Government Increases Debt Limit, Announces Commission Of Audit

The Abbott government has increased the debt limit from $300 billion to $500 billion and announced a Commission of Audit.

At a press conference in Canberra today, Treasurer Joe Hockey said that Commonwealth Government Securities on issue would reach $379 billion by 2015-16 and that peak debt will now exceed $400 billion.

He said advice from the Australian Office of Financial Management is that “it is prudent to maintain a buffer of $40-60 billion”. The government will legislate to increase the Commonwealth Government debt limit to $500 billion.

Hockey

The Minister for Finance, Senator Mathias Cormann, announced the composition and terms of reference at the press conference. Tony Shepherd, president of the Business Council of Australia, will chair the National Commission of Audit. Hockey said the commission will have “very broad terms of reference” and will report in two phases.

The Commission’s members will be:

  1. Tony Shepherd (Chairman) – President, Business Council of Australia
  2. Dr. Peter Boxall – former Secretary of the Department of Finance and Administration and other departments, currently chairman of the NSW Independent Pricing and Regulatory Tribunal (IPART)
  3. Tony Cole – former Treasury Secretary and Deputy Secretary of the Department of Prime Minister and Cabinet
  4. Robert Fisher – former Director-General of the Western Australian Departments of Industrial and Regional Development, of Trade and of Family and Children’s Services.
  5. Amanda Vanstone – former Senator and minister in the Howard government from 1996 until 2007

Commission of Audit’s Terms of Reference:

Transcript of joint press conference by Treasurer Joe Hockey and Finance Minister Senator Mathias Cormann.

HOCKEY: Thank you very much for coming along today. Cabinet has made two decisions which I particularly want to announce today. The first involves increasing the debt limit for the issuance of Commonwealth Government securities. The second is the Commission of Audit. Firstly, I announce today that the Coalition Government will have to increase the debt limit for Commonwealth Government securities to $500 billion.

We are increasing it to that level because I have been advised that on 12 December, the current debt limit of $300 billion will be hit. We need to move quickly to deal with this, particularly in the wake of what has been revealed in the United States in recent times. This is a significant issue. We need to put it beyond any doubt and we do not want to have to revisit this issue again. The fact of the matter is that peak debt in the Pre-election Fiscal Outlook was expected to be $370 billion. We have been advised it will now exceed $400 billion on current trends. Given that, we have to ensure that there is a buffer of $40 billion to $60 billion to provide stability to the issuer, the Australian Office of Financial Management. We have decided to go to $500 billion. This is the legacy of a bad Labor government. This is part of the job that we have to fix.

The second announcement is about ensuring that we never have to reach the debt limit. There is a difference between the debt limit and the debt. And we need to address the increasing debt of the Commonwealth Government. Today we are announcing a Commission of Audit with very broad terms of reference that is going to focus on delivering to myself, the Minister for Finance and the Prime Minister a comprehensive report in two phases, which the Minister will talk about in one moment. The Commission of Audit is to be headed by Mr Tony Shepherd, President of the Business Council of Australia. It will have a number of numbers, Dr Peter Boxall, former Secretary of the Department of Finance. Mr Tony Cole, former Secretary of the Treasury. Mr Robert Fisher, who has been involved directly in the delivery of services at a state level and former Senator Amanda Vanstone, who has been a Minister in Social Services and also has extensive experience in this area. The Commission’s Secretariat will be headed up by Mr Peter Crone. The Commission itself will be based in Department of Finance. We will have very regular engagement with the Commission during the course of its work. We are today releasing the terms of reference together with the announcement about the Commission. I will ask my colleague Mathias to say a few words.

CORMANN: Thank you, Treasurer. What is very clear to us is that Labor left behind a Budget in very bad shape. The numbers in the Pre-election Economic and Fiscal Outlook were bad enough. But what is even more concerning is that we have inherited from Labor a Budget which continues to deteriorate. We went from a promised surplus to an $18 billion deficit at Budget time to a $30 billion deficit at election time and still growing. Gross debt is growing to $400 billion and beyond as the Treasurer has just indicated. Annual government spending under Labor increased by more than $120 billion over the six years from 2007-08 to 2013-14. In real terms, spending under the Rudd and Gillard Governments increased by more than 25%, or an annual average of more than 4%., irrespective of Labor’s so-called fiscal targets. Importantly on top of having inherited a bad starting position from Labor we are facing significant structural and fiscal pressures on the spending side in particular related to the aging of our population. We have to repair the Budget, we have to reverse the current trend we have from Labor. We have to get spending growth under control.

The Government has to be able to live within its means on a sustainable basis over the long term and this is of course what the Commission of Audit has to help us achieve in a calm, methodical and orderly fashion. As the Treasurer has indicated, the Commission’s work will be conducted in two phases. Phase 1 will report to the Government by the end of January on the roles and responsibilities of government, efficiency and effectiveness of government expenditure and on medium-term fiscal sustainability. Phase 2, which will report to the government by the end of March will then focus on public sector performance and accountability. This is a very important task that the Commission of Audit has to take on for the Government. We did inherit a Budget in very bad shape. We do need to deal with it in a calm methodical and orderly fashion from here on in.

JOURNALIST: It says here in the terms of reference that the recommendations will achieve savings sufficient to deliver a surplus of 1% of GDP before 2023-2024. That seems a long way out. Are you suggesting it is going to be a very long haul?

HOCKEY: No it is not a long haul to surplus. We said 1% of GDP, which exceeds surplus. We will get to a surplus before that.

JOURNALIST: The terms of reference include the privatisation of commonwealth assets. Can you talk about your thinking about when it might be worth selling off assets? If you were to do that, could you tell us when you might be selling off assets? With some assets you’d are giving up a useful dividend strand. What are your thoughts on when that might happen?

CORMANN: In relation to the sale of commonwealth assets, the current policy of the Government is that we intend to sell Medibank Private and we’ll have something more to say about that very soon. We don’t have, at present, a policy to sell any other Commonwealth assets. We’re not going to speculate here today about what the Commission of Audit may or may not recommend. That is a matter for them. But we do, of course, want them to look very much at the scope of government moving forward and whether there is a case in relation to the potential sale of Commonwealth assets into the future but we’re not going to speculate about what the case may be.

JOURNALIST: [Inaudible]

HOCKEY: No. We are going to keep to our election promises but we are also going to make sure that we live within our means.

JOURNALIST: I don’t have a terms of reference at the moment. Is anything at all ruled out of the terms of reference? When you talk about privatisation, and you want to have a look and see what comes up, do you have a starting point that anything such as Australia Post?

HOCKEY: I want to emphasise, the last one was done in 1996. It is time to do it again and we are doing it. It is going to be very thorough and very comprehensive. It involves a relationship between the Commonwealth and the States and it has very broad terms of reference. Now, I’m not going and my colleagues won’t get into speculating what the outcome is of the commission. Let it do its job. It’s going to have all the resources and support we can muster.

JOURNALIST: [Inaudible] are you willing to expend political capital?

HOCKEY: We have to fix the Budget. We have to fix the Budget.

JOURNALIST: [Inaudible]

HOCKEY: The percentage of GDP keeps increasing. Over time when you have an actual figure, it decreases as a percentage of GDP and that is attractive to us. When we see MYEFO you will see the full details of the budget numbers.

JOURNALIST: [Inaudible]

HOCKEY: What matters is not the debt limit, it is the debt, and the level of the debt. You have got to have a credible plan to bring the debt down. That is what we are doing. That is why we are having the Commission of Audit.

JOURNALIST: [Inaudible]

HOCKEY: No. He is absolutely the right person to do it. But he is one of a number of commissioners.

JOURNALIST: On the question of debt. There were suggestions you were going to look at infrastructure bonds to fund the big infrastructure works the Government’s committed to – up to $100 billion. (Inaudible).

HOCKEY: No.

JOURNALIST: Is that what you plan to do?

HOCKEY: I’m not going to talk about the issuance timetable from the AOFM. We have got to make sure there is demand for quality assets in Australia and if government debt issuance is seen as a quality investment then people will go with it. The credit rating is what matters. The pricing I will leave that to the markets. It’s not for us. From our perspective, we have got to focus on the challenges that lie ahead. We are going to go for growth.

JOURNALIST: If you want this to be comprehensive and thorough, you’ve got a very tight timetable. January and then March. It will all be over within six months. The Henry Review took years.

HOCKEY: Yes. And where did that leave us?

JOURNALIST: Such a tight timetable for such a mammoth task or two tasks, really?

HOCKEY: I would say to you the challenge is that we have got to make sure it works. And that the results are credible and they will feed into our budget. This is not the Henry Review, it is a Commission of Audit. It has got a lot of resources.

JOURNALIST: Why have you got the Commission looking at the ANAO and Parliamentary Budget Office?

HOCKEY: Every area of government will be examined. There are no restrictions. Thanks very much.


Reserve Bank Leaves Interest Rates Unchanged

The Reserve Bank of Australia has left interest rates unchanged after its monthly board meeting today.

The cash rate stays at 2.5%.

It is the first decision on interest rates under the Abbott government.

Statement from Glenn Stevens, Governor of the Reserve Bank of Australia.

At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent.

Recent information is consistent with global growth running a bit below average this year, with reasonable prospects of a pick-up next year. Commodity prices have declined from their peaks, but generally remain at high levels by historical standards. Inflation in most countries remains well contained.

Overall, global financial conditions remain very accommodative. Changes in the outlook for US monetary policy have increased volatility in financial markets, but long-term interest rates remain very low and there is ample funding available for creditworthy borrowers.

In Australia, the economy has been growing a bit below trend over the past year. This is expected to continue in the near term as the economy adjusts to lower levels of mining investment. The unemployment rate has edged higher. There has been an improvement in indicators of household and business sentiment recently, though it is too soon to judge how persistent this will be. Inflation has been consistent with the medium-term target. With growth in labour costs moderating, this is expected to remain the case over the next one to two years, even with the effects of the lower exchange rate.

The easing in monetary policy since late 2011 has supported interest-sensitive spending and asset values. The full effects of these decisions are still coming through, and will be for a while yet. The pace of borrowing has remained relatively subdued to date, though recently there have been signs of increased demand for finance by households. There is also continuing evidence of a shift in savers’ behaviour in response to declining returns on low-risk assets.

The Australian dollar rose recently, but is still about 10 per cent below its level in April. A lower level of the currency than seen at present would assist in rebalancing growth in the economy.

At today’s meeting, the Board judged that the setting of monetary policy remained appropriate. The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target.


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