Chapter 4 - Commonwealth Inscribed Stock Amendment Bill 2009
Purpose of the Bill
4.1
The Commonwealth Inscribed Stock Amendment Bill (CIS Bill) amends the Commonwealth
Inscribed Stock Act 1911 (the CIS Act) by inserting a new section 5A which
allows the Treasurer to declare that a special circumstance exists which
justifies an increase in the cap of Commonwealth Government Securities on
issue.
4.2
Currently, the maximum face value of Commonwealth Government Securities (CGS)
on issue is $75 billion. The CIS Bill proposes to allow the Treasurer to
declare that special circumstances exist which justify an increase in the limit
on the face value of securities on issue by $125 billion. A special
circumstance could include, but is not limited to, a deterioration in global or
domestic economic conditions or a deterioration in revenues.[1]
4.3
Other provisions of the CIS Bill provide that:
- at any one point in time, there can only be one declaration that
there are special circumstances, that is the Treasurer can not make another
declaration until the previous declaration is revoked;
- the declaration is not reviewable under the Administrative
Decisions (Judicial Review) Act 1977; and
- the Treasurer will still be required to issue a direction under
the CSI Act specifying the total amount of CGS that can be on issue within the
cap.
Issues
4.4
A number of issues were raised in relation to the proposed increase in
the cap of the CGS including: the cost of the debt; the attractiveness of CGS to
investors; and the potential impact on exchange rates.
4.5
The Treasury indicated that the gross debt on issuance is currently
$58.5 billion, which is 5.5 per cent of gross domestic product.[2]
The additional $125 billion would be required to fund the proposed package
and other funding needs of the Government including refinancing of existing
borrowing lines.[3]
The Treasury commented that the Government's borrowing requirement is 'largely
due to the reduction in estimated tax receipts resulting from the deteriorating
economic outlook and the unwinding of the commodities boom'. It was noted that
since the Mid Year Economic and Fiscal Outlook, taxation receipts have been
revised down by around $75 billion over the forward estimates. These falls in
tax receipts, along with higher payments associated with the weaker economic
outlook, account for around two-thirds of the overall borrowing requirement.[4]
4.6
Dr Ken Henry, Secretary of the Treasury, noted that:
...we are making interest payments on that gross debt. We make
interest payments in the form of coupons for people who hold Commonwealth
government securities on that debt. But at the same time, we hold financial
assets on the balance sheet; obviously in the Future Fund and other financial
assets that we hold that more than offset that gross debt on issuance.[5]
4.7
In addition, the costs of the funds was explained thus:
The cost of funds is going to depend on the maturity structure
of the debt that gets issued, and we have not yet determined that because it
would depend on market conditions. But at the moment I think our average cost
of funds for new issuance is around about four per cent.[6]
4.8
Mr David Tune, Department of the Prime Minister and Cabinet, also
commented in responding to a question on whether the increase imposed an
unsustainable cost to the economy:
It depends where your starting point is. If you are looking at
reasonably low debt levels to start with, you trade off the costs around these
things in the future against the benefits you get in the current period. As
long as you do not move the country into huge, unsustainable debt levels—which
this will not do; net debt will remain at a reasonable level and low by
international standards—there is probably not a problem. But yes, there is a
cost.[7]
4.9
Mr Greg Evans of the Australian Chamber of Commerce and Industry (ACCI) also
recognised the necessity of a temporary deficit:
We agree with the concept that there needs to be a temporary
deficit to deal with the current economic circumstances. We are on record as an
organisation as being fiscally conservative in these matters, so we believe
that this is not the time to relax any sort of government discipline with
respect to wasteful government spending or inefficiencies. They should also be
dealt with. [8]
4.10
Dr Henry went on to comment that in the UEFO it is stated that:
As the economy recovers, and grows above trend, the Government
will take action to return the budget to surplus by:
- allowing the level of tax receipts to recover naturally
as the economy improves, while maintaining the Government’s commitment to keep
taxation as a share of GDP below the 2007-08 level on average—
taken together with the second dot point—
- holding real growth in spending to 2 per cent a year
until the budget returns to surplus—
4.11
Dr Henry concluded:
I consider that there is good reason to expect that, with those
two conditions satisfied when the economy is growing strongly, any increase in
net debt due to the implementation of this package would be unwound over time.
The reason I draw your attention to the first dot point is that that implies
that the increase in net debt would be unwound over time without taxation
increasing as a share of GDP above the 2007-08 level, on average.[9]
...
As I indicated the last time we met, obviously net debt will be
reduced over time by future budget surpluses—that is the intention—and that
would be true no matter how the budget surpluses were achieved, obviously. It
could also be achieved by asset sales. That has certainly been a way in which
debt has been reduced in the past. But, provided the budget achieves a headline
surplus, and certainly if it achieves an underlying cash surplus in the way we
measure these things these days, the net debt will be reduced. That is a
tautology.[10]
4.12
A further issue raised during the inquiry was the attractiveness of CGS
to investors when many other governments are also borrowing money to address
problems in their economies. Dr David Gruen, Treasury, commented that for
private investors 'there has been a huge reduction in appetite for risk, so
investors are crying out for government assets, which they deem to be safe, so
yields on government bonds all around the developed world are falling because
demand is extremely strong for those sorts of assets'.[11]
4.13
In evidence, the Treasury responded to concerns that raising money in
the bond market could lead to an increase in the exchange rate as foreign
investors will purchase Australian dollars to buy bonds. A higher Australian
dollar could impact adversely on export-oriented industries. Dr Henry
responded:
A general view among macroeconomists would be that, if one
country acting in isolation were to undertake an expansionary fiscal policy and
that country had a freely floating exchange rate, then one of the consequences
of that unilateral fiscal expansion would be that its exchange rate would
appreciate. Obviously we are not in those circumstances. It is the case that
governments around the world are undertaking expansionary fiscal policy. It may
well be the case that, were Australia not to undertake an expansionary fiscal
policy, our dollar would depreciate even further than it already has. Maybe
that would provide some measure of support for some sectors of the economy that
would benefit from a depreciating exchange rate, but it would also reduce
forecast growth in the Australian economy in 2008-09 by ½ a percentage point
and in 2009-10 by ¾ to one percentage point. Even taking into account the
impact on the exchange rate of the fiscal stimulus, that would be the effect.
To put it another way: in making these forecasts, our modelling
would have taken into account, at least to some extent, impacts on the exchange
rate of the economic stimulus package that is here. Any economic stimulus
package is going to directly benefit some sectors of the economy more than it
does others; I suspect that is unavoidable. The same is true of monetary
policy, as you know. Not everybody likes to see interest rates fall. Yet I
think we all accept that, when the economy weakens, it is desirable that
interest rates fall.[12]
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