Financial Agreement Bill

About this Item
Speakers - Murray Mr John; Neilly Mr Stanley; Collins The Hon Peter
Business - Bill, Second Reading

FINANCIAL AGREEMENT BILL

Second Reading

Debate resumed from 27 October.

Mr J. H. MURRAY (Drummoyne) [11.35]: During the period between the arrival of the First Fleet in Australia and Federation in 1901 British settlement was effected on the basis of the establishment of a number of independent colonies on the Australian mainland. Those colonies acquired financial powers commensurate with their political status, including the power to borrow at home and overseas. While some use was made of the local capital market, it was, of course, still developing and the colonial governments turned to the metropolitan capital for funds. By the end of the 1800s it was the colonial governments who were the most important Australian borrowers in London, which was then the biggest capital market in the world. Before the outbreak of the First World War as much as two-thirds of the public debt of Ł313 million was incurred overseas.

At the end of the nineteenth century when the colonies agreed to federate and to establish a Federal government, they retained the power to borrow as States, which they had previously possessed as colonies. However, the inauguration of the Commonwealth Government brought with it an element of contention into the arrangements for borrowing, concentrating on the issue of which body had priority - the Commonwealth or the States. The issue of borrowing priorities was temporarily resolved during the First World War when the Commonwealth Government assumed the role of borrowing authority for the States. As soon as the war was over this arrangement lapsed.

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During the 1920s the States undertook large-scale immigration and settlement schemes. This period immediately after the First World War also saw a significant increase in urbanisation and industrialisation in Australia, and the States embarked upon a marked expansion in the provision of infrastructure to underpin this development. Considerable attention was devoted to providing facilities for the growing industrial and urban areas. With the development of motor transport, electric power and improved housing standards, the demand for the construction of roads, bridges, electricity and telegraph installations, and water and sewerage facilities expanded rapidly.

During the 1920s two considerations induced governments in Australia to borrow - principally overseas. The first was that before the First World War there had not been a high level of direct taxation in the colonies or in the subsequent States. Although income tax had been increased significantly during the First World War by the Federal Government and the States, people expected it to be reduced afterwards. State governments therefore preferred to borrow than to maintain unpopular wartime taxation levels. Second, it was considered that heavy domestic borrowing would deplete the private sector of capital for investment in manufacturing and other industries.

Between 1921 and 1929 Ł276 million was added to public indebtedness, of which 73 per cent was obtained in London and New York. In fact, the Commonwealth's overseas borrowing program was about 60 per cent of net loan expenditure. As the States expanded their borrowing during the 1920s the issue of priority in borrowing soon arose again when the Commonwealth Government was seriously embarrassed by the States' failure to leave the market clear for a large conversion loan of Ł38 million in 1923. Thus, at the Premiers' Conference in May 1923 the Bruce-Page Nationalist-Country Party Federal Government called for the establishment of a loan council. Since this was to be undertaken informally, the States raised no objection.

The council first met in 1924 and its executive consisted of the Federal Treasurer and the Treasurers of New South Wales, Victoria and South Australia. It operated quite successfully until 1927, when a major issue was raised in New York. In this period the rate of interest on government issues fell to around 5.25 per cent. Although council was certainly not responsible for this, it received some of the credit. The difficulty was, however, that despite a certain measure of agreement on a common approach, council found it increasingly difficult to bring any pressure to bear to reduce borrowing programs. Collectively, each government agreed that the rate of borrowing would have to be reduced to avoid serious consequences, but individually none was prepared to reduce its expenditure for fear that others would not do likewise and that they would thereby fall behind in the development race. This resulted in problems for the council.

A financial agreement was entered into between the Commonwealth and State governments which called for the Loan Council to become a formal body. This financial agreement, which was ratified in 1928 by the Commonwealth and State parliaments, was confirmed in November 1928 by a referendum which allowed for the insertion of section 105A into the Australian Constitution, establishing the Loan Council as a constitutional body and authorising the Commonwealth Government to make agreements with the States with respect to all aspects of their public debts. All future borrowings and other debt transactions, whether on behalf of the Commonwealth or the States, were to be arranged by the Commonwealth subject to the approval of the Loan Council.

In 1994, at the Hobart meeting of the Council of Australian Governments, a new financial agreement was signed implementing the changes decided on at the June 1992 Loan Council meeting. In addition to approving the provisions agreed on in 1992, further provisions were also agreed to. The new financial agreement provides for the continued existence of the Loan Council with broadly specified roles and powers and sets out certain obligations on the part of the States in respect of past borrowings undertaken by the Commonwealth on their behalf. Council will have the power to make resolutions only in relation to borrowings, fundraisings and other financial arrangements of public sector entities. The resolutions, however, are not legally binding.

In order to realise the changes agreed upon it has been decided that each State will pass a bill implementing that State's adherence to the new financial arrangements. So far, five legislatures in Australia have passed a bill. That is why we have before us today the Financial Agreement Bill. In many respects this bill only formalises a process that has been occurring over the past 15 to 20 years, during which time the States have been given back an increasing degree of responsibility for borrowing. It may be asked, however, whether this is a worthwhile development, on an overall level, given the reasons that first led to the establishment of the original financial agreement and the Loan Council. The degree of borrowing, particularly from overseas, which existed in the 1920s seems, of its own nature, to have called forth the need for a supervising body. The Great Depression of the 1930s, however, markedly reduced the level of borrowing. Although borrowing was increased somewhat during the 1950s, it played a lesser role in providing finance for development than it did during the 1920s.

On some immediate levels, however, other aspects of the reasons for the foundation of the original financial agreement seem relevant when looking at the conclusion of the new arrangements. The fact remains that for more than half a century the Loan Council has provided a coordinated and orderly approach to capital raising for Australian governments. This has eliminated governmental competition for funds and has enabled all governments to obtain their funds on terms and conditions that
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apply to borrowers with the best possible credit rating. I turn to the main provisions of the bill. Its purpose is to obtain Parliament's approval of the new financial agreement. The document is aimed at formalising and streamlining existing intergovernmental arrangements with respect to public sector borrowings and the role and operations of the Loan Council.

The new agreement removes the Commonwealth's explicit power to borrow on behalf of the States as provided for in the previous agreement. Since 1987-88, the Commonwealth has undertaken no new borrowings on behalf of the States. In recent years the States have conducted their own borrowings through the respective central borrowing authorities. The relevant authority in New South Wales is the Treasury Corporation. A new fund, the debt retirement reserve trust account, will be established to provide a more efficient debt-redemption framework. In future, the redemption of Commonwealth securities previously issued on behalf of the States and the Northern Territory will be administered through the trust account.

The debt retirement reserve trust account will replace the previous arrangements for debt repayments through the National Debt Sinking Fund for the States and the Northern Territory Debt Sinking Fund for the Northern Territory. The Financial Agreement Act 1944 of New South Wales had a standing appropriation provision which allowed the Consolidated Fund to be appropriated to the extent necessary for the purpose of carrying out the financial agreement. The appropriations were to cover the payment of interest and the repayment of borrowings. A similar provision has been included in this bill. The new financial agreement will not impose additional costs on the State Government. As I said earlier, complementary legislation has been passed by five other jurisdictions. I support the bill.

Mr NEILLY (Cessnock) [11.46]: I support the Financial Agreement Bill, which in essence ratifies an agreement between the Commonwealth and the States signed on 25 February 1994. A copy of the agreement is appended to schedule 1 to the bill. Primarily, that agreement, which was signed by all the State Premiers and the Chief Minister of the Northern Territory, is designed to amend the original document of 12 December 1927. The explanatory note to the bill gives a fair resumé of what this legislation is about - as referred to by the honourable member for Drummoyne. The explanatory note states:

The 1994 financial agreement therefore:

(1) abolishes the explicit power of the Commonwealth to borrow on behalf of the States;

(2) removes the restriction on States borrowing by the issue of securities in their own names in both domestic and international markets;

(3) removes the requirement that the Commonwealth and States obtain Loan Council approval of future borrowings.

With reference to debt retirement, the explanatory note states:

The States and the Northern Territory must refinance debt raised on their behalf by the Commonwealth . . . The Commonwealth must compensate the States and the Northern Territory for any additional costs incurred by them as a result of the change-over.

The explanatory note also stipulates:

The Loan Council is to be a monitoring and coordinating body, with the power to make resolutions in relation to the borrowings, fund raisings and other financial arrangements of public sector entities.

This is part of a process of freeing up the States, to some extent, to enter into their own borrowing arrangements and to be responsible for the payment of debts incurred under old Loan Council arrangements. It is important for the States to be aware of their status in international ratings as they will borrow from overseas in the future. I am not referring here to debt retirement or to the refinancing of debt previously incurred under old arrangements. Because of our high credit rating we can take advantage of our status. This legislation will reduce some of the paperwork generated between the States and the Commonwealth through Loan Council arrangements. We do not want to create a paper war and increase bureaucracy. I have not read the bill in its entirety, but I wish to ask the Minister one question. I presume that the monitoring process referred to will enable the Loan Council to prevent the sorts of transactions conducted in the mid-1980s concerning the financing and leasing arrangements of Bayswater power station. I hope the Minister will give me a response when he replies to the debate.

Mr COLLINS (Willoughby - Treasurer, and Minister for the Arts) [11.50], in reply: I thank honourable members for their contribution to this debate. Though I assume that my response to the question asked by the honourable member for Cessnock will be in the positive, I am unable to respond at this stage. I will provide him with a written answer after this debate has concluded. I commend the bill.

Motion agreed to.

Bill read a second time and passed through remaining stages.

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