Andrew Murray (WA, Australian Democrats) Share this | Link to this | Hansard source

I have been known to rescue the Senate before, Mr President, but hopefully my speaking first will cause the opposition some consternation because I am not going to be speaking for long, so the opposition needs to find its speaker. With those brief remarks, I turn to the bill before us, the Commonwealth Securities and Investment Legislation Amendment Bill 2008. The bill amends three acts to empower the Treasurer to borrow money on behalf of the Commonwealth by issuing stock in Australian currency and to invest public money in authorised investments. The bill also expands the types of assets that are acceptable as collateral in Commonwealth securities lending arrangements.

The explanatory memorandum for the bill says that it wishes to ensure the efficient operation of Australia’s financial markets by paving the way for the issuance of a further $25 billion worth of Commonwealth government securities, especially fixed coupon treasury bonds. The Treasurer’s media release of 20 May 2008 said:

The Government’s decision to increase CGS issuance—

in other words, Commonwealth government securities issuance—

is consistent with the decision of the previous federal government—

the Howard government—

announced in the 2003-04 Budget, to maintain the CGS market. In announcing that decision, the previous government noted that “this will entail ensuring sufficient CGS remains on issue to support the Treasury bond futures market”.

I think the point of this bill is that it continues a sensible decision by the previous government, the Howard government, which was toying—on advice, as I understand it—with the idea of withdrawing from the bonds market altogether. I recall the discussion and consternation that that caused in the financial media and in financial securities markets, because essentially the status of the Commonwealth government in the bonds market is essential to underpin both its activity and its continuity. It is very important that the Commonwealth does indeed remain an active player in the bonds market.

One of the reasons that it was under review was that the Commonwealth felt at that time that it had no financial reason for needing to be in the bonds market. Debt had been very significantly reduced—I think the coalition will claim that it was reduced altogether, but of course there are others who take the view that, if you take an expansive view of debt, namely to do with long-term liabilities including superannuation, that is never so. But the fact is that the government’s cash flow was and is strong. It remains strong. We are generating surpluses. Our income is ahead of our expenditure. On those grounds, you would not normally need to raise funds, because you are highly liquid. So, if you were a company, you would not be in the bonds market. But we are not a company; we are a Commonwealth, and it is very, very important to the stability and the future, the certainty and the status of our financial securities markets that we remain in the bonds market.

With those remarks, you will gather that the Democrats support this bill. We have long been supporters of the bonds market. If the coalition had decided—which they did not, very wisely—to pull out of the bonds market, we would have opposed that because we would have thought it a wrong policy. But they did not adopt that policy, so that is good. We think this bill deserves the support of all parties, and I therefore commend the bill to the Senate.

Helen Coonan (NSW, Liberal Party, Shadow Minister for Human Services) Share this | Link to 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.

David Bushby (Tasmania, Liberal Party) Share this | Link to 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.

Stephen Conroy (Victoria, Australian Labor Party, Deputy Leader of the Government in the Senate) Share this | Link to this | Hansard source

I would like to thank the senators who have participated in the debate on the Commonwealth Securities and Investment Legislation Amendment Bill 2008. The bill will strengthen the efficient operation of the treasury bond market by increasing treasury bond issuance and extending the collateral accepted for securities lending operations. These measures will help maintain the role played by treasury bonds in the smooth functioning of Australia’s financial markets. The bill will also provide for the safe investment of the proceeds of increased issuance in conjunction with management of the government’s cash balances, using a wider range of high-quality investment instruments than at present.

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. They thereby contribute to a lower cost of capital in Australia. Without these markets, the financial system would also be less diverse and less resilient to the shocks that can emerge from time to time, such as the credit concerns that have resulted from 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 market.

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 not exceeding $75 billion. This bill therefore allows an increase in the volume of fixed coupon treasury bonds of up to $25 billion over current levels. As a result of this new cap, 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 financial assets on the government’s balance sheet. The returns on these assets will also offset the interest costs from the increased issuance.

The bill will also provide for a modest extension in the range of eligible investments that the Treasurer can make under the Financial Management and Accountability Act to include investment grade debt securities. It will also provide for the Treasurer to give direction to delegates on classes of authorised investments and matters of risk and return. It has been suggested that this proposal will lead to a significant increase in risk being taken on by the Commonwealth. That is not correct. This proposal will enable the Australian Office of Financial Management to improve the returns on Commonwealth assets while also better managing costs and risks. This policy of the government investing in high-quality assets is more conservative than the mandate given by the previous government to the Future Fund.

Following consultations with financial market participants, the government has also decided to allow a wider range of collateral to be accepted by the AOFM through its securities lending faculty. This will increase access to the facility and further help the efficient operation of the treasury bond market. These various measures will strengthen the markets for treasury bonds and the futures contracts that depend on them, which will in turn contribute to the efficiency and robustness of our financial system. These measures demonstrate the government’s determination to ensure the efficient operation of Australia’s financial markets. I commend this bill to the Senate.

Question agreed to.

Bill read a second time.