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ECONOMICS LEGISLATION COMMITTEE
02/06/2009
Australian Office of Financial Management

CHAIR —The meeting will reconvene with the Australian Office of Financial Management.

Senator Conroy —Before we do, may I add to an answer I gave earlier?

CHAIR —Yes, go ahead.

Senator Conroy —I asked a question about whether or not the public health initiative, PHI, private health reforms were in the budget papers and I think Senator Cormann insisted that they were not. For the committee’s benefit I point to page 137 of the Budget Paper No. 1, where there is a chart. I also point to page 31 of the budget overview, which quite clearly demonstrates the 10-year figure. So the actual information is contained in two separate budget papers.

Senator CORMANN —If you call that a budget forecast or an estimate—that just lacks any credibility whatsoever. A little picture is not a credible forecast.

CHAIR —Senator Cormann, I understand that you are interested in speaking to this agency and I was about to welcome them here this evening and ask Mr Hyden if there is any opening statement he wishes to make.

Mr Hyden —No, thank you.

CHAIR —We will begin questioning with Senator Joyce.

Senator JOYCE —Mr Hyden, back in February you told me about the $200 billion facility:

I think that would take us several years—

to draw down—

so probably about 2012 or 2013, four or five years time.

Do you still stand by that statement that that is when we will have this $200 billion facility drawn down?

Mr Hyden —I am not quite sure that I caught all of that, but obviously circumstances have changed since that time.

Senator JOYCE —Have circumstances changed that dramatically that a prediction that you made on the draw down for four to five years time is now for the end of this year?

Mr Hyden —What was being drawn down?

Senator JOYCE —That $200 billion worth of bonds and notes will be fully drawn by the end of this year. That is basically the situation now, is it not?

Mr Hyden —The latest figures would show that the $200 billion limit would be reached in 2010-11, so I think that is still consistent with what we are saying.

Senator JOYCE —You say now that the $200 billion, instead of being drawn down in 2012-13, will now be drawn down in 2010—is that correct?

Mr Hyden —In the 2010-11 financial year.

Senator JOYCE —Are we sticking to that prediction, or are we going to review that one as well?

Senator Conroy —That is a hypothetical, Senator Joyce.

Senator JOYCE —What are we currently drawn to at this very moment?

Mr Hyden —We do not make predictions in the AOFM in terms of bond issuance; we use the budget figures, the forecasts of budget outcomes, to deduce how much debt we will need to issue. I think your underlying question goes to the budget figures themselves, for which we do not have any direct responsibility.

Senator JOYCE —The question I am asking is: as of today, as I am walking in here, what are we currently drawn down to in bonds, notes and other forms of securities to finance our debt?

Mr Hyden —It is $73 billion.

Senator JOYCE —In total?

Mr Hyden —For Treasury bonds.

Senator JOYCE —What about notes?

Mr Hyden —We have Treasury notes of $13.6 billion.

Senator JOYCE —Is there any type of other paper out there that finances?

Mr Hyden —Not that counts against the $200 billion dollar ceiling.

—So we are at $86 billion now. You are saying 2009-10 is when the other $114 billion will happen, even though we have got a so-called $125 billion black hole in the budget, so we have been told?

Mr Hyden —Yes.

Senator JOYCE —That will be an interesting one to watch. I am backing you out on that one. It was also stated by Dr Gruen that we have a net debt of 5.2 per cent of GDP at the end of the projection period. Do you think that figure is still relevant?

Mr Hyden —No, the figures of CGS on issue have gone up quite substantially because of the change in the budget circumstances.

Senator JOYCE —These changes are all since February this year.

Mr Hyden —Yes, there has been an increase in the forecast budget outcomes over that period.

Senator JOYCE —So in four months we can make a two-year adjustment in figures. Are we still on that trajectory on draw down? Is it plateauing out? Can we rely on where we are at the moment?

Mr Hyden —As I said, we are dependent on Treasury for their forecasts of what the budget outcomes will be—more specifically, what the underlying cash surplus or deficit will be. Those figures have changed significantly since UEFO in February.

Senator JOYCE —Can you not see, with such a vast change in four months, it starts to call into question the whole reliability of what Treasury is presenting to us?

Mr Hyden —We do not make a judgment on Treasury’s reliability; we use their figures to determine estimates of future bond and other issuance.

Senator JOYCE —Unfortunately, we do rely on what Treasury tells us and these are the same figures that Treasury tells us are going to bring a 4½ per cent growth in the economy in a couple of year’s time, which is also highly unbelievable. Also, the current appropriations move towards a possible bill limit—I think it is $300.8 billion in the budget, but I now believe that it is up to $315 billion. Have you entered into any sorts of negotiations as to when you expect that to be fully drawn?

Mr Hyden —The $300 billion figure is an estimate of the CGS on issue at the end of June 2013.

Senator JOYCE —So that is now the June 2013 figure.

Mr Hyden —Yes.

Senator JOYCE —About $4 trillion worth of bonds is going to be issued in the world this year—is that correct?

Mr Hyden —I do not have a particular figure in mind.

Senator JOYCE —What is your anticipation of the total market that will be out there of extra bonds looking for a home.

Mr Hyden —I do not have a figure, but there is clearly a very large increase in issuance by a number of sovereign countries.

Senator JOYCE —How are we going to rate in the market now—and I am looking back on what you told me last time—in regard to the attractiveness of our security, considering the trajectory of debt we are on?

Mr Hyden —I think our securities are attractive in the global market.

Senator JOYCE —Why?

Mr Hyden —That reflects a number of factors, such as the Commonwealth’s high credit rating—

Senator JOYCE —At the moment.

Mr Hyden —the relatively small volume of debt which we have on issue and will build up and which remains—

Senator JOYCE —We have just shown that that is falling out of bed.

CHAIR —Senator Joyce, you asked a question and you are listening to an expert. Rather than giving your own answers, can you listen to—

Senator Conroy —Let the officer finish his reply before you add to your questions; otherwise, I will start adding to the answers.

CHAIR —Let’s continue, and please allow Mr Hyden to finish.

Mr Hyden —Even with the foreshadowed volumes of debt that we expect to issue, the level of debt proportionate to GDP is still low relative to that of many other countries. The yields on our debt are a little higher than in some other countries, so that makes them attractive. And I think many investors have an optimistic view of the prospects for the Australian economy so that they see it as attractive to invest in our issuance.

Senator JOYCE —A premium makes them attractive. What do you foresee is the cost of funds to maintain that attractiveness in the market so that we are able to move these bonds? What do you foresee as the face value that you will have to give to these things to move them?

Mr Hyden —The yield on our bond is determined by the market; we do not determine that.

Senator JOYCE —What do you determine the yield to be? What would you presume the yield to be?

Mr Hyden —It will be whatever the market makes it, but historically our yields have been somewhat higher than those, say, in the United States.

Senator JOYCE —A one per cent, two per cent, premium?

Mr Hyden —It has been of that order.

Senator JOYCE —Two per cent. What is the US at the moment?

Mr Bath —US 10-year Treasury bond yields are around about 3½ per cent.

Senator JOYCE —3½ and we are about two, so about 5½. That is interesting because the interest on ours seems to be working out that we are getting the funds at less than four per cent, so something is coming unstuck.

Mr Bath —These are 10-year bond yields currently.

Senator JOYCE —Do you think you can move them better in the short term?

Mr Bath —We do not just issue 10-year bonds.

Senator JOYCE —What we are getting at is: what is going to be the cost of funds on the money that we are borrowing? That is vitally important for how our budget works.

Mr Hyden —Yes, and we have estimates in the budget of the cost of that. Those forecasts or estimates of the cost of our debt are based on assumptions, of which the key assumption is that the yield curve that applied shortly before the budget would continue to apply over the whole forward estimates period. That is a curve so that there are different rates for bonds of different maturities but that those rates themselves would remain unchanged. The four per cent you referred is an average, not a specific figure.

Senator JOYCE —An average. That yield curve is over the total period, but obviously if you are saying the yield curve is consistent you are looking at consistency based in a recession and yet in the same budget papers we are looking at 4½ per cent growth. So it cannot possibly be a consistent yield curve out there otherwise we will not be coming out of recession, we will be staying in recession.

Mr Hyden —This is a technical assumption that has been used consistently for many years to avoid the need to try and forecast interest rates, which is a particularly difficult task.

Senator JOYCE —It is a technical assumption, but the assumption obviously is wrong if factors change and in the same time we are talking about a 4½ per cent growth in the economy. The yield curve is completely innocuous with that set of conditions that will be apparent at that point. There would have to be a tightening of funds as people start looking for money to invest.

Senator Conroy —That is your opinion, Senator Joyce.

Senator JOYCE —It is stating the bleeding obvious. Who are the main buyers of our funds at the moment? Who is out there buying our bonds and our notes?

Mr Hyden —We do not have detailed knowledge of that. We have some perceptions, but—

Senator JOYCE —Okay, give me a perception.

Mr Hyden —Broadly, more than half of our bonds are taken up by overseas investors.

Senator JOYCE —Predominantly?

Mr Hyden —Predominantly investors that are looking for a high degree of security in the investments they make, and that includes central banks and—

Senator JOYCE —Such as predominantly China?

Mr Hyden —I do not think I want to name specific central banks or other countries’ reserve assets—conservative provident funds, all sorts of insurance companies and the like, sovereign wealth funds.

Senator JOYCE —Sovereign wealth?

Mr Hyden —Yes.

Senator JOYCE —Predominantly Asian—

Mr Hyden —I am describing the type of investor that we understand to be important.

Senator JOYCE —I imagine there are not going to be many purchases from England or from the United States, they will be dealing with their own, so one would have to suspect Asia would be high on the list?

CHAIR —Norway is still doing okay, last I heard.

Mr Hyden —We have substantial take-up in Asia but also from Europe and the United States.

Senator JOYCE —On our budget figures, our long-term budget liabilities are at half a trillion dollars. Has there been any discussion about how you are going to finance them?

Mr Hyden —We are only concerned with financing the government’s funding requirement. We do not look to other elements of the government’s balance sheet.

Senator JOYCE —The current global environment with the trajectory of funds is established in the budget papers. Do we have the capacity in the future to finance half a trillion dollars?

Senator Conroy —Sorry, Senator Joyce, could you ask that question again.

Senator JOYCE —Do we have the capacity, as a nation, to finance half a trillion dollars? Do we have the capacity to move bonds in the market to the value of half a trillion dollars?

Senator Conroy —That would be a hypothetical.

Senator JOYCE —No, I do not think it is hypothetical at all.

Senator Conroy —That is entirely a Senator Joyce hypothetical.

Senator JOYCE —Has there been any run-off or exit strategy given to you on how you will start paying off these bonds?

Mr Hyden —The government has spoken of its fiscal objectives for returning the budget to surplus—

Senator JOYCE —In the cycle. So when would the cycle happen?

Mr Hyden —That is a matter of government fiscal policy.

Senator Conroy —Those are Treasury fiscal policy forecasts.

Senator JOYCE —Has anybody got a rough idea when these cycles come to an end? It could go on forever?

Senator Conroy —It is called the Fiscal Policy Group. They are on tomorrow.

CHAIR —Senator Coonan.

Senator COONAN —Mr Hyden, I will try not to be repetitious but there are a few things I would like to start off with, please. Could you tell the committee what the total size of the Commonwealth government securities borrowing program will be—that is, what your program is for issuance?

Mr Hyden —For next year, we intend to issue about $60 billion of Treasury bonds. In addition, we would issue some Treasury notes over the course of the year which will be used to maintain the stock of Treasury notes and to allow for within-year financing. But we are not envisaging that there would be an increase in the volume of Treasury notes on issue over the course of the year—that is, from the beginning to the end—so that that would not add to the volume of stock on issue at the end of the year compared to the start of the year.

Senator COONAN —Just so I understand you, and leaving aside the notes, the figures I have noted here are that the government expects to increase the amount of Commonwealth bonds on issue from $30 billion in June 2008 to $79 billion this financial year, then to almost double it again in 2009-10 to $133 billion and then rising quickly to $30 billion in 2013. Is that about right?

Senator Conroy —Sorry, what figure in 2013 did you say, Senator?

Senator COONAN —$300 billion in 2013.

Senator Conroy —Yes, we did confirm that earlier for Senator Joyce.

Mr Hyden —Yes, those figures are correct.

Senator COONAN —What will be the impact of this supply on the level of bond yields? I am interested in the shape of the yield curve. Could you address that? In other words, will issuance activity include activity right across the yield curve?

Mr Hyden —We do not make any attempt to forecast movements in interest rates ourselves, so we are not making any predictions about the impact of that on interest rates. There will be many factors impinge on interest rates, both globally and domestically. The supply of bonds is one, but obviously things that influence demand are also important.

Senator COONAN —I might come to that shortly. I understand that absolutely. Will it cover everything from 13-week Treasury notes to reintroduction of long-dated inflation-linked bonds?

Mr Hyden —We are considering resuming the issuance of indexed bonds but have not reached any conclusions on that. Similarly, we are considering the introduction of longer maturity bonds but have not reached any conclusions on that. Those elements of a potential issuance for the year ahead are minor add-ons, if you like, or variations to the basic program. We do not see them as contributing a particularly large amount of the total borrowing requirements.

Senator COONAN —Would it be a fair characterisation to say that they are in contemplation but no decision has been made?

Mr Hyden —They are under consideration, yes.

Senator COONAN —I absolutely understand your answer that you are dealing with forecasting and budget outcomes and the assumptions contained in that, but it seems to me looking at the 2010-2011 year that there will be some significant challenges for the budget because $17 billion falls due when tax cuts of about $13.9 billion come off the bottom line.

Senator Conroy —What year is that?

Senator COONAN —2010-2011, Minister.

Mr Hyden —A substantial volume of bonds will mature in the 2010-11 financial year. Normally our Treasury bond lines are spaced a year apart but not exactly a year apart so two maturities will occur within the same financial year. Also some indexed bonds will mature, so we have a particularly large maturity schedule for that year. That will add to the bond issuance task in that year.

Senator COONAN —It also coincides with the tax cuts taking effect that year?

Mr Hyden —The tax cuts are one of the factors that influence the underlying cash balance or the budget outcome. That is already included in those budget figures.

Senator COONAN —Could financing requirements go above $70 billion that year?

Mr Hyden —That depends on what happens to the budget.

Senator COONAN —If they did, it would require Treasury to issue bonds of more than $1.3 billion a week.

Senator CAMERON —That is a bit of speculation again, is it not?

Senator COONAN —No, it is based on the budget.

Mr Hyden —I think what you are doing is just an arithmetical calculation.

Senator COONAN —Yes.

Mr Hyden —I might point out that we are currently issuing more than $1.3 billion a week. We are, in fact, issuing about $1.4 billion in Treasury bonds.

Senator COONAN —That was my next question.

Mr Hyden —That is not an increase over what we are currently doing.

Senator COONAN —How long could Treasury sustain a rate of $1.4 billion per week?

Mr Hyden —It is a matter of what the market can sustain. Since we commenced issuing at this rate in February, we have been proceeding for three months without experiencing any difficulties. We have had good results from our tenders in terms of coverage and the range of bids accepted. Circumstances always can change. Markets are volatile. But the experience so far is quite positive.

Senator COONAN —I appreciate all of that and absolutely accept what you say. There have not been any higher interest rates as a result of the $1.4 billion?

Mr Hyden —There have been movements in yields over that period, but it would be hard to say what portion of that might have been influenced by the increased issuance, if it had any influence at all. Interest rates globally have moved up over that period. Our experience is not exceptional.

Senator COONAN —I acknowledge the upward trend. Has AOFM given consideration to what would happen if the government’s debt forecasts were too optimistic?

Senator Conroy —That is clearly hypothetical, Senator Coonan. Perhaps you might like to ask has the AOFM given consideration to a possibility that the government’s estimates are too optimistic.

Senator COONAN —If you are going to say tomorrow that we are unable to ask questions about the macro settings because it is hypothetical we might as well —

Senator Conroy —I was suggesting you might perhaps care to rephrase the question.

Senator COONAN —Just let me make this point, Senator Conroy, so that we will get on a bit better, I hope. There are lines of questioning which clearly go to hypothetical questions the answers to which are not within the knowledge, realm, expectation or expertise of a witness, but witnesses who do forecasting and people who issue bonds based on assumptions in the budget are of a slightly different character and some latitude ought to be appropriate otherwise you could never really ask them any questions.

Senator Conroy —I was perhaps inviting you to rephrase the question. I am sure we will be able to get you an answer.

Senator COONAN —All right, then. How confident are you that future deficits will be covered by the government raising $315 billion in gross debt and $203 billion in net debt by fiscal 2014?

Mr Hyden —Let me say that those figures, which are not in the budget, are total debt on issue. Some of that represents debt that is already on issue now. The increment that we have to make over that period is less than that. Obviously markets are volatile and we cannot be totally confident about what is happening or what may happen in the future, but, as I have already said, the issuance that we are undertaking at present has gone without any difficulty. The current rate of issuance is around 12 times the volume that we were issuing a year ago. Indeed, for the current year at the beginning of the last budget we anticipated issuing something a bit over $5 billion. We are now planning to issue over $60 billion, and, of course, at a weekly rate it is rather more than that. We will be issuing in a few weeks almost as much as we were planning to put out in the whole year if we also take account of the T notes that we are issuing. We are not experiencing problems at the moment. The estimates do provide for a higher level of issuance in 2010-11 than in 2008-09. We are reasonably confident that that can be achieved. Thereafter, as I recall, the figures slow a little. There is nothing in our current experience which would indicate that we are at the limits of what can be achieved.

Senator COONAN —How high can you go? Could you go to $350 billion if required—say, by 2016?

Mr Hyden —I do not think it is a matter of the cumulative amount on issue being a constraint so much as the amount of issue each year. It is how much the market can absorb. The market may have an interest in the total balance sheet of the government but, as I said, even with the volumes now contemplated, our position will remain relatively good compared to other AAA-rated sovereign issuers. The cumulative amount on issue would still remain a very small proportion of the total sovereign debt on issue globally, so I do not think we are anywhere near the limits of capacity of investors to absorb our debt.

Senator COONAN —Thank you. Treasury told the committee in February in another context that cost of funds was about four per cent. Once again going to the budget figures, based on the scale of the lending program over the next four years, public debt interest expenses will increase—I think I have got this right—from $6.3 billion in 2009-10 to $12.5 billion in 2013, which is 4.15 per cent of the $30.8 billion in securities on issue that year. What kind of effect will this have on the likely increase in bond yields given the upward trend in the bond market?

Mr Hyden —The figures you quote are based on the assumptions we have used for calculating PDI, as I explained earlier in answer to Senator Joyce’s question. That makes the standard assumption of a fixed yield curve. It is not intended to represent a forecast of, or to have implications for, what might happen.

Senator COONAN —Are you aware that the government has proposed that Aussie infrastructure bonds will be issued in relation to the National Broadband Network?

Mr Hyden —Yes.

Senator COONAN —Why have estimates of issuance to fund the National Broadband Network been omitted from the budget?

Mr Hyden —I am not sure that I can answer the question as to what the treatment of those funds has been. My recollection is that there is some provision in next year’s budget for some appropriation for the Broadband Network, and that would be part of the budget funding on which we are basing our issuance plans next year.

Senator COONAN —The equity injection, I suppose.

Mr Hyden —I am not clear on what assumptions have been made in the subsequent years in the budget, but I am aware that there is still a long way to go on the National Broadband Network company and the arrangements surrounding it. There is perhaps not complete finality on that.

Senator COONAN —Yes, it seems that the economics of the network are not yet quantified and it is difficult to know what it is about. What will be the total amount of Aussie infrastructure bonds to be issued?

Mr Hyden —I cannot answer that either. My knowledge of Aussie infrastructure bonds is essentially what has been announced by ministers.

Senator COONAN —So you are obviously not in a position at this stage to enlighten us as to what the rate or the yield would be or if there is a premium for risk, for example?

Mr Hyden —It is a question of what the nature of those bonds would be: would they be any different in substance from our other issuance? They may have some different features or characters, but the cost of them may be very similar to the cost of our other issuance. In that case it will not make a lot of difference to the estimates, assuming that our projections represent the total government borrowing requirement.

Senator COONAN —At this stage it is very difficult to do any calculations of what debt will be raised in relation to Aussie infrastructure bonds. Senator Joyce asked you some questions about some Commonwealth government securities owned offshore. The figure I have is that they have risen to about 60 to 65 per cent, largely as a result of Asian central banks, compared with about 50 per cent earlier this decade. Are you able to confirm that?

Mr Hyden —I could not say where the increase in overseas holdings is coming from in terms of that proportion. Clearly the total amount of issuance that we are doing is increasing. I think all sectors of our investor base are increasing their investment, but it is not easy to get figures on the relative shares.

Senator COONAN —Information is provided and published by the RBA on the estimated non-resident holders of government securities. How is this information compiled and by whom?

Mr Hyden —The RBA gets its information from the Bureau of Statistics, which undertakes a survey quarterly.

Senator COONAN —Does it survey you, the AOFM? Who does it survey?

CHAIR —We have ABS next, Senator Coonan.

Mr Hyden —Yes, you could ask them that, but I can try to answer your question in general terms. The bonds that we issue are in the registry which is maintained by the Reserve Bank. Ninety-nine per cent of those are in one account, which is held by Austraclear, and the others are retail or small holders. Austraclear, which is an Australian resident, is the holder so far as the bank is concerned. Within Austraclear the holdings of those bonds are held on behalf of various companies, many of which are nominee companies that are mostly—I think all—Australian residents. To get closer to the ultimate investor, the ABS has to survey those nominee companies. My understanding is that it pursues the track as far as it can to get as clear a picture as it can. In the course of that, it has to give various confidentiality assurances, which makes it difficult to provide more detail than is published so that it can give a break-up of non-resident and resident holdings. If one tries to get further detail, one runs into those sorts of limitations.

Senator COONAN —We might ask the ABS. Thank you for that information. Do you know what happens in other countries—for example, the United States or New Zealand? I may not have this information to hand in any detail, but I understood that some other jurisdictions are better able to identify this information even if it is not to the point of identifying individuals; they can identify countries or nationals who are investors.

Mr Hyden —I think in the United States the data is collected by the Federal Reserve and the United States Treasury in joint operations, and they are able to publish it in much finer detail than the bureau does in Australia.

Senator COONAN —I am sorry, I just missed the beginning of your answer.

Mr Hyden —In the United States the Federal Reserve and the United States Treasury prepare and publish this data in finer detail—that is, by individual country of investor. I do not have any information on how accurate that data is.

Senator BUSHBY —Mr Hyden, would that include details of central banks from other nations holding US securities?

Mr Hyden —I do not think they publish that data, but I am not totally familiar with their statistics.

Senator BUSHBY —But presumably they would indicate the country that it comes from, which may leave open to supposition who in that country may have bought it?

Mr Hyden —They publish figures by country of residence, but there are questions about how meaningful those sorts of figures are. For example, you may find that there are substantial holdings in some small offshore islands, which may represent nominee companies—

Senator BUSHBY —I guess it is certainly open to manipulation.

Mr Hyden —located in those countries rather than giving you the true residence of the ultimate investor. That is why it is very difficult to evaluate how good these figures are.

Senator BUSHBY —You are not aware of the depth to which the US holds details in its register of bondholders.

Mr Hyden —I do not think the registry is a particularly fruitful source of information on this; one has to use a survey approach. I think the United States puts a lot more resources into it than we are able to in Australia. I do not have a view on how good the results are.

Senator COONAN —Are there additional risks to the Australian government’s sovereign credit rating in providing this AAA credit rating to support issuance by state governments and banks?

Mr Hyden —I do not think I can answer that from the point of view of the responsibilities of the AOFM.

Senator JOYCE —But you may have knowledge of the state debt.

CHAIR —I think Mr Hyden has given the answer. Senator Coonan.

Senator JOYCE —The federal government underwrites the whole lot.

Senator COONAN —Yes, I would have thought the witness might have been able to make a comment. Is there any risk that investors will be attracted to high yields in state government bonds? For example, we have looked critically at a proposal to establish Ruddbank, colloquially speaking. There has been a suggestion that funding would be three percentage points above market rates.

Mr Hyden —I cannot comment on the Ruddbank proposition because I am not—

Senator COONAN —I am just using it as an example.

Mr Hyden —But if your question is if issuance by the states at high yields will have an impact on our ability to issue, that is not a new situation.

Senator COONAN —They love that infrastructure.

Mr Hyden —The states have been issuing and paying higher yields than we have for a long time. Their volume of issuance, of course, will increase, but ours is increasing as well. I do not see that as overstretching the market. Some investors will be attracted by the higher spreads that they get on state debt, particularly if they are guaranteed by the Commonwealth. Some investors prefer to have the greater assurance of the sovereign owned debt. We see both sorts of investors in the market. Ultimately, what happens to those spreads is a matter of market forces, of supply and demand.

Senator BUSHBY —Thank you to the officers of AOFM. Mr Hyden, in February you stated:

There is certainly a question as to how far the appetite of investors will continue as the amount of stock on issue is increased.

What has happened to the amount of stock on issue internationally in the past six months? Has it increased, decreased or remained fairly static? What have you observed?

Mr Hyden —The amount on issue has certainly increased and is in prospect of increasing more. The figures are now larger than were foreseen in February. At the same time I think we were all expecting that if there were any risk it would be on the upside rather than the downside.

Senator BUSHBY —That is true. I do not want to put words in your mouth. I left it up to you to point out the direction. Given that we have seen a substantial increase in the amount of stock being issued by sovereign nations, what is the general experience of national governments selling bonds into the international market over the past six months? Are issues being filled consistently or are there notable instances of issuances not being filled?

Mr Hyden —I think the general picture is that governments have been able to issue the volume of debt that they are needing to issue, but there have been some problems in some fairly isolated cases. In Britain, for example, one tender was not fully subscribed, and there has been a similar experience in the United States. They are single tenders amongst many and overall their programs are being achieved.

Senator BUSHBY —Given that most issuances are still being filled, you would say that the appetite of investors is not yet satiated?

Mr Hyden —That is right.

Senator BUSHBY —But you made that statement that at some point it will be. You questioned the extent to which the appetite of investors would continue.

Mr Hyden —I cannot say that there is any ultimate end point where satiation occurs, but we are a long way from that happening.

Senator BUSHBY —Has the ability of countries to fill their issuances been better enabled by some of them offering high yield curves? Have they had to offer higher yield curves to continue to fill them? Is that an apparent trend?

Mr Hyden —Issuers generally do not offer yield curves. The yield curves are set by the market. In other words, issuers are not price takers.

Senator BUSHBY —Are yield curves increasing, though, in response to the quantity of securities on offer?

Mr Hyden —There have been movements in interest rates over recent months.

Senator BUSHBY —And they are up?

Mr Hyden —There are always movements in interest rates because the market is always moving.

Senator BUSHBY —Is the trend up, though?

Mr Hyden —There have been some general upward movements. That reflects a variety of factors.

Senator BUSHBY —That would reflect a variety of factors but presumably, to use your analogy, to continue to satiate or to meet the appetite of the investors might—

CHAIR —I think that is your analogy.

Senator BUSHBY —No, I was quoting Mr Hyden. He used those words. I did not put it forward at the time. Presumably one of the factors that may well lead to an upward trend in yield curve may well be the quantity of stock on offer?

Mr Hyden —That is one factor, but another factor is the demand.

Mr Hyden —We have seen over the past couple of years a huge change in investor appetites away from risk and towards safer securities, and that has brought a big increase in demand for such securities. Indeed, for most of this financial year up until February our problem in Australia was that the increase in demand for our stock was running ahead of the issuance and—

Senator BUSHBY —But we were not issuing anywhere near as much as we are now.

Mr Hyden —we had to issue more stock to keep the market running smoothly.

Senator BUSHBY —I will move on from there slightly. In February you also noted that the United States ‘clearly have a large challenge’ in raising their $790 billion in bonds. How have they gone? Does the AOFM have any idea where the money is coming from to purchase the US bonds?

Mr Hyden —I do not think I can attempt to answer that.

Senator BUSHBY —Are you aware whether there is any evidence that money printed by the United States Treasury is being used to purchase US bonds either directly or indirectly?

Senator Conroy —US bonds?

Senator BUSHBY —Yes.

CHAIR —I think again Mr Hyden has indicated that he cannot—

Senator BUSHBY —It is a different question.

Senator Conroy —He shook his head, which Hansard would not have picked up but—

Mr Hyden —No, I cannot.

Senator Conroy —I am sure he was simply saying he could not possibly venture a guess.

Mr Hyden —That is correct.

Senator JOYCE —In an Australian context, would quantitative easing in Australia have dire effects on the price or yield of our securities?

Senator Conroy —A quantitative easing of what?

Senator JOYCE —The printing of money, Senator Conroy. I will help you out there.

Senator Conroy —If the money supply tightened, that would mean interest rates went up.

Senator JOYCE —The question has been asked.

CHAIR —I think I will allow Senator Bushby to continue on with his line of questioning. That might make life easier.

Mr Hyden —It is a hypothetical question. It obviously would depend on the parameters.

Senator BUSHBY —There is currently in place a legislative ceiling of $200 billion that you can issue up to. We have had a lot of talk about peak debt rising to more than $300 billion. Will there need to be a revision in the legislative framework to allow you to meet that issuance?

Mr Hyden —That is correct, yes.

Senator BUSHBY —That $200 billion relates to peak debt, not to net debt?

Mr Hyden —No, the $200 billion ceiling under the legislation applies to the total amount that we can have on issue at any time.

Senator BUSHBY —It does not take account of investments, as net debt would?

Mr Hyden —No, that is right. It is gross CGS debt.

Senator BUSHBY —That is my understanding, but I wanted to clarify that.

Mr Hyden —The definition of it is slightly more complicated. It is set out in the legislation, but in substance it is the total amount.

Senator BUSHBY —For us laymen senators that will suffice.

Mr Hyden —Perhaps I could just say that the budget papers stated that the government intends to make a legislative change at an appropriate time.

Senator BUSHBY —Which obviously it will need to. How far away are we in time from needing to make that legislative change, given your projection of the debt trajectory that you will need to put in place?

Mr Hyden —I think that goes to the question we were looking at before as to when the stock of debt would reach $200 billion, which we said would be about 2010-11.

Senator BUSHBY —Would you be comfortable if the legislation was not changed until then or do you think it would need to be changed in advance?

Mr Hyden —It needs to be changed in advance of the figure reaching $200 billion, but that depends on when one thinks that might occur. Perhaps I might add that the ceiling applies to treasury notes as well as to Treasury bonds. As I said in answer to I think Senator Coonan’s question, we will be using treasury notes for within-year financing so that the volume of treasury notes may increase within a year to, say, $20 billion, $30 billion or even more. That is relevant to when that $200 billion ceiling would be reached. The figures in the budget papers on CGS on issue relate to the market value of the debt on issue at the end of each financial year. What the ceiling relates to is the face value of debt on each day, so that might mean it would come a little earlier. But I think in general our current estimates are that the $200 billion ceiling might be reached in the first half of 2011.

Senator BUSHBY —When you approach decisions on the timing and the quantum of issuances what degree of consultation do you have with Treasury and/or Finance?

Mr Hyden —We get advice from Treasury on the budget figures and the government’s forecasts, which are basically the forecast in the budget and MYEFO. Essentially we undertake the borrowing program using that data as a starting point on our own judgement of market conditions.

Senator BUSHBY —That is your starting point. You look at the budget papers and from then on you plan your own trajectory for how and when you will issue and how much?

Mr Hyden —We plan our issuance yearly for a financial year based on the latest forecasts by the government. We want flexibility in that to respond to changing market conditions, particularly in the choice of the bond lines and the maturities that we will offer. We plan to give a general indication of that to the market each quarter, but then we will announce to the market each week what we plan to do in the following week. That is the practice we have been following since February.

Senator BUSHBY —You mentioned planning on a different line to bonds. Are you able to provide full details of the lines of bonds that you have issued and the volume and quantum of bonds issued in each line? I am not sure whether you have that information with you today. You could take it on notice if you do not.

Mr Hyden —That information is published periodically on our website and, of course, is in our annual report.

Senator BUSHBY —Could you just provide for the use of the committee the latest copies of that? Given that you judge which lines to issue based on your assessment from week to week of where the demand is greatest, has the demand for each or any of these lines varied in the past 18 months? If so, what are the trends telling you about where the demand is heading in terms of the characteristics of each line?

Mr Hyden —It is a little hard to talk about demand for lines in an absolute sense because it is relative to the supply. Our judgements are between different lines where the issuance that we want to make will be best absorbed. Since February I think we have issued into each of the 10 bond lines that we undertake. We have increased that by one by starting a new line. All of them have had some additional issuance, so that it is spread over all of them.

Senator BUSHBY —There are no trends apparent as to which ones are more attractive to investors at this point?

Mr Hyden —In the market there is clearly a very strong demand for the shorter bond lines. That is not peculiar to Australia. It is evident worldwide. We wanted to issue across all our bond lines to get a better managed portfolio and to reduce the rollover task that we would have if all the stocks we issued were very short.

Senator JOYCE —Mr Hyden, would you have any hope at all of supplying bond lines if any of the government’s contingent liabilities, such as for underwriting the banks, were called upon? We are looking at $600 billion of contingent liabilities. Would you have the vaguest hope of being able to go to the market to obtain those sorts of funds?

Senator Conroy —That is a very serious hypothetical based entirely around a set of circumstances.

Senator JOYCE —The contingent liability is certainly not hypothetical.

Senator Conroy —It is entirely a hypothetical question, Senator Joyce.

CHAIR —Senator Bushby, have you finished your questions?

Senator BUSHBY —I have not finished my questions.

CHAIR —Senator Bushby, then.

Senator JOYCE —The realisation of that is hypothetical or the capacity to pay it would be hypothetical?

Senator BUSHBY —I am not too far from finishing my questions.

CHAIR —Senator Bushby, can you continue.

Senator BUSHBY —You mentioned that there is probably a more noticeable demand for the shorter term bonds, but in terms of risk management and spreading the risk, I take it that you are actually issuing longer terms as well, is that an accurate interpretation of what you just said?

Mr Hyden —We have bond lines out to 2021, and we have issued into all of those bond lines.

Senator BUSHBY —Is there any consideration of expanding the bond lines further?

Mr Hyden —Yes. We have indicated that we consider issuing a new 2022 bond next financial year. That is more or less following our standard practice. We have one bond line mature each year, so we start a new bond line, and they age as the years progress. As indicated in the budget papers, we are giving consideration to the possibility of commencing some bond lines with maturities even longer than that.

Senator BUSHBY —What is the thinking behind the ‘even longer than that’ bond lines?

Mr Hyden —Many other sovereigns do have much longer yield curves than we do. Some go out 30 or 50 years. In an international sense, Australia has a relatively short maturity range in its issuance. Just by looking at what others do, we might say, ‘Is that a part of the market that we are not tapping at the moment that we could?’ So we have said we will look at that.

Senator BUSHBY —Is it more to expand the potential, basically so that you can issue more debt or obtain more funds for the government. In a climate where we are actually issuing $1.4 billion a week, do you anticipate that, at some point, we may need to offer with characteristics that we currently are not able to continue to fill the issuances that we do?

Mr Hyden —I think the object is that if we can tap a wider range of investors, we will have more options in our issuance and therefore we may be able to do it more cheaply or in a way that gives us better risk characteristics.

Senator BUSHBY —So more options and potentially at a cheaper cost?

Mr Hyden —We do not have predetermined views on that. We are consulting with the market to make an assessment of whether it is worth doing.

Senator BUSHBY —Interestingly, I guess if you did do longer than that, you would be issuing bonds that would mature after the date that the Treasurer tells us we will have negative net debt again?

Mr Hyden —That could well be, and certainly that has been the case in the past. We have had negative net debt but still positive gross debt, because the gross debt has been more than outweighed by assets that the Commonwealth has held. It may be an efficient management of the debt overall to have longer maturity stocks and it would give priority to paying back shorter debt as it matures or using some of the surplus to invest. Just because a bond is issued with a particular maturity does not stop you from buying it back before that maturity.

Senator BUSHBY —No, that is right. It was more an observation, I guess.

Mr Hyden —I think it is a matter that the more options you have, then the more flexibility, the better you may be able to manage the stock of debt.

Senator BUSHBY —My final group of questions is on the ownership of the debt, which previous questioners have already touched on. When was the most recent release of the ABS publication catalogue 5302.0 which contains information on the amount of Commonwealth government securities held by non-residents?

Mr Hyden —I think the last one was in the December quarter.

Mr Bath —It would be almost exactly a quarter.

Senator BUSHBY —In February you indicated the last one was December at that point. It has been four months since then. I would think that we have had another one since?

Mr Bath —The March quarter is due out either this week or next week. December might have been the answer to the question, ‘What is the next available quarter?’ but in February it might not have been available.

Senator BUSHBY —In a pack of information they have given me, my staff have given me a copy of the latest one which came out today.

Mr Bath —Right, it was released today.

Senator BUSHBY —You are not going to be able to questions for me on that here because you will not have had a chance to analyse it.

Mr Hyden —I have not seen it as yet, Senator.

Senator BUSHBY —I could give it to you; I have a copy here if you like, but they have highlighted some things here, and I am not really sure what they have highlighted. In February you indicated that the percentage of securities held by non-residents was over 60 per cent, and in answer to a question on notice, you actually indicated it was actually 68 per cent. I have not had a look through this, but just on a quick glance it does not seem to have that figure poking out. I think it requires some analysis. Can you take on notice what is the current percentage of securities held by non-residents and provide that figure for me?

Mr Hyden —All right, I can do that. I might say that there is quite a lot of variation from quarter to quarter in those figures. It is not a monotonic series; it is one that goes up and down. I am not sure if there is any clear reason for it.

Senator BUSHBY —Would you be able to provide an historical chart or information showing what those figures were over, say, the last three or four years?

Mr Hyden —Yes, certainly.

Senator BUSHBY —So that would give us an indication of how it does go up and down, as you say. In an answer given earlier, you indicated that you had an idea of the nationality of the ultimate holders of a lot of the securities issued by Australia. You also indicated that you were not keen to put on the record the central banks that may be holding Australian securities or the nature of their investments. You also indicated that there was a substantial take-up of our bonds by US and Europe. Does that suggest that the US and some European central banks hold Australian securities, or is that an assumption that you cannot make on the basis of the fact that they are held by US entities?

Mr Hyden —I cannot comment on the US central bank, but I can say that there are substantial holdings by European central banks.

Senator BUSHBY —I am not particularly interested at this point whether central banks of any nation are holding securities, but I am interested in knowing which nations the holders of those securities are from. I sense from some of the things you said that you may have a greater degree of knowledge of that than you have actually—

Senator Conroy —I am not sure that the people who hold these bonds necessarily enter into them on the basis that they get to be revealed. There could be issues of confidentiality that we are unaware of but Mr Hyden is aware of.

Senator BUSHBY —Mr Hyden, are there any confidentiality clauses contained in the contracts when these securities are purchased?

Mr Hyden —The bonds are not purchased under contract. They are purchased in the market. The investor may do so through nominee companies. They normally do buy them through nominee arrangements so that it is not always clear who is the ultimate holder. I would not like to speculate as to the reasons or motives for those arrangements. In some cases it is a matter of convenience and practicality, but in some cases they may not wish to disclose publicly their holdings.

CHAIR —It is 10.30.

Senator BUSHBY —I am on the last couple of questions on this.

—It is 10.30, and that was the agreement. I am sure you will be in this position when we get to ABS as well, so I would like to end this session and thank the AOFM for coming in. I do not think there has been this level of intense interest in your activities since Senator Andrew Murray was on this committee. Thank you for your patience here tonight.

Mr Hyden —I think I am well on the record of attending estimates committees.

CHAIR —That is right. I now welcome to the table the officers of the Australian Bureau of Statistics. Do you have an opening statement that you wish to make, Mr Harper?

Mr Harper —No, thank you.

CHAIR —I might start off the questioning tonight. There is a blog that I have some interest in, the Pollytics blog, who are talking about some results, and I thought I would get your comment on this. It says:

Remembering back to last month when the unemployment figures were released by the ABS showing a fall from 5.7 to 5.4%, the howls of incredulity from economic firms that guessed wrong on this was deafening. The ABS unemployment figures are actually derived from a poll, albeit an enormous survey of around 41100 people, and it was pretty much lambasted across the economic sector as a “rogue” result and a consequence of the ABS reducing their sample size. The reporting of the issue was just mind numbingly dodgy.

So the poor old ABS got slapped around for weeks on how their small sample size of 41100 was creating all this enormous volatility and uncertainty in their figures, and as a result of this hysterical (and let it be said, mostly ridiculous) gnashing of teeth and stomping of tootsies by private sector economic firms - the ABS has now restored their Labor Force Survey to run on a sample of around 54400.

The blog continues—and I will paraphrase this a little:

Let’s get something straight here - this new sample size will make—

no difference whatsoever. Could you comment on the accuracy of that report?

—Okay. There are a lot of things in that statement. In terms of the factual side of things, yes, the ABS Labour Force Survey in recent times has had a sample of about 41,000 households. Because of budgetary pressures, the ABS reduced the size of its labour force sample in June last year from 54,000 to 41,000. Because of additional funding that we received in the budget in May, we will restore the sample size back to the 51,000. We will do that progressively with the aim of having it fully restored by December 2009. The reduction in sample size has created an additional margin of error around the survey results. Every sample labour force survey and every other sample survey that the ABS conducts has a statistical error associated with it. That statistical error can be measured, and the ABS publishes information about that error. The reduction in the sample size for the labour force survey increased the statistical error by approximately 15 per cent. In terms of the estimates for Australia, particularly employment and unemployment, the standard error was still relatively low with the reduction in the survey size. Nonetheless they are there, and they need to be taken into account in interpreting the results.

It is important to note that the reduction in the sample survey did not introduce any bias into the results, so the result for the month of April of 5.4 per cent was an unbiased result, just as the result for the previous month of 5.7 per cent was also an unbiased result. We checked the April estimates extensively to make sure that they were as accurate as we could make them, and we could find no reason to be concerned with them. We do know that when economic circumstances are changing, there is quite often volatility in the labour force survey results. We have gone back and looked at history and we have seen similar sorts of ups and downs in previous times of economic challenge. The other observation is that the ABS would always encourage users to look at the trend which smooths out the month-to-month volatility in the estimates and provides a longer term perspective as to what is happening with those statistics.

CHAIR —Thank you. Just to confirm, the blog says:

If we plug in 41100 as the sample size and 5.7 as the result for Poll 1, the margin of error on this survey comes out as 0.22%.

If we plug in the larger sample size that the ABS used to run and will now do so again, a sample size of 54400 with the same result of 5.7 as Poll 2 - the margin of error is 0.19%.

All this outrage has been over a structural improvement of 0.03% in the accuracy of the raw results!

Mr Harper —That is the 15 per cent that I talked about, the difference between the 0.19 and 0.22 per cent.

CHAIR —Therefore, to a layman, there is very little difference between the actual results?

Mr Harper —The reduction in standard error does lead to a more accurate result and therefore users can take somewhat more confidence in the statistics that are produced. But, as is pointed out, even with the return to the previous sample size, there still will be a margin of error around that survey. You need to make a judgment as to the fitness of purpose for the statistic, taking into account the standard error and the particular application that you have for it. It is always a trade-off that the ABS has to make in terms of the sample sizes that you have for collections which, in an ideal world, you would want to be as large as possible to minimise that error, but obviously you need to take into account the costs of conducting surveys, both in terms of the cost to the taxpayer and the cost to the providers of having to provide that information to the organisation.

CHAIR —Thank you. In other words, it is much ado about nothing, and I am pleased to have one of my favourite blogs indicate it.

Senator BUSHBY —I actually had a number of questions on the labour force statistics, but, Chair, you have asked a question that has elicited most of the answers that I would have been looking for. Can I say, though, that I am very pleased that the government has decided to admit its error in removing the funding from the ABS that led to the decision to reduce the sample size.

Mr Harper —Can I make a point of clarification? The budget situation that the ABS found itself in was a combination of an efficiency dividend that was imposed by the government as well as increased costs of the ABS doing business, so it was not entirely attributable or even substantially attributable to a reduction of funding of the ABS.

Senator BUSHBY —We have had the ABS before us on a number of occasions, and we have explored that, and I thank you for your clarification. There is testimony in the Hansard about this in a number of ways on which I guess we can all make our own judgment. Nonetheless, despite the politics of it, I am pleased to see that you do have the funding now to be able to restore the sample size to a more meaningful level that provides a more reliable series, particularly given the fact that employment figures are likely to jump around a little bit in the next few years due to a number of factors, not least the global financial situation. I will move on from that. The only other line of questions that I have for you is to do with the survey that you conduct that I was asking the AOFM about, and that is ABS 5302.0-Balance of Payments and International Investment Position, Australia, Mar 2009. What information do you gather from the purchases of Australian securities as part of this survey?

Mr Harper —Essentially, as I think the officers from AOFM explained, most of the Australian government securities that are held by nonresidents are held via Australian nominee companies, so it is the name of the Australian nominee company that appears on the register of the securities. The Australian Bureau of Statistics conducts a survey of those nominee companies and identifies the first over-the-water beneficial owner of those securities—

Senator BUSHBY —When you say you identify the first beneficial owner—

Mr Harper —Across the water.

Senator BUSHBY —do you get the full details of who they are?

Mr Harper —We get information. I am not quite sure of the full detail that we get.

Senator BUSHBY —Would you be able to take on notice whether that is the information that you get?

Mr Harper —We certainly get information on the country of residence of the first beneficial owner across the water.

Senator BUSHBY —Do you know whether you get the name of the beneficial owner?

Mr Harper —I would have to take that on notice.

Senator BUSHBY —Okay. Do you do that with all securities on the register of the RBA?

Mr Harper —We approach nominee companies and we get them to provide us with information about all securities, both Commonwealth and other—

Senator BUSHBY —So it is not a sample.

Mr Harper —No, it is a complete collection of nominees which act on behalf of non-resident investors.

Senator BUSHBY —I note that the ABS will be introducing new standards into a number of surveys, including 5302.0, from the September release. What impact will this have on the ability to compare information contained in past releases of 5302.0 and those released from September 2009? Will they be comparable or will the changes that you are introducing mean that it is hard to compare apples with apples?

Mr Harper —The ABS has a policy when it introduces changes to the underlying conceptual basis for compiling its statistics to provide, wherever possible, time series information compiled on the new basis, and where that is not possible, to provide bridging information so that people can understand what the impact of the new standards has been. I think in the case of the balance of payments that we will be endeavouring to recompile the historical time series to be on a consistent basis. The changes from a balance of payments perspective are more marginal rather than substantial as a result of those unchanged standards.

Senator BUSHBY —What sort of changes will be evident in the new release?

Mr Ewing —I am not across the detail of the balance of payment changes but, as you say, they are essentially marginal modifications to the BPM 5 standard to the BPM 6 standard. As Peter has mentioned, we will be producing backcast series that will enable people to compare the new series with changes in the past. So we will be backcasting the old series on the new conceptual basis.

Senator BUSHBY —Given the uncertain economic times we face, being able to conduct a thorough comparison of how things were and where things are going would be very important, particularly for laymen like the senators around this table.

Mr Harper —For the key aggregates such as debt, foreign equity, the current account balance and so forth, I think the new changes have very little, if any, impact. It would be more in terms of the classifications that are adopted for some of the statistics.

Senator BUSHBY —Okay. Not that I will necessarily be able to understand it when you give it to me, but would you mind taking on notice to provide me with the details of the changes that will actually show up in this particular survey?

Mr Harper —Yes, we can do that. We have actually published information papers over the last few years which foreshadow the changes and describe what the changes will be. Later on this year we will start to publish information as to what the actual statistical impact of those changes will be. So we can certainly give you that information.

Senator BUSHBY —That is probably all I am going to ask at this point. Thank you.

CHAIR —As there are no further questions, thank you to ABS for coming in and assisting us again. Thank you, Minister. We will see you again tomorrow.

Senator Conroy —Absolutely.

CHAIR —That concludes Treasury Revenue Group, Australian Office of Financial Management and Australian Bureau of Statistics. The committee will recommence tomorrow morning with the Treasury Macroeconomic Group.

Committee adjourned at 10.45 pm