be opposing the bill, but I do want to make some comments in relation to taking that position.

The purpose of the bill is threefold. The bill will enable the government 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 the CGS by $5 billion in 2008-09, on top of the current planned issuance of $5.3 billion that will replace stock that is maturing. The bill will also widen the investment mandate to enable the government to invest the proceeds of the CGS in Australian dollar denominated instruments of investment grade—that is, Standard and Poor’s rated BBB and above. The bill will also enable the Australian Office of Financial Management to accept of broader range of collateral when lending CGS.

In 2002 the former Treasurer Peter Costello commissioned Treasury to undertake a study into whether the government should continue with the Commonwealth government securities market, which market participants said was essential to provide liquidity to the market. With the coalition’s successful policies to eliminate government debt, the coalition announced in the 2003-04 budget the retention of the CGS market to offset unfunded superannuation liabilities. The 2008-09 budget forecasts net debt to fall to a negative $106 billion by 2011-12.

Since CGSs are, in effect, liabilities of the Commonwealth government and considered risk free by the market, the funds received from selling CGS have been invested by the Australian Office of Financial Management in a range of authorised investments. These currently include securities issued or guaranteed by the Commonwealth or an Australian state or territory, a deposit with a bank, and debt instruments issued or guaranteed by the government of a foreign country.

The bill proposes to amend the following acts: the Commonwealth Inscribed Stock Act 1911, to provide authority for the Treasurer on behalf of the Commonwealth to issue Commonwealth government securities in Australian currency to a value not exceeding $75 billion—as the current stock is around $50 billion, this will allow an additional issuance of $25 billion; the Financial Management and Accountability Act 1997, to broaden the Treasurer’s investment powers and extend the range of authorised investments in which the Treasurer may invest public moneys; and the Loan Securities Act 1919, to allow the Treasurer to enter into securities lending arrangements involving CGS and to allow a wider range of collateral to be accepted in connection with such securities lending arrangements.

The broadening of the investment mandate will enable the Treasurer, through the AOFM, to include debt instruments denominated in Australian currency with an investment credit rating—that is, Standard and Poor’s BBB and above. The bill provides that the Treasurer would be able to give directions only on the classes of investments in which delegates may invest on matters of risk and return in relation to investment activity. These directions must be tabled in parliament within 15 sitting days.

Since both sides of government support the existence of a Commonwealth securities market, it is reasonable that its size should be allowed to expand somewhat to accommodate the growth of Australia’s financial sector since the 2002 announcement. It will also inject further liquidity into the markets, especially in some CGS lines that are in relatively short supply. More problematic perhaps is the expansion of the range of instruments in which the AOFM might invest Commonwealth funds. In effect, the government borrows money at the risk-free rate by issuing CGS and then invests the proceeds in riskier instruments, which generally can be expected to have higher returns. So it may normally be expected that the AOFM would profit from these transactions. However, by taking riskier instruments, there is a greater chance of default and, hence, losses by the government. If this is prudently managed then the risk should be reasonable.

The key would be to hold a balanced portfolio with a relatively limited exposure to the riskier end—that is, BBB rated debt instruments. Experience shows that governments have a low tolerance for risk. When some foreign currency losses not realised were incurred on Australian government foreign currency denominated bonds, the coalition government copped a barrage of criticism from the Labor opposition—if I am not wrong, I think from Senator Conroy. A further important factor is that investments by the government should be broadly spread so as not to distort prices. There is also a need to consider public policy issues associated with having substantial ownership or influence over private or public sector entities. This suggests that it would be more prudent for the government to favour the purchase of private sector debt instruments, which is consistent with the proposed policy. On balance, while there is acknowledgement of a small increase in risk being borne by the Commonwealth, the proposal, in our view, is not without merit. With those reservations clearly on the record, we support the bill.

Finally, it is appropriate in the context of the bill to also remind the Senate that the discussion we are having today would be entirely academic had it not been for the superior economic management of the former coalition government. The coalition in government concentrated on prudent financial management over a long period of time, with solid surpluses that allowed us to pay off the $96 billion debt left by the economic vandals in the Labor Party. The Labor government had so mismanaged the economy that it left Australian families with $96 billion worth of debt. In paying off Labor’s debt, the coalition, with an eye to the future, put $40 billion—of course, that figure has now been vastly exceeded—into the Future Fund to relieve future generations of unfunded superannuation liabilities they would otherwise have had to bear. It is also appropriate to recall that it was the coalition that drew a line in the sand under the former Labor government’s banana republic. On 17 February 2007, Australia’s AAA credit rating was restored by Standard and Poor’s.

I make these comments because, although we support this bill with the reservations I have outlined, it is entirely appropriate to put on the record that the coalition has left the Rudd Labor government with no net debt and it has left this country with a government that does not need to borrow for its own purposes and with liabilities for public servants’ superannuation comprehensively covered into the future. The Rudd Labor government, in the view of the opposition, should be a tad more gracious in its rhetoric than we have seen in the past couple of weeks. The incontrovertible facts are that, because of the hard work of the former coalition government, the Rudd government has inherited not only a sound economy but also a $22 billion surplus, and this should be loudly proclaimed.