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Wednesday, 2 March 1932

Mr LYONS (Wilmot) (Prime Minister and Treasurer) . - With few exceptions the speeches on this bill have been free of parly . bias. Generally speaking, the criticism has been fair and logical. The honorable member for Oxley (Mr. Baker) stated that the Premier of New South Wales had been made the target of an attack by ministerial members. I remind the honorable member that this attack came not only from ministerial supporters; in any case, the name of the Premier of New South Wales could hardly be kept out of this debate, because from his conduct has arisen the need for this bill. This Government is taking legitimate action to cope with the default of the Government of New South Wales, but any Commonwealth Government would have been obliged, for the sake of the credit and prestige of Australia generally, to take similar action against any other defaulting government, regardless of its party political colour. The intrusion of Mr. Lang's name into this debate was natural and unavoidable. I feel, however, that the matter should be dealt with upon its merits. While the Government, does not agree with some of the criticism that has been levelled at the bill, it does not find fault with that criticism generally, nor with the suggestions that have been made in an endeavour to improve the measure by modifying some of its provisions.

When discussing the bill, the right honorable the Leader of the Opposition (Mr. Scullin) stated that the acceptance by the Commonwealth Government of liability for the amounts for which a State had defaulted in the payment of its interest was unnecessary, as that existed already. The right honorable gentleman further said that any doubt about the matter arose only from the action of this Government, and was first created when it declined immediately to find the sum of money for which the State of New South Wales had defaulted, and originated this legislation.

Dealing first with the existence or otherwise of any doubt as to the liability of the Commonwealth, I draw attention to the clear definition that is contained in clause 1 of Part III. of the Financial

Agreement, which sets out that the Commonwealth - will in respect of the debts so taken over assume as between the Commonwealth and the States the liabilities of the States to bondholders.

The Government wa3 definitely advised that there was no direct liability on the part of the Commonwealth to the bondholders; the responsibility was for the carrying out of the agreement " as between the Commonwealth and the States."

Mr Scullin - It was a legal obligation to the States.

Mr LYONS - Subject to the payment by the States, and to the preceding clause which stipulates that the States shall pay the amounts due to the Commonwealth. The Commonwealth Government was advised that any other view would ignore the words " as between the Commonwealth and the States ".

Mr Scullin - Was it not advised that it was under a legal obligation to the States, excepting a defaulting State?

Mr LYONS - The Government was advised that there was definitely a doubt as to the liability of the Commonwealth to the bondholders. As to the suggestion that the Commonwealth Government created the first doubt, I refer to the book What Every Australian Ought to Know, written by Sir Edward Mitchell, and published in November last.

Mr Scullin - Did not the Government receive the opinion of counsel on the subject?

Mr LYONS - The- right honorable gentleman must realize that the opinion of counsel is not unanimous on this or on any other subject. The Government was advised along the lines that I have indicated, which emphasizes that there is a serious doubt as to its liability to the bondholders. That doubt has existed from the beginning.

Mr Scullin - Will the Prime Minister quote the substance of that advice?

Mr LYONS - I do not propose to go into that matter now. I believe that the right honorable gentleman will accept my word that the Government was advised along the lines that I have indicated. The Government -did not first raise the doubt. In November

Sir EdwardMitchell published the book to which I have referred, and which ha3 been quoted freely during this debate, and in it he declares -

That as regards all the State debts taken over by tlie Commonwealth under clause 1 of Part III. of the First Agreement, " as between the Commonwealth and the States " that language precludes the owners of those particular public debts, i.e., those borrowed up to- 1st July, 1929, being able to enforce rights against the Commonwealth directly under that agreement. Their direct remedies remained against the States to whom they respectively originally lent.

Surely that raises the doubt as to the liability of the Common-wealth. That opinion was given long before this Government raised the doubt.

Mr Scullin - It does not remove the obligation of the Government. The honorable gentleman misinterprets the language.

Mr LYONS - I do not. I am emphasizing that from the beginning there was a doubt, and that this Government was not the first to raise it. The Government realizes that, setting aside the legal aspect, it was generally believed from the beginning that the Financial Agreement would provide Commonwealth backing to all State loans, in addition to the State backing that then existed. Yet a very real doubt has persisted up to the present, and it will continue till this legislation becomes law and removes it. The Government believes that it is entirely in the interests of the credit of the nation that that doubt should be permanently removed. That is why it is determined in Part II. of the bill.

The Leader of the Opposition raised a question as to the validity of that , portion of the bill which deals with the enforcement of State obligations incurred under the agreement, and asked whether it is a valid exercise of the powers granted under the Financial Agreement and under the Constitution; if so, is it a proper exercise of those powers. Section 105,v (3) of the Constitution provides that -

The Parliament may make laws for the carrying out by the parties thereto of any such agreement.

This Government has been careful to take the best legal advice in regard to the matter, and it is satisfied that the power which it is seeking to obtain from Parliament and will exercise comes within the language of that provision. The agreement may seem a wide exercise of that power, but I point out that it differs vitally from other agreements. In ordinary circumstances default by a party to an agreement may determine the contract, but the Commonwealth Government could not adopt that attitude with regard to the Financial Agreement. The failure on the part of a State to carry out its obligation would not enable the Commonwealth to terminate that agreement as between itself and the States, as the other parties have to be considered. The Government is advised, therefore, that a wide interpretation of the powers to which I have referred is necessary in order to give it authority to insist that the States shall carry out their part of the bargain. The Government has no doubt that, taking section j 05a (3) in conjunction with section 51 (xxxix) of the Constitution, it has definite legal sanction to provide the power that it is now taking.

Apart from the validity of the legislation, the Leader of the Opposition asks whether it is a proper use of that power, and he definitely said that it offends the principle that no man may be both judge and accuser in his own cause. I believe that he has clause 6 in his mind, and I find his reasoning difficult to follow. I can only assume that he is confusing the various arms of the Commonwealth authority; the Parliament, the Executive, and the Auditor-General. Even if it were provided in clause 6, as it is in clause 5, that application must be made to the High Court, we should merely bring in one other arm of the Commonwealth authority, the judiciary, and the same objection would still lie.

Mr SCULLIN (YARRA, VICTORIA) - That is queer reasoning.

Mr LYONS - It is merely carrying the honorable gentleman's reasoning a step further. The Auditor-General, who occupies an independent position, gives the necessary certificate, and the two Houses of Parliament are called upon to pass the resolution. Until their joint approval is obtained no further action can be taken. '

The Government recognizes that there may be some objection to the course that is proposed under clause 6. Honorable members have made suggestions whereby that clause may be improved, and, in an endeavour to safeguard the interests of the States, the Government proposes to amend the clause when the committee stage is reached, and make it mandatory for the Commonwealth to make an application to the court within a reasonable time. The whole object of the provision was to save time. It is recognized that the Commonwealth cannot wait months in order to recover sums it has paid on behalf of a defaulting State. There may be_ special reasons which make it essential for the Commonwealth to take prompt action for the recovery of the amounts involved. Tho Commonwealth Government has no desire to inflict an injustice on any State, and the amendment that I have forecast, in addition to making it mandatory for the Commonwealth to make application within a reasonable time after the certificate has been granted and the necessary resolutions carried, makes it possible for the State concerned to apply to the court. In those circumstances there can surely be no objection to the clause.

Mr Hughes - Can the State apply to. the court for a stay of proceedings?

Mr LYONS - The State may make its application to the court, and that will be dealt with on its merits, exactly as though, the Commonwealth Government had made the application. That should meet the objection that was raised by the honorable member for Martin (Mr. Holman) in connexion with clause 6.

The Leader of the Opposition and the Leader of the Country party, both suggested that we should provide remedies for the States against Commonwealth default. To do so in this bill would have no real effect, for if a Commonwealth Government defaulted it could promptly repeal any legislation which might adversely affect its position. Only a constitutional provision would be of any value in the case of Commonwealth default; the States would not be safeguarded by any legislative provision. But. according to the advice which we have received, the States are already in a position to take action to protect themselves in the case of Commonwealth default.

Dr Earle Page - If a clause were incorporated in the agreement the States would be in a better position..

Mr LYONS - If the right honorable gentleman can suggest any provision which would really safeguard the States against Commonwealth default, the Government will consider it; but legislative provision manifestly would be of little value, because a defaulting Commonwealth Government could repeal it.

Mr Scullin - Does not that statement apply to the whole of Part II. of the bill ?

Mr LYONS - I admit that if a future Commonwealth Government is not prepared to accept liability it could cause that part of the bill to be repealed; but it would have to do so in the face of the opposition of the people of Australia. Whatever legal construction may be put upon the provisions of the Financial Agreement, there is no doubt that the people regard the Commonwealth as being liable. Notwithstanding what has been said during this debate, the States are in no real clanger, for the Senate may be trusted to look after State interests.

The Leader of the Country party suggested that the bill should be subdivided, and that the provisions for the acceptance of liability by the Commonwealth should be included in a separate measure. There are some advantages in making in one measure a declaration of our acceptance of the liability, and, in another, providing in the event of the States failing in their payments for the recovery by the Commonwealth of the amounts due. We recognize too that there is the possibility that this legislation may be attacked from one stand-point or another. It might be confusing and misleading if in the case of an attack upon the provision authorizing the Commonwealth to recover, an impression were created overseas as well as in Australia, that the power of the Commonwealth to accept liability was being attacked. Such a misunderstanding might damage the credit of Australia. The Government is, therefore, accepting the suggestion that the provisions of the present bill be dealt with in two separate measures. We propose to ask, in the committee stage, that clause 4, which is Part II. of the bill, be struck -out with a view to its re-introduction as a separate bill.

Our first procedure in committee, ^herefore, will be to strike out Part II. and re-introduce, in a separate bill, provisions for the acceptance of liability by the Commonwealth. That having been done, we shall proceed with our consideration of the other portions of the bill. The Government does not think that there is any real substance iu the other argument used by the Leader of the Country party in favour of the subdivision of the bill, to the effect that the whole measure might be held to be a law imposing taxation, and that such a decision might invalidate it. We are advised that the power which is being sought is derived wholly from section 105a (3), and is entirely separate from any. taxing power of the Commonwealth. This measure could not therefore be invalidated on 'that ground.

Another suggestion made by the Leader of the Country party had relation to the attaching of revenue in the hands of taxpayers. The right honorable gentleman expressed a doubt whether the taking of that action, rather than the attaching of revenue at the central point of collection, might not cause injustice to be done to individuals who were ignorant of the existence of any default on the part of a State, or of any action taken by the Commonwealth to recover. The Government gave full consideration to this matter during the preparation of the bill, and felt that the course it proposes to take was safer and more desirable than that suggested by the Leader of the Country party. But in order to avoid any possibility of an injustice being done to individual taxpayers through their ignorance, it is proposed, in committee, to introduce an amendment to meet that objection.

Mr Scullin - Will an indemnification clause be inserted?

Mr LYONS - It is proposed to give the Commonwealth Treasurer a discretionary power. He will be able to satisfy himself before any action is taken against an individual that the person concerned acted in ignorance, and not in spite of knowledge. Such discretion must be reposed in some authority, and it is felt that the Commonwealth Treasurer is the proper person in whom to repose it.

Another fear that has been expressed is that the Commonwealth Government, in the exercise of its power, might attach funds deposited with banking or financial institutions by government contractors who retained the right to collect such funds under certain conditions, and at certain times. Provision will also be made in committee to meet that objection.

Still another suggestion made by the Leader of the Country party was that before any action was taken in Parliament, pursuant to this legislation, a resolution should be passed by the Loan Council that action should be taken. I have no doubt that the right honorable member desires such a provision in order to safe- guard the interests of the States. The tafes need have no fear whatever that the Commonwealth will act against any State which is honouring its obligations. I am satisfied that when the representatives of the States thoroughly understand this legislation, any fear that they may have in that regard will be dissipated. The interests of the States are already thoroughly safeguarded. But while the Government feels that it is not right to bring the Loan Council into an action against a defaulting State, it is prepared to consult the States with a view to providing safeguards. I take it that no Commonwealth Government would act against a State unless it was satisfied that the default was deliberate. We shall introduce an amendment with the object of limiting the duration of this measure for two years, and in the meantime we shall confer with the representatives of the States on the Loan Council with the object of ascertaining whether there are any satisfactory safeguards which could be inserted in this legislation, reserving to the Commonwealth full and complete power to enforce compliance with the terms of 'the Financial Agreement. That does not mean that it will be two years before any proposals which the States may make can be incorporated in this legislation. I am sure that it will be generally realized that the relations between the Commonwealth and State representatives not only in respect of this Government, but in respect of previous governments in recent years, have been most friendly. There has been no antagonism whatever. The States tfr. Lyons recognize that so long as they are fairly complying with their undertakings they have no need to fear any Commonwealth action. After all, the Commonwealth and the States represent exactly the same taxpayers, and there is no reason why there should be any conflict of interests. A provision limiting the life of the measure to two years will ensure that within that period this legislation will be re-submitted to Parliament' in the light of practical experience.

The honorable member for Darling Downs (Sir Littleton Groom) expressed concern lest the proposed notice of three days should be insufficient. Clause 5 provides that after the gazettal of a certificate from the Auditor-General application may be made to the High Court upon not less than three days' notice. From the time when a certificate of the Auditor-General is gazetted, a great deal of publicity will doubtless be given to any proceedings that are contemplated. But in any case, there is nothing to prevent the High Court, if it feels that insufficient notice has been given, granting an adjournment in order that any injustice in that respect may be remedied.

The honorable member for Martin (Mr. Holman) and another honorable member raised a doubt as to the power of the Commonwealth to withhold from the States loan moneys raised by the Commonwealth for them for the purposes of public works. The Government has taken special care to investigate the validity of the measure from every angle. It has been considered by the law officers of the Crown, and the advice of eminent outside counsel has also been obtained. The Government has been advised by three constitutional authorities, in turn, that the validity of this clause would be upheld. I can say no more than that the Government has gone to the highest constitutional authorities in order to obtain advice before bringing down this bill, and the Government is supported by those authorities in the action it has taken. On the merits of the case, I would point out that the various Governments of New South Wales have borrowed large sums of money for carrying out public works, and the present State Government now finds that it is unable to pay the interest, on the sums so borrowed. In recent years the Commonwealth Government has been the channel through which these borrowings have taken place. Is it reasonable that a government that admits that it cannot and will not pay the interest due on the sums already borrowed, should now ask the Commonwealth Government to borrow on its behalf further millions on which it would surely be unable to pay interest? In private transactions, would a citizenhave any hope of borrowing even the smallest sum under such circumstances ? If the Financial Agreement were not in existence to-day, and each State were compelled to do its own borrowing, how would the Government of New South Wales fare in seeking further large sums from those from whom millions have been borrowed in the past, should it declare its inability to pay the interest due? It is against common sense to suggest that the Commonwealth Government as the borrowing agency, should raise further millions for a State that will not pay its interest.

Mr Beasley - Does the Prime Minister suggest closing down the State of New South Wales?

Mr LYONS - We suggest that the Government of that State should carry

Out the promise made to the last Commonwealth Government and to the Loan Council, to accept responsibility for payment of the interest due on its debts.

Mr Ward - What was promised ?

Mr LYONS - The honorable member knows full well that the Government of New South Wales undertook, in common with the other States, to reduce its expenditure; but it has not done so. When it carries out that undertaking, it will be in a position to meet its obligations, and when it has paid the interestnow due, it will be justified in asking for further loans to be raised on its giving an undertaking to pay the interest. There is no escape from the fact that the Government of New South Wales says to the Commonwealth Government, as the borrower, " We will not pay interest on the sums which we have already borrowed, and which you have raised for us; yet we desire you to raise more money for us". Therefore, there is one straightforward thing for the New South Wales Government to do, and when it has done that, it will be in a position to paythe intereston the money that has been borrowed already on its behalf, and to claim further amounts. In view of all the circumstances, it is only fair to the people of the Commonwealth generally that some brake should be put on the borrowing powers of New South Wales. By doing that, the Commonwealth Government is acting in the interests of the Government and of the people of that State.

Question - That the bill be now read a second time - put. The House divided (Mr. Speaker - Hon G. H. Mackay.)

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