Bills Digest No. 21, 2013–14              3 December 2013

Commonwealth Inscribed Stock Amendment Bill 2013

Daniel Weight
Economics Section 

Date introduced: 13 November 2013

House:  House of Representatives

Portfolio: Treasury

Commencement: On Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.

Purpose of the Bill

The purpose of the Commonwealth Inscribed Stock Amendment Bill 2013 (the Bill) is to amend the section 5 of the Commonwealth Inscribed Stock Act 1911 (the CIS Act) to increase the limit on the total amount of Commonwealth stock and securities that may be on issue at any one time from $300 billion to $500 billion.[1]

Structure of the Bill

The Bill is technically simple. It contains one schedule containing one amendment. The amendment proposes substituting the ‘$300’ figure in section 5 of the CIS Act with the figure ‘$500’.

History of the debt limit

Currently, the CIS Act limits the total amount of Commonwealth stock and securities that may be on issue at any one time to $300 billion. A discussion of Commonwealth borrowing and the operation of the debt limit is contained in Appendix A.

Prior to 2008, there was no legislative limit on the amount of stock and securities that may be on issue at any one point. However, in 2008 the Commonwealth Securities and Investment Legislation Amendment Act 2008 amended the CIS Act to limit the amount of stock and securities that may be on issue at any one time to $75 billion.[2] At that time, the then Treasurer indicated that the purpose of the debt limit was to provide an indication to financial markets about the likely level of Commonwealth securities on issue in order to deepen the market for Commonwealth securities.[3] Since that time, however, it has been increased or modified several times. These increases coincided with the deterioration in the Commonwealth’s fiscal position that was associated with the Global Financial Crisis.

The first increase was from $75 billion to $250 billion, and was made by section 18 of the Appropriation Act (No. 2) 2011-12.[4] Between 2009 and 2011, the CIS Act included a section 5A. Section 5A of the CIS Act authorised the Treasurer to issue up to an additional $125 billion of stock and securities by making a declaration that ‘special circumstances’ existed, which justified an increase. That section was inserted by the Commonwealth Inscribed Stock Amendment Act 2009, and repealed by the Appropriation Act (No. 2) 2011-12.[5] The most recent increase, which lifted the debt limit from $250 billion to $300 billion, was set out section 18 of the Appropriation Act (No. 2) 2012-13.[6]

The above information is summarised in Table 1.

Table 1: The debt limit over time

Date of effect

Debt limit

Notes

Before 13 July 2008

not applicable

13 July 2008

$75 billion

18 February 2009

$75 billion or
$200 billion in ‘special circumstances’

Added a section 5A to the CIS Act. Section 5A of the CIS Act authorised the Treasurer to issue up to an additional $125 billion of stock and securities by making a declaration that a ‘special circumstance’ existed, which justified an increase.

29 June 2011

$250 billion

This Act also removed section 5A of the CIS Act.

28 June 2012

$300 billion

Key issues

The gross amount of debt on issue is expected to increase due to anticipated budget deficits over the forward estimates period. In addition to the general growth in the Commonwealth funding requirement due to budget deficits, short-term peaks in the value of Commonwealth securities on issue are anticipated due to the ‘rolling-over’ of Treasury Bond series and expected variations in the timing of revenue receipts during the year.

In a minute to the former Treasurer, Mr Swan, which was tabled in the House, the Australian Office of Financial Management (AOFM), which manages the day to day operation of Commonwealth debt issuance, described the process of dealing with maturing Treasury Bond series. The AOFM said:

There are normally one or two Treasury Bond maturities each financial year…  In advance of the maturity of a bond line it is necessary to run up the volume of Treasury Notes on issue in order to finance the maturity of the bond line.  This means that immediately prior to maturity of a bond line there is both the near to maturity bond line and a large volume of Treasury Notes on issue.[7]

The same AOFM minute advised the then Treasurer that, were a debt limit considered desirable from a policy perspective, it should be set at $40 to $60 billion above the expected peak in securities on issue in order to provide for a ‘buffer.’ Specifically, the AOFM advised that:

[t]his would allow for unanticipated events with a fiscal impact to be managed without raising financial market speculation on the cap becoming a binding constraint.[8]

The latest official forecast of the total value of Commonwealth securities on issue, including value and timing of the expected intra-year peaks, is as follows:

Table 2: Forecast value of Commonwealth securities on issue, and intra-year peak

2013–14

2014–15

2015–16

2016–17

$b

$b

$b

$b

End-of-year amount

290

330

350

370

Within-year peak

300

350

370

Not available

Month of peak

Dec 2013

Apr 2015

Apr 2016

Not available

Source: Department of the Treasury and Department of Finance and Deregulation, Pre-election economic and fiscal outlook 2013, Treasury, August 2013, p. 17, accessed 2 December 2013.

The existing $300 billion debt limit is anticipated to be reached by 15 December 2013. On that date, $9.3 billion in Treasury Bonds will mature, and the process of rolling over those bonds will require additional funds to be raised prior to that date.[9]

The Parliament is scheduled to sit in the weeks commencing 2 December 2013 and 9 December 2013; suggesting that some legislative resolution must be achieved prior to the conclusion of those sittings.

Alternatives to raising the debt limit to $500 billion

Various alternatives to increasing the current $300 billion debt limit to $500 billion have been suggested. Generally, the debate about the existing debt limit and possible changes to it has featured two key themes:

·         an assertion that the current debt limit does not provide an appropriate mechanism for controlling the level of debt on issue and

·         a recognition that parliamentary scrutiny, or control, over the overall level of debt is necessary or desirable.

Labor’s proposal

The Labor Party has proposed increasing the debt limit to only $400 billion. In the debate on the Bill in the House, Labor unsuccessfully proposed an amendment to the Bill to substitute the figure ‘$500’ with the figure ‘$400’.[10] A later attempt to substitute the figure ‘$500’ with ‘$400’ in the Senate was successful, however, that amendment was rejected when the Bill was returned the House.[11]

The Labor position appears to be that the Government’s proposed increase of $200 billion is not yet demonstrably necessary; particularly given that the 2013–14 Mid-Year Economic and Fiscal Outlook (MYEFO), which will contain updated revenue and expenditure forecasts, has not yet been released. In any case, Labor has argued that any increase above $400 billion, a level that it would support, should require additional parliamentary approval.

The Shadow Treasurer, Mr Bowen, wrote to the Treasurer, Mr Hockey, expressing the Opposition’s position on the Bill. That letter, which Mr Hockey later tabled in the House, stated as follows:

·          The Opposition remains ready to vote for an increase in the debt limit to $400 Billion at the earliest opportunity, as we have already done

·          The Opposition also remains ready to vote for an increase in the debt limit to $500 Billion, if such an increase is supported by revised net debt [sic] figures in the Mid-Year Economic Forecast [sic] or in another form of update that you choose to publicly release.[12]

The Greens’ proposal

The Greens have proposed that the debt limit be repealed, and that it be replaced with a more comprehensive reporting requirement. For example, the deputy Leader of the Greens, Mr Bandt, has said:

Labor and the Coalition should join with the Greens to explore removing the artificial debt ceiling altogether, in return for more detailed reporting to Parliament on how the debt is being spent…[13]

Treasury’s view

In the recent 2013–14 Supplementary Senate Estimates hearings the Treasury Secretary, Dr Martin Parkinson, was questioned regarding the apparent need to amend the debt limit prior to December 2013. Dr Parkinson supported raising the debt limit, and suggested that the existing debt limit could be redesigned. Specifically he said:

As I have noted, we did not have a debt limit prior to 2008. That is clearly an option for the government. Alternatively, if a debt limit is to exist, it could be specified as a share of GDP, in which case the dollar amount for the limit would rise over time. It could be specified as a dollar amount which is indexed to GDP growth, which again would mean it would rise over time. Or it could be specified in fixed dollar terms.

As I have noted, we have previously anticipated a peak, plus the within-year buffer, to exceed $430 billion. It is now highly likely the quantum we will find will significantly exceed that amount. As such, the choice of a $500 billion limit seems prudent if we are to place a premium on ensuring financial market confidence. Were we to settle on a debt limit that was less than the anticipated prudent amount, it would be entirely reasonable for financial market participants here and overseas to wonder what might happen when what was clearly inevitable on current pathways came to occur.

Of course, it is a matter for the parliament to decide whether this is in the national interest, but the May 2012 AOFM minute, which is on the public record, highlights that uncertainty around the government's ability to undertake debt management would create widespread and potentially serious negative speculation within the investment community. As I said, the 2013-14 MYEFO will provide the full details and changes to the bottom line since PEFO but, since we need to await the September quarter national accounts in the first week of December, I cannot give you any more detail on the figures than I have just discussed.[14]

Other views

Economist, Professor Ross Garnaut, has called for the debt limit to be removed entirely. Specifically, he has said:

I'd get rid of the debt ceiling and replace it with a requirement that whenever certain thresholds get reached, the government of the day has to make a detailed statement about the justification of the debt that it has incurred, [and] the outlook for the debt…[15]

Committee consideration

On 14 November 2013, the Senate Selection of Bills Committee resolved not to refer this Bill to a committee.[16]

Senate Standing Committee for the Scrutiny of Bills

The Senate Standing Committee on the Scrutiny of Bills has not considered this Bill at the time of writing.

Financial and economic implications

The Bill has no direct financial implications. However, its passage would allow up to a further $200 billion in Commonwealth securities to be issued in order to provide for general governmental expenditures and programs.

Potentially, the Commonwealth may be prevented from making at least some payments as they fell due if the Bill, either as originally introduced or in some other form, did not pass the Parliament sometime before 15 December 2013. Breaching the debt limit would not be an option as, while there are no penalties for doing so, it would be unlawful.[17]

Consequently, a failure to pass the Bill (or another legislative measure) may have broader — potentially negative — economic consequences, arising from the suspension of various government expenditures and programs or from a significant reduction in investor and financial market confidence in Australia generally. In its memo to the former Treasurer, the AOFM advised that:

With increasing scrutiny of, and interest in, the market for CGS [Commonwealth Government securities], it is critical to maintain a clear and unambiguous signal that debt market operations will not be impeded.[18]

However, any potential adverse effects might be reduced — or avoided entirely — if the Government provided another response to reaching the debt limit, such as quickly implementing significant expenditure reductions, or accessing alternative sources of funds (refer to Appendix A).

Statement of Compatibility with Human Rights

The Statement of Compatibility with Human Rights can be found at page 7 of the Explanatory Memorandum to the Bill. As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[19]

Appendix A: Commonwealth Government borrowing and the operation of the debt limit

Commonwealth Government borrowing

Section 37 of the Financial Management and Accountability Act 1997 (FMA Act) provides that the Commonwealth may only borrow if the borrowing is authorised by an Act.[20]

There are various ways the Commonwealth may borrow. Section 38 of the FMA Act, for example, allows the Commonwealth to borrow from a bank for a period of up to 90 days.[21] This is mostly used by Commonwealth departments and agencies in order to meet short-term financing requirements.

Issuing securities in financial markets is the primary form of borrowing undertaken by the Commonwealth in order to fund general governmental expenditures. Several unique characteristics of securities mean that they are a more desirable mechanism for raising significant amounts of funds for ongoing governmental operations.

Commonwealth securities

Securities are generally sold, or ‘issued,’ by open tender. The Australian Office of Financial Management (AOFM) performs this function for the Commonwealth by periodic public tender of securities.[22]

Currently, the Commonwealth issues three main types of security:

·    Treasury Bonds

·    Treasury Indexed Bonds and

·    Treasury Notes.

In the past, the Commonwealth has also issued other types of securities.

Treasury Bonds

Treasury Bonds are securities that:

·    are issued for differing terms, or ‘maturities’, of between one year, and 30 years

·    pay the holder periodic interest at six monthly intervals

·    may be traded on secondary markets during their term and

·    entitle the holder to receive the face value of the security upon maturity.

At no point is the principal (the face value) owing to the holder of a Treasury Bond reduced by the payment of interest by the Commonwealth. In this way, a Treasury Bond is similar to an interest only loan.

The varying maturities of bonds allow financial market participants to match the length of their lending to their desired investment horizon, and assist financial markets by providing an indication of short, medium and long-term expectations about likely interest rates.

However, a consequence of the differing terms for Treasury Bonds is that individual series of Treasury Bonds will mature from time to time, and require the issuing of new series of a Treasury Bonds in their place. The process of redeeming and reissuing securities has been referred to as ‘rolling-over’ Commonwealth securities.

Treasury Indexed Bonds

Treasury Indexed Bonds are similar to Treasury bonds; however, the amount repayable upon maturity is adjusted for inflation; protecting the lender against any unanticipated changes in the prevailing rate of inflation over the term of the security.[23]

Treasury Notes

Treasury Notes are short-term securities that are generally issued for periods of around three months.

Unlike Treasury Bonds and Treasury Indexed Bonds, Treasury Notes pay no interest, but are sold at a discount to their face value upon initial issue. An investor receives their return through the difference between what they pay initially, and the face value upon redemption. Treasury Notes are used for the short-term financing requirements of the Commonwealth.[24]

The debt limit

The basic rule

Subsection 5(1) of the CIS Act currently provides as follows:

(1)     The total face value of stock and securities on issue under this Act and the Loans Securities Act 1919 at any time must not exceed $300 billion.

While the debt limit is not framed in terms of government financial reporting concepts, its practical effect is to limit the gross debt of the Commonwealth.

Subsection 4(1) of the CIS Act allows for the creating of stock, Treasury Bonds, Treasury Notes and ‘other prescribed securities from time to time’. Regulation 6A of the Commonwealth Inscribed Stock Regulations prescribes the following stock for the purposes of subsection 4(1):[25]

·    Australian Savings Bonds

·    Treasury Indexed Bonds

·    Treasury Bills

·    Treasury Bonds and

·    Treasury Notes.

Some of these securities are no longer issued. However, all these categories of instruments would appear to be subject to the debt limit where they are issued under the CIS Act or the Loans Securities Act.

Section 51A of the CIS Act appears to allow for the issue of various Commonwealth securities, which would also be subject to the limit. However, subsection 51A(3) of the CIS Act prevents any further securities being made out, issued or sold under that section after the commencement of that subsection, which occurred on 2 June 1984.[26]

Exemptions to the rule

Some categories of securities and other arrangements, however, are exempted from the debt limit under subsection 5(1) of the CIS Act. Subsection 5(2) provides as follows:

In working out the total face value of that stock and securities, disregard:

(a) stock and securities issued in relation to money borrowed under the Loan (Temporary Revenue Deficits) Act 1953; and

(b) stock and securities loaned by the Treasurer under a securities lending arrangement under section 5BA of the Loans Securities Act 1919, or held by or on behalf of the Treasurer for the purpose of such an arrangement; and

(c) stock and securities invested under subsection 39(2) of the Financial Management and Accountability Act 1997; and

(d) stock and securities on issue on the commencement of this section, other than Treasury Fixed Coupon Bonds.

Two of these exemptions are worthy of further discussion.

The Loan (Temporary Revenue Deficits) Act 1958

The exclusion from the debt limit of stock and securities issued under the under the Loan (Temporary Revenue Deficits) Act 1953 (the Temporary Deficits Act) appears to allow for an alternate method of raising short-term funds outside of the limit in the CIS Act.[27]

Section 4 of the Temporary Revenue Deficits Act provides as follows:

Whenever the amounts in the Consolidated Revenue Fund are, or are expected by the Treasurer to be, insufficient to meet expenditure from that Fund, the Treasurer may, under the provisions of any Act authorizing the issue of Treasury Bills, borrow moneys not exceeding the amount of the insufficiency or expected insufficiency (emphasis added).[28]

While Treasury Bills may be issued under subsection 4(1) of the CIS Act (via Regulation 6A), they may also be issued under the Treasury Bills Act 1914 (the Treasury Bills Act).[29] Treasury Bills are another type of short-term security which operate in a similar manner to Treasury Notes.

It would appear that the Temporary Deficits Act in conjunction with the Treasury Bills Act might provide an alternate mechanism for raising funds outside of the debt limit in section 5 of the CIS Act. However, utilising that mechanism to avoid the operation of the debt limit may not be without difficulties:

·         firstly, there would appear to be some legal questions related to the issue of Treasury Bills. For example, it is not altogether clear whether Treasury Bills would be included in the debt limit: they may be outside the limit because they could be issued under the Treasury Bills Act and would, therefore, not be subject to the debt limit; however they may be included because Regulation 6A made under the CIS Act prescribes Treasury Bills for the purposes of the CIS Act and therefore the debt limit

·         secondly, no Treasury Bills have been on issue since 1982.[30] There is, therefore, no established market in which to sell Treasury Bills. While there may be sufficient purchasers of Treasury Bills (if they were issued) to raise the necessary funds, those purchasers may demand a higher rate of return on their funds, given the lack of an established deep and liquid market in Treasury Bills. Any legal doubts arising from the issuing of Treasury Bills in order to avoid the debt limit would likely compound investor uncertainty and

·         thirdly, section 5 of the Temporary Revenue Deficits Act requires that ‘Moneys borrowed by virtue of the last preceding section [section 4 discussed above] shall be repaid in the financial year in which they were borrowed.’ This section would appear to foreclose the possibility that the Temporary Revenue Deficits Act could be used to provide any long-term funding outside the scope of the debt limit.

In the 2013–14 Senate Supplementary Budget Estimates hearings, the Executive Director of Fiscal Group in the Department of the Treasury, Mr Nigel Ray, discussed the possibility that the Temporary Revenue Deficits Act could provide an alternative to raising the debt limit. He said:

That piece of legislation [the Temporary Revenue Deficits Act] is available to a government to issue debt under, but it is not without some legal questions, particularly were the debt to be issued. So there are questions about whether it could be done within year or over the end of the year, for example.

Secondly, I have given evidence before that one of the things I think we have learnt over the last few years is that a deep, liquid market for Commonwealth government securities that is well understood and managed consistently is an asset in terms of how the financial markets, and therefore the economy, operates. And issuing your securities under one piece of legislation is a much cleaner way of doing it than using different things that might be available to a government.[31]

Certain securities on issue at the commencement of section 5 of the CIS Act

Paragraph 5(2)(d) of the CIS Act excludes from the scope of the debt limit ‘stock and securities on issue on the commencement of this section, other than Treasury Fixed Coupon Bonds.’

The Treasury Bonds discussed above are Treasury Fixed Coupon Bonds within the meaning of that paragraph; meaning they are subject to the debt limit irrespective of when they were first on issue.

Treasury Indexed Bonds, however do not appear to be within the scope of the term Treasury Fixed Coupon Bonds; meaning that any such securities that were on issue prior to the commencement of that paragraph are not subject to the debt limit. The most recent official budget update — the Pre-Election Economic and Fiscal Outlook (PEEFO) —advised that there would be only $4.6 billion of Treasury Indexed Bonds in 2013–14 issued before the commencement of the debt limit.[32]

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.

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ISSN 1328-8091

[1].              Commonwealth Inscribed Stock Act 1911, accessed 2 December 2013.

[2].              Commonwealth Securities and Investment Legislation Amendment Act 2008, section 4, accessed 2 December 2013.

[3].              W Swan (Treasurer), ‘Second reading speech: Commonwealth Securities and Investment Legislation Amendment Bill 2008’, House of Representatives, Debates, 18 June 2008, p. 5187, accessed 2 December 2013.

[4].              Appropriation Act (No. 2) 2011-2012, section 18, accessed 2 December 2013.

[5].              Commonwealth Inscribed Stock Amendment Act 2009; Appropriation Act (No. 2) 2011-2012, section 18, accessed 2 December 2013.

[6].              Appropriation Act (No. 2) 2012-2013, section 18, accessed 2 December 2013.

[7].              Australian Office of Financial Management, Commonwealth Government securities on issue: impact of within-year financing requirement, Executive Minute, 3 May 2012, p. 3, accessed 2 December 2013.

[8].              Ibid., p. 2.

[9].              Australian Office of Financial Management, ‘Benchmark Treasury fixed coupon bonds on issue at 31 October 2013’, Australian Office of Financial Management website, accessed 29 November 2013.

[10].              Parliament of Australia, ‘Commonwealth Inscribed Stock Amendment Bill 2013 homepage’, Australian Parliament website, accessed 29 November 2013.

[11].              Australia, House of Representatives, ‘Commonwealth Inscribed Stock Amendment Bill 2013’, Votes and proceedings, HVP 3, 14 November 2013, accessed 2 December 2013.

[12].              C Bowen, Letter to the Treasurer, 21 November 2013, accessed 2 December 2013.

[13].              M Kenny, ‘Greens call for debt limit to be removed’, The Canberra Times, 25 November 2013, p. 6, accessed 2 December 2013.

[14].              M Parkinson (Secretary, Department of the Treasury), Evidence to the 2013–14 supplementary budget estimates: Treasury Portfolio, 20 November 2013, p. 44, accessed 29 November 2013.

[15].              J Kelly, 'Warning issued on tea party debates', The Australian, 16 November 2013, p. 2, accessed 2 December 2013.

[16].              Selection of Bills Committee, Report No. 9 for 2013, The Senate, 14 November 2013, accessed 2 December 2013.

[17].              See M Parkinson (Secretary, Department of the Treasury) and N Ray (Executive Director, Fiscal Group, Department of the Treasury), Evidence to the 2013–14 supplementary budget estimates: Treasury Portfolio, 20 November 2013, pp. 54–55, accessed 29 November 2013.

[18].              AOFM, Executive Minute, op. cit., p. 2.

[19].              Explanatory Memorandum, Commonwealth Inscribed Stock Amendment Bill 2013, accessed 2 December 2013.

[20].              Financial Management and Accountability Act 1997, section 37, accessed 2 December 2013.

[21].              Ibid., section 38.

[22].              See generally: Australian Office of Financial Management website, accessed 29 November 2013.

[23].              Australian Office of Financial Management, ‘Glossary’, Australian Office of Financial Management website, accessed 29 November 2013.

[24].              Australian Office of Financial Management, ‘Glossary’, Australian Office of Financial Management website, accessed 29 November 2013.

[25].              Commonwealth Inscribed Stock Regulations, regulation 6A, accessed 2 December 2013.

[26].              Statute Law (Miscellaneous Provisions) Act (No. 1) 1984, accessed 2 December 2013.

[27].              Loan (Temporary Revenue Deficits) Act 1953, accessed 2 December 2013.

[28].              Ibid., section 4.

[29].              Treasury Bills Act 1914, section 3, accessed 2 December 2013.

[30].              Reserve Bank of Australia (RBA), Commonwealth Government securities on issue, RBA, table E10, accessed 29 November 2013.

[31].              N Ray (Executive Director, Fiscal Group, Department of the Treasury), Evidence to the 2013-14 supplementary budget estimates: Treasury Portfolio, op. cit., p. 55.

[32].              Department of the Treasury and Department of Finance and Deregulation, Pre-election economic and fiscal outlook 2013, op. cit., p. 17.