David Bushby (Tasmania, Liberal Party) Share this | Hansard source

The Commonwealth Securities and Investment Legislation Amendment Bill 2008 will deliver two primary outcomes. The first is that it will increase the amount of Commonwealth government securities on issue by some $25 billion to $75 billion. In that context, I understand that the government has also announced its intention to increase the stock of CGS in 2008-09 by $5 billion on top of the current planned issuance of $5.3 billion that replaces stock that is maturing. The second primary outcome is that it will change the investment mandate by widening the range of investment options for the proceeds of the CGS from the current risk-free AAA rated option down to BBB rated options and, of course, those rated as AA and A in between.

Of course, any discussion on the appropriate approaches to be taken by the government in the context of this bill must also reflect on the prudent financial management of the Commonwealth’s fiscal position and the economy. This is because the opportunity for the changes outlined in this bill only arises because of the strong economic management exhibited by the Howard government since 1996. Consideration of where to invest substantial sums raised through CGS would not be taxing the mind of the government were it not for the prudent and difficult decisions made by the previous government in paying off all federal government debt. As this was done, the government today enjoys the fact that it has more money than it needs.

The act of issuing securities is, essentially, the government selling investments to raise money—commonly known as government bonds. In the past, it was generally accepted that one of the main reasons for governments to sell bonds was to raise money to finance deficits. Due to the highly prudent and responsible management of the previous government, the federal government is now, of course, a net lender of money, not a net borrower. Given this, why does the federal government still issue bonds? Because, after some debate—much of which was played out publicly—it was decided that there was substantial benefit to the economy to be derived from the government continuing to issue bonds, as it provided a risk-free benchmark against which other investments could be compared and it provided much-needed liquidity to the market. This decision was taken in 2002, when the then Treasurer, Peter Costello, commissioned an examination of the need to continue with the CGS market.

It is important to remember that CGS are liabilities of the government and are considered risk free by the market. For this reason and because continuing the CGS market had more to do with the wider market and benefits to that market, it was considered prudent to limit the investment mandate to a range of authorised investments, including 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. But the reality is that, in accordance with previous government policy, the Australian Office of Financial Management, the office with responsibility for managing both the issuance of CGS and the investment of the proceeds, has only been depositing those proceeds with the RBA.

The other great achievement of the previous government that is highly relevant to this debate is the retrieval of the Commonwealth government’s AAA rating. Under previous Labor governments, in 1986 and then in 1989, our rating had been progressively downgraded. In February 2003, in recognition of the responsible approach to management of the Australian economy, Australia’s rating was restored to AAA, finally closing the chapter on Keating’s infamous banana republic.

Since bilateral support exists for the need to have a Commonwealth securities market, and the bill proposes a reasonably measured increase in its size, I have no issues with its expansion somewhat to accommodate the growth of Australia’s financial sector since the 2002 decision. I also understand that there is a need for additional liquidity in the market, particularly in some lines, and consider that this change will assist to address that shortage.

The issue of the widening of the investment mandate, however, is less clear and more concerning. As I see it, there are two worrying aspects to this change. The first is that the change allows investment of CGS proceeds in instruments that are riskier, effectively increasing the exposure of Australian taxpayers to losses. If this risk is prudently managed, then the risk should be reasonable. The key will be to hold a balanced portfolio with a relatively limited exposure to the riskier BBB rated debt instruments. But adding to the concern over the risk is the provision contained in the bill allowing the Treasurer, by signed instrument, to give directions to the AOFM in relation to the classes of authorised investment on matters of risk and return. Left to its own devices, I am sure that the AOFM would take the desired, highly prudent and responsible approach to managing these funds with a view to achieving a sound return and minimal risk. However, I am concerned that the interference of the Treasurer, who may have other objectives, may hamper the ability of the AOFM to create investment portfolios that best reflect desirable characteristics.

This leads into my second major concern—that of the temptation the changes will place before the government to chase yield. As mentioned, the agreement in 2002 for the ongoing existence of the CGS was based on the clear benefits of liquidity support and of investment benchmarks. It was not made to allow the government to borrow, as the Commonwealth can do, at the risk-free rate available to it as a sovereign government and to then invest in riskier investments to chase yield. But the fact is that the changes may present the current government with what is a very significant moneymaking opportunity and it may find the temptation too much to resist. I would be concerned if it were to succumb to this temptation and therefore take on substantial risk to the potential detriment of Australians. As such, I would feel far more comfortable in voting for this bill if I were first able to sight the investment mandate or direction that would be supplied by the Treasurer to the AOFM.