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Thursday, 26 November 1959

Mr CAIRNS (Yarra) .- The purpose of this bill is to authorize the Commonwealth Bank to issue and to circulate £61,000,000 worth of new money to meet the requirements of the Commonwealth Government. The first point that should be made by the Opposition in relation to a measure of this kind is that the bill registers the recognition, by the conservative parties in this country, of the use of the Commonwealth Bank for this purpose. At this stage we must cast our minds back to 1931 when a Labour government was in office. The then Governor of the Commonwealth Bank served an ultimatum on the Government of the day to the effect that not one penny would be made available to it. The country was faced with a financial crisis which was the result of a policy of dictatorship which was implemented by the banking interests. They succeeded in wrecking the Labour Government.

The amount that was involved in those days was a mere £27,000,000 which was needed to save this country from the effects of the depression. To-day, as a casual passing thing, we have the Commonwealth Government and the Commonwealth Bank prepared to issue £61,000,000 worth of new money. It is important that this matter should be emphasized in view of the experience of previous Labour governments.

The heading of this bill is -

A bill for an act to authorize the raising and expending of a certain sum of money for defence purposes.

That heading is misleading. The bill does not seek to authorize the raising of money for defence purposes. Tt seeks to authorize the raising of £61.000,000, of which £37.000.000 will be expended on defence purposes and the remaining £24.000.000 will be used to redeem securities. No one can suggest that this latter purpose is a defence purpose.

This method of trying to separate into categories the raising of money in this way is totally unsound. As the honorable member for Melbourne Ports (Mr. Crean) has pointed out, it does not matter whether you regard this money as being raised for defence purposes or for social services. The economic effect is exactly the same. This is an example of the out-dated and oldfashioned method of drawing up bills and compiling public accounts which prevails in the Commonwealth at present. The £24,000,000 to redeem securities is merely a bookkeeping entry. The honorable member for Melbourne Ports pointed out that, of the £3,590,100,000 of public debt classified in the sixteenth " Treasury Information Bulletin", £1,281,000,000 is held by the Government itself and by government bodies. In other words, more than onethird of the so-called debt that the government system in Australia owes, it owes to itself. It represents merely a bookkeeping entry. The £24,000,000 which ostensibly is being raised under the terms of this bill for the redemption of securities is nothing more than a fiction. The sole purpose is to balance the accounts at the end of the financial year.

Whether or not the Government will in fact draw the £61,000,000 is the next question to examine, Mr. Deputy Speaker. Last financial year, as the honorable member for Melbourne Ports pointed out, the Government expected to draw £1 10,000,000 but, in fact, drew only £29,500,000. Deficit financing is very unreal to this Government. It seeks to raise money in every other conceivable way - by increasing revenue, from loans, from private persons and private institutions, and from the central bank itself. All these are methods which are not identified with the present method of raising funds for the redeeming of securities through the National Debt Sinking Fund. If, having turned to all those other methods, the Government finds that it has not enough money, it turns to the central bank for the balance. There is no real deficit financing in this - no plan to finance public works or something of the sort by turning to the central bank. This bill is merely a document introduced into the Parliament in an attempt to balance the Government's accounts at the end of the financial year.

I think that the House ought to be concerned with what is a deficit. For many years a deficit was regarded, I think rightly, as the difference between revenue and expenditure - the difference between the amount of revenue that the Government could raise in cash and the amount of cash that it spent. But a different meaning of the term " deficit " has now slipped in. This Government considers as cash funds its revenue plus borrowings from every conceivable source other than the central bank. That is the sum of the cash resources that this Government considers it has available. If that sum is less than expenditure, the Government says that it has a deficit to the extent of the difference. If you look at it that way, £61,000,000 is the margin at the present time. But the correct way to look at the Government's financial position, Mr. Deputy Speaker, is to have regard to the revenue that it is able to obtain in various forms such as taxation, on the one hand, and what it spends on the other. The difference between the two is the real deficiency - the deficit.

This financial year, the Government's expenditure is expected to be £1,682,263,000 and its revenue is expected to be £1,385,263,000. So there is an actual deficit, this financial year, of £297,000,000 - not £61,000,000. I think it is time that this was emphasized. A deficit is the difference between the money the Government can raise by way of revenue and the amount it spends. This represents the amount it has to borrow. The deficit is the extent to which you go into debt, surely. I think that any one looking at the matter from a business point of view would agree with that. To what extent, then, does the Government expect to go into debt this financial year? The answer is that it expects to go into debt to the amount of £297,000,000. This deficit is approximately equal to the deficit of last financial year. These last two deficits, I think, are substantially greater than was any other deficit in the history of Australia, in either nominal or real terms. These two record deficits of £297,000,000 have come at the end of a series of deficits under the financial management of this Government.

We must think of the effect of these continuing and growing deficits. The first effect is debasement of the country's purchasing power as a result of the continuous cycle of rising prices and costs. It is wrong simply to regard this as inflation. Inflation can come to have an accepted favorable meaning, as it has for a number of distinguished people who do very well out of it. What we are suffering from is debasement of the purchasing power. It is very difficult to sell the idea of debasement, but very easy to sell the idea of inflation, and the present Government has done this very successfully. If we think of the matter in the proper terms of debasement of the standard of living of those who cannot keep ahead of the cycle, and debasement of the purchasing power of the Australian currency, we have, I suggest, a better idea of the real meaning of the Government's financial policy.

The first effect of the kind of deficit financing of which this bill is a part is debasement of the standard of living of those who cannot keep up with the rising prices. The second effect is the important matter raised by the honorable member for Chisholm (Sir Wilfrid Kent Hughes)- the growing public debt. Here, the honorable member made very vividly a very strong point which the Treasurer (Mr. Harold Holt) seemed to find great difficulty in answering. That point is that the total of Commonwealth and State debt has been growing over the last few years. The documents tabled with the Budget for the current financial year indicate that the total debt has increased from £2,826,053,469 in 1949 to £4,040,901,005 in 1959. We have to understand a number of things about this. First, the debt said to be owing by the Commonwealth has fallen from £1,817,169,436 in 1949 to £1,649,280,606 in 1959. Secondly, the debt said to be owing by the States has risen very remarkablyfrom £1,008,884,033 in 1949 to £2,391,620,399 in 1959.

I think that this change in the debt situation of the States and the Commonwealth, although it gives a significant clue to what has been going on in Commonwealth finance, is not nearly as important as Mr. Hiley and the honorable member for Chisholm think it is. The explanation of this, Mr. Deputy Speaker, is fairly simple. When we refer to table No. 19, at page 93 of the budget papers for 1959-60, where this debt is classified, we see that it is only since 1956 that the Commonwealth's debt has declined. It was £1,926,566,757 at 30th June, 1956. That was its highest point. It declined to £1,649,280,606 at 30th June, 1959. There has been a decline only over the last three years, and it has not been a big decline - only about £300,000,000. This decline has taken place because the Commonwealth has written off treasury-bills and other government securities mainly held by other government bodies, including, particularly, the Commonwealth Bank of Australia. If we refer to the table at page 15 of the " Treasury Information Bulletin ", to which the honorable member for Melbourne Ports referred, we find that holdings of Commonwealth securities by Commonwealth and State governments and local and semigovernmental bodies have fallen from £885,300,000 to £792,300,000 in the twelve months to 30th June last, and that holdings by the Commonwealth Bank have fallen from £440,500,000 to £432,500,000. The Commonwealth Government has used the financial situation in order to write off treasury-bills.

Treasury-bills and securities held by the Commonwealth Bank alone in 1955, when this process began, amounted to about £525,000,000 and to-day they amount to about £405,000,000. The seasonal factor is involved but I have taken corresponding months and there is about £120,000,000 alone there that has been written off. This does not mean that this money is available to spend. As the Treasurer pointed out by interjection earlier in the debate, this does not mean that the Commonwealth had that amount of money available. It chose to write off treasury-bills. In a contrary way, it could have chosen to issue new treasurybills. But because it was able to do this to balance its accounts, does not mean that it had the cash. It did not have the cash. It is purely and simply a bookkeeping entry.

So the Commonwealth has written off treasury-bills to that extent, but on the other hand, it has debited, as it were, the new loans increasingly to the States. The new loans are charged against the States. The old loans have been written off, probably at the rate of not more than £80,000,000 a year since 1955. The loans that have been written off are those that were debited against the Commonwealth.

Mr Hulme - They were the war loans.

Mr CAIRNS - What does it matter? The new loans that have been raised have been charged against the States. I do not think that this is very important in the overall pattern, but the net effect is that the interest charged to the Commonwealth has hardly risen. In 1949 it was £51,000,000; to-day, it is £52,000,000. However, whereas the interest chargeable - that is the correct word to use because it is not all actually charged - to the States in 1949 was £32,000,000, to-day, it is £96,000,000. The amount is three times what it was.

Sir Wilfrid Kent Hughes - That is the big point.

Mr CAIRNS - Yes. I think that that has particular relevance to the point raised by the honorable member for Chisholm. When the honorable member raised that point the Treasurer said, " But the States have taxing power ". With a chargeable interest burden that has risen from £32.000,000 to £96,000,000 in the space of ten years, the States, with their very minor, insignificant and declining taxation power, have been forced into an increasingly difficult position.

As was pointed out by the honorable member for Melbourne Ports the States are carrying on what the Opposition regards - and I would think some members on the other side would regard - as most important activity*: such as education, the building of roads, water supply, sewerage and, to some extent, housing. Those are basic services. The States are being forced into a position in which they have to pay more in interest to the Commonwealth and have te rely upon minor and diminishing taxation powers. Consequently, we find State expenditure on basic services declining relative to other kinds of expenditure, including that of the Commonwealth, which pays for its public works and for defence substantially out of revenue. The Commonwealth has had no difficulty in getting money for fighters, and other defence equipment although, according to the speech of the Minister for Defence (Mr.

Townley) this morning, this is not now as easy as it was. Previously, no limits applied.

The Snowy Mountains scheme, valuable as it is, has never had the disadvantage of shortage of funds such as State works even more essential than the Snowy Mountains scheme have had. However, this relative decline of Commonwealth debt and the increase of State debt is not important as a financial procedure because it is all part of the same scheme. Nevertheless, we have to be sure of the economic effect that it has.

Mr Hulme - The total State debt, before the war, was four times that of the Commonwealth, and the ratio is much the same to-day.

Mr CAIRNS - Yes, but in those days the States had full taxing powers and it was easier for them to carry that debt. I cannot understand that kind of interjection. Do Ministers really understand the position? Are they just trying to pass the buck to the States? The States' debts may have been four times as high as the Commonwealth debt before the war, as the Minister for Supply has said, but the States' taxation capacity was probably twenty times higher than it is now. Did the Minister not think of that?

Mr Hulme - The States have been assisted by Commonwealth tax reimbursements.

Mr CAIRNS - The tax reimbursements have been very inflexible. The pressures that have been exerted at conferences between the Premiers and the Prime Minister (Mr. Menzies) have revealed that. I think that this issue has to be broken into somewhere, and I think that before long the Commonwealth must break into it by allowing greater flexibility. The interjection of the Minister for Supply and the earlier one of the Treasurer show that there is little or no flexibility in this field.

I turn to another point: I have said that, last year, there was an actual deficit of £297,000,000 in the Commonwealth finances, as there is this year. Facing that deficit, what does the Government do? The first thing it does is to tura to people outside the Government's financial structure to borrow from. It turns to the public, to the private banks and, finally, to the public banks. What the Government will do this year, I think, is pretty well illustrated by what it did last year. Last year, faced with an actual deficit of £297,000,000, as it is again this year, the Government managed to borrow £31,000,000 abroad. It managed to borrow £27,000,000 from the public - that is to say, from private citizens who, no doubt, were on varying ranges of income - through the issue of special bonds. Probably, another £30,000,000 or so was obtained from the public in Commonwealth securities. So a total of perhaps £50,000,000 or £60,000,000 was obtained from the public. The rest of the borrowing last year - no doubt between £160,000,000 and £180,000,000 - was from private banks and other financial institutions. I suggest that the Government will be in greater difficulties this year in all those fields. There was a big upward trend in borrowing from overseas during 1956, 1957 and 1958. Overseas reports say that there is now a decline in the moneys available. We know that the amount of private money has declined very considerably. Three years ago, £23,700,000 was borrowed from the United States of America, but only £5,800,000 was obtained in the last financial year. So, the Government will find it harder to borrow from abroad in the next twelve months. Nor do I think it will be easier to get money from the ordinary private citizens. What about the rest of it? The Government still has to raise almost as much money as it raised last year. How will it do it? Last year it adopted a piece of financial jiggerypokery which I think members of the House did not fully understand. We are told that resort to the Commonwealth Bank would mean inflation. But members of the Australian Country Party, by interjection, said to the honorable member for Melbourne Ports that borrowing from the private banks and the private short-term money market was not inflationary because it would draw off spending power which belongs to the banks and would otherwise be spent in other directions. But that is not so. The process of borrowing which took place last year from the trading banks and from the private short-term money market was just as much inflationary as it would have been had it been done through the Commonwealth Bank in the first place. Indeed, it was more inflationary for reasons that I will mention in a moment.

Precisely what happened was this: Instead of going to the Commonwealth Bank directly for £90,000,000 or £100,000,000 and securing it by means of a bill of this kind, as the Government could have done, it agreed to release from the special account £90,000,000 to the private trading banks. If honorable members look at the " Monthly Review of Business Statistics " they will find that the balance in special accounts from July, 1957, to February, 1958, was about £340,000,000 all the time. Then there began to be a release, and by June, 1959, the balance was £250,000,000. This means that £90,000,000 had been handed over by the Commonwealth Bank to the trading banks.

What did they need that £90,000,000 for? Normally they would have lent it to their customers on overdraft, but we find that they did not do that. Their overdrafts in February, 1958, were £750,000,000, in June, 1958, £832,000,000, and in June, 1959, £795,000,000; that is to say, £37,000,000 less. They did not lend this £90,000,000 to the public. What did they do with it? 1 think we have the authority of the Treasurer for this. In his Budget speech, when he was talking about money the Government raised last year, he said -

But there were also exceptionally large subscriptions to Commonwealth loans by trading banks which were unusually liquid at that period.

You're telling me! They were unusually liquid to the extent of £90,000,000. The Treasurer went on -

Moreover, the new short-term market institutions, which were establishing portfolios of securities, contributed heavily to Commonwealth loans. A considerable part of their funds was obtained from the trading banks.

I ask honorable members to note those words - " a considerable part of their funds was obtained from the trading banks ". The process was simple; the £90,000,000 flowed out of the special accounts in the Commonwealth Bank but instead of flowing directly to the Commonwealth Government at 1 per cent, it flowed to the trading banks which, in turn, either lent it to the Commonwealth Government at 4 per cent, or 5 per cent, or to the short-term money market at something in between. Then the shortterm money market lent it to the Commonwealth Government.

The Treasury Information Bulletin No. 16, at page 15, which was quoted by the honorable member for Melbourne Ports (Mr. Crean) shows precisely what happened. The holdings of Commonwealth securities by the trading banks went up from £234,200,000 to £311,800,000, an increase of just on £78,000,000. The holdings of the savings banks, which would be the private ones mainly, rose from £721,100,000 to £744,300,000. The money market dealers - I think the Treasury should find a much more respectable name for them than that, and I hope it will alter it by next year - had nothing at the beginning of the year but by 30th June, 1959, they held £49,000,000. Companies not elsewhere included had holdings which rose from £82,500,000 to £96,500,000. These financial geniuses were £163,800,000 better off in holdings of government securities at the end of the process compared with what they were at the beginning.

If members of the Australian Country Party think about this they will see that this was a more inflationary process because the Commonwealth Bank lent to the trading banks and the trading banks lent to the short-term market. Instead of borrowing directly from the Commonwealth Bank at 1 per cent., the Government was borrowing from these intermediaries at 4 per cent, or 5 per cent. I think, as the honorable member for Melbourne Ports pointed out, if the gentlemen of the press discovered some kind of jiggery-pokery in a couple of government departments as a result of which people were defrauded to the extent of £2,000,000 or £3,000,000 they would give it headlines throughout Australia, but I suggest that anything the honorable member or I have said in this debate will not be given headlines iri any newspaper tomorrow. But I want to say quite clearly, so that they can quote it if they so desire, that this is a piece of financial jiggerypokery in which the people of Australia have been defrauded to the extent of £3,000,000 or £4,000,000 during the course of the last financial year. Probably as a result there will be considerable contribu- tions to the funds of the Liberal Party before the next elections.

I suggest it is much better for the money the Government requires, such as the £61,000,000 mentioned by the Treasurer, or even more, to be taken directly from the Commonwealth Bank at 1 per cent, or so than to be channelled out through the various streams of finance and be borrowed back from the private money lenders at 4 per cent, or 5 per cent. That would be far less inflationary and far less costly. It is satisfactory to borrow from private lenders money which would otherwise be spent, but this was not money which would otherwise be spent. The Government passed it out, or a substantial part of it, through the special accounts and put it into circulation in the first place. It was not money which would otherwise have been spent.

If new money is to be created, as it is being created under this legislation and as it should have been created to an even greater extent last year, instead of adopting the process I have described it should be created through the public banking system and not through the agency of private money lenders. It is satisfactory to borrow £61,000,000 in this way at the present time and it would certainly be satisfactory to borrow even more, but the process in this coming year will be very similar to that of last year with the exception of these facts: First, the Government will not get as much money from overseas as it obtained last year; secondly, it will get no more from private individuals than it got last year, and thirdly, it is not asking for as much money from the central bank because it is getting more money from the trading banks.

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