Today I announce that the Government will increase its issuance of Commonwealth Government Securities (CGS) as part of the Government's commitment to the effective operation of Australia's financial markets.
The Government's decision to increase issuance follows consultations with market participants about the adequacy of the supply of CGS.
The Rudd Government is committed to ensuring that Australia's financial markets continue to perform strongly and are a leader in the Asia-Pacific region. The Australian Government's budget surpluses mean that we do not need to issue securities to finance spending, but Treasury Bonds play a special role by providing the lowest-risk, highest-quality instrument in financial markets.
Because they are risk-free, Australian Government Treasury Bonds are the benchmark used by participants in Australia's financial markets to set interest rates beyond the short end of the yield curve, including in the bond futures market. The Australian Government is committed to ensuring that its bonds can play this role efficiently.
The existence of an active and efficient bond market alongside the banking system strengthens the robustness of Australia's financial system and reduces its vulnerability to adverse shocks.
The Government's decision to increase CGS issuance is consistent with the decision of the previous federal government, announced in the 2003-04 Budget, to maintain the CGS market. In announcing that decision, the previous government noted that "this will entail ensuring sufficient CGS remains on issue to support the Treasury bond futures market".
To maintain the important benchmarking role played by Government bonds and ensure that the Government has the flexibility it needs to maintain liquidity in the bond spot and futures market, we will provide legislative authority for an increase in future CGS issuance of up to $25 billion.
Fixed-coupon Treasury Bonds worth around $50 billion are currently on issue. The Government will add around $5 billion to issuance during 2008-09 and monitor market conditions to determine whether further issuance is required. The new issuance will increase the size of existing bond lines and will add to the announced issuance program for 2008-09. The additional issuance of around $5 billion will be in those bond lines that are in shortest supply in the market, particularly mid curve stocks.
The Government is committed to strong fiscal discipline to meet the needs of the economy as demonstrated by delivering the second largest surplus in more than 35 years in last week's Budget.
The Government remains firmly committed to delivering the surpluses outlined in last week's Budget.
The Government will place the proceeds of the increased bond issuance with the Australian Office of Financial Management (AOFM). The AOFM is the Government agency responsible for debt management.
The increase in CGS issuance will not adversely affect the Government's net financial worth since the increase in CGS will be fully offset by an increase in financial assets on the Government's balance sheet.
Because of the additional resources to be held by the AOFM, the Government will change its investment powers to allow it to invest in a broader range of assets than under its current mandate.
At present the AOFM invests in term deposits with the Reserve Bank of Australia. By modestly widening the range of the AOFM's investments, it will be able to better offset the cost and risk of the additional issuance.
As a result, the increase in borrowings is not expected to involve any net cost to Government. The new investments would continue to be low risk.
I am also announcing changes to the operation of the securities lending facility operated by the AOFM. This facility supports the CGS market by allowing market participants to access bonds that are in temporary short supply. This helps smooth the operation of the market. Under the changed arrangements, the facility will be permitted to accept a wider range of assets as collateral. The change will allow the AOFM to accept similar securities to those accepted as collateral by the Reserve Bank of Australia in its market operations.
These initiatives are part of a package to strengthen financial markets.
The final element of this package is to change the Interest Withholding Tax (IWT) arrangements for State Government bond issuance. Bonds issued by State Governments will be eligible for exemption from IWT.
This change is expected to improve depth and liquidity in State Government bond markets and improve price discovery. A better functioning State bond market will add to the attractiveness of these bonds, and allow them to make a greater contribution to financial market stability, while resulting in only a small reduction in revenue received by the Australian Government.
This suite of initiatives would be progressed quickly, with a view to legislation being introduced and passed in the current sitting of Parliament.
This demonstrates the Government's determination to ensure the efficient operation of Australia's financial markets.
20 May 2008