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Thursday, 1 November 2012
Page: 8779


Senator CORMANN (Western Australia) (12:59): The coalition supports the amendments made by the Commonwealth Government Securities Legislation Amendment (Retail Trading) Bill to the Commonwealth Inscribed Stock Act and the Corporations Act as the first steps towards developing a more liquid corporate bond market in Australia. We acknowledge that this is an important development and we support it because it addresses a structural gap in Australian financial markets—the absence of an accessible retail market in debt securities, whether government issued or issued by corporates.

Since the late 1980s Commonwealth government securities have not been able to be bought and sold on securities exchanges in Australia but have traded only in wholesale markets. Trades were settled through the Austraclear system, which is the ASX's clearing and settlement facility for debt securities traded in the over-the-counter market and on the professional financial market. It is not equipped to deal with the settlement of trading by retail investors. Retail investors were excluded from the market for Commonwealth government securities as well.

We welcome the opening up of retail investment in a secure form of investment—Commonwealth stock. We would also like to see a deeper and more liquid secondary market for corporate bonds. Developing a market in retail trade in Commonwealth government securities will help in this regard because it will provide a visible benchmark for pricing the corporate bond market.

There are a few things I will mention in support of the amendments made by this bill. An increasing level of investment by Australian households would reduce the government's reliance on overseas sources of capital and on overseas financing. Approximately three-quarters of Commonwealth government securities are currently in the hands of offshore investors. There is also the related need of local banks for access to alternative sources of finance. The intervention made by Dr Ken Henry earlier this year was quite instructive in that regard. He said:

If only for purposes of macroeconomic insurance, I would argue that it is strongly in our interests to find ways of reducing, over time, the banks' reliance on offshore debt finance.

Secondly, the level of investment by superannuation funds in equities is arguably overweight in comparison with the investment mix of United States and United Kingdom retirement funds. An OECD analysis of retirement income systems shows that equities are by far the largest asset allocation for Australia, at nearly 55 per cent in comparison with 45 per cent held by United States retirement funds and 40 per cent held by United Kingdom funds. Relevant, too, is the observation in Budget Paper 1 of 2012-13:

Since 2008 there has been a substantial shift in superannuation funds' asset acquisition away from foreign equities and debt securities towards domestic equities.

The overweighting to equities seems in part to reflect the lack of a deep and accessible market in local fixed-interest securities, whether government issued or corporate bonds.

While developing a retail market for government stock can be supported, it should not be taken by Labor as a green light to increase the level of government debt. I remind the chamber that this government inherited a $20 billion surplus and $70 billion of net Commonwealth assets, and after four budgets Wayne Swan as Treasurer has delivered $173 billion of accumulated deficits. We have seen the Treasurer, the Prime Minister, the Minister for Finance and Deregulation and others in the government crab-walk away from their ironclad guarantee that in 2012-13 we would have the first Labor surplus in more than 20 years. But if you read between the lines, if you listen very carefully to what the Treasurer is saying, and if you take careful note of what he is not saying, then it is very clear that Mr Swan is on track to deliver his fifth deficit budget—yet another Labor deficit budget to join the many from over the last 20 years.

The 2012-13 MYEFO revealed the following about the state of the government's finances: net debt has already reached a record level of over $147 billion in 2011-12, and will remain virtually unchanged at this level for the next few years; and net interest payments on Labor's debt keep rising and will reach $7.8 billion in 2015-16. In fact, this is another very important observation to make: the comparison of the fiscal record and the implications of sound fiscal management by the former government with the very bad fiscal management of the current government.

Essentially, as a result of paying down debt and putting significant investments into the Future Fund to fund the future of superannuation liability of the Public Service, in the last year of the Howard government the government was able to collect more than $1 billion in interest payments. The current government, as a result of $173 billion—and rising—of accumulated deficits, has to plan to pay nearly $30 billion in interest payments just to service the debt it has accumulated so far. In the last year of the Howard government the government received more than $1 billion in net interest payments because of the net positive asset position; now the government is planning to spend nearly $30 billion on interest payments to service the debt it has accumulated. Just imagine what a good government could do if it did not have to pay nearly $30 billion just on interest payments to service the debt it had accumulated!

Retail government securities provide the retail investment sector with the benefits of a broader range of investment choice and a secure investment. To facilitate retail trading the government has chosen a trading model based on indirect beneficial ownership. Retail investors do not acquire legal ownership of Commonwealth government securities such as Treasury bonds and Treasury indexed bonds. Instead, they will get a financial product called a depository interest, giving the investor the right to receive interest and principal payments. The depository interest will be traded on retail markets in a similar way to shares. There are more than 80 types of depository interests traded on the ASX.

The bill includes a number of provisions that deal with a requirement for financial advisors to disclose relevant information to retail clients when providing advice about investing in Commonwealth government securities. The information statement will be prepared and issued by the Australian Office of Financial Management via an online facility. Investors in Commonwealth government securities will face little risk in receiving principal and interest. Interest rate changes over the term of the security, however, may have an effect on the price that they can expect if they sell before maturity. In conjunction with the industry there should be an education process undertaken to inform retail investors of the steps the government has taken to foster the development of this market.

The coalition supports the amendments made by this bill, and we recognise that they are important first steps towards developing a deeper and more liquid retail bond market in Australia.