Chapter 1
Introduction
Background
1.1
The recent economic downturn makes it an appropriate time for state and
territory governments (hereafter called ‘states’) to expand infrastructure
investment, both in budgetary terms (in that resources are cheaper and more
available during such times) and as a counter-cyclical measure (to stimulate
the economy by creating jobs and building a foundation for recovery). This
requires substantial borrowing programmes. However, as discussed further in
Chapter 3, states are finding it more expensive to borrow with the diminished
appetite for risk in financial markets.
1.2
On 25 March 2009, the Treasurer the Hon Wayne Swan, announced that 'the
Rudd Government will take further action to support jobs and protect vital
infrastructure plans from the global recession by providing a time-limited,
voluntary guarantee over state government borrowing. This important measure
recognises that pulling back on critical nation-building infrastructure
investment now would mean ever slower growth and higher unemployment in the
future.'[1]
Conduct of the Inquiry
1.3
Under a Senate Resolution of 14 May 2009, the Guarantee of State and
Territory Borrowing Appropriation Bill 2009 was referred to the Senate
Economics Legislation Committee on its introduction into the House of
Representatives on 27 May 2009. The resolution requires the Committee to report
to the Senate on 16 June 2009.
1.4
The Committee advertised the inquiry on its website. The Committee
thanks Infrastructure Partnerships Australia and the Tasmanian Government for
their submissions to this inquiry. A public hearing was held in Canberra on 10
June 2009. The Committee thanks Mr Peter Jolly from nabCapital and officers
from the Department of the Treasury for appearing.
The Bill
1.5
The Bill's purpose is to provide a standing appropriation enabling the
Australian government to pay out of the Consolidated Revenue Fund any claim
made under the government's guarantee of state borrowing.
1.6
Where there is insufficient funding in the Consolidated Revenue Fund to
pay a claim, the Bill also allows the Minister to borrow money to 'top up' the
Consolidated Revenue Fund for the purpose of paying that claim. The borrowing
must not be for a period exceeding 24 months and includes raising money or
obtaining credit, whether by dealing in securities or otherwise.[2]
1.7
The states will be charged a fee for the guarantee, determined according
to the state's credit rating. According to the government:
The fee has been set according to historical experience of
borrowing spreads, and at a level that provides an incentive for states to
cease utilising the guarantee when market conditions normalise.[3]
1.8
The proposed fee structure is outlined in Table 1.
Table 1: Fees for
guarantee
|
Credit Rating |
On existing stock |
On new issuance |
|
AAA |
15 basis points |
30 basis points |
|
AA+ |
20 basis points |
35 basis points |
Source: Bills Digest, p
4.
1.9
The Reserve Bank observes:
The fees payable for such a guarantee (between 15 and 35
basis points per annum) will be significantly less than those levied on the
(lower-rated) authorised deposit-taking institutions.[4]
1.10
The Bill is due to commence on the day it receives Royal Assent.
Outline of the report
1.11
Chapter 2 of the report provides a brief history of state debt
guarantees and discusses the question of whether there is an implicit
Commonwealth guarantee of state borrowing. Chapter 3 outlines the key issues
raised during the inquiry and concludes that the bill should be passed.
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