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Thursday, 22 March 1928

Senator Sir GEORGE PEARCE (Western Australia) (Vice-President of the Executive Council) [3.10]. - I move -

That the bill be now read a second time.

The purpose of the bill is to approve a financial agreement entered into on the 12th December, 1927, between the Commonwealth Government and the Governments of the six States. It makes practicable a permanent solution of the longstanding difficulty that has vexed the Commonwealth and the States in their financial relations with each other. The agreement is subject to the ratification of the Parliaments of the Commonwealth and the States, and its permanency is dependent upon an amendment of the Constitution being agreed to by the people, and a validating act being passed by the next Commonwealth Parliament.

Many attempts were made by previous Commonwealth Governments to bring about a permanent settlement of this question; but they were unable to arrive at an agreement with the States. The execution of this agreement with the States which now makes the way clear for a lasting settlement of' this difficult problem is no mean achievement. I remind honorable senators that this is the first occasion on which the Commonwealth and the States have been in agreement.

Senator THOMAS (NEW SOUTH WALES) - The Commonwealth is giving away everything.

Senator Sir GEORGE PEARCE -I shall show shortly that that is not the case. The subject of Commonwealth and State finances has been considered and dealt with' at length by honorable senators on previous occasions, and I do not propose therefore to do more than refer to one or two incidents in connexion with the history of this agreement. In 1919 the right honorable member for Balaclava (Mr. Watt), then Acting Prime Minister, submitted the first proposal for an alteration of the capitation payment. His scheme provided for a gradual reduction of the payment of 25s. per head to 10s. per head, but it was not accepted. In 1923 and again in 1926 further proposals which provided for the Commonwealth giving up to the States some portion of the income tax field as compensation for the abolition of the capitation payments were placed before the States, but were not acceptable to them. After the 1926 conference of Commonwealth and State Ministers the Government came to the conclusion that the capitation system, which could be suspended by the will of Parliament at anytime, should be superseded by some scheme that would provide for a permanent settlement of this vexed problem. As a preliminary it brought forward a measure to discontinue the payments under the Surplus Revenue Act as from 30th June, 1927. That measure also provided for special grants on the capitation basis, for the year 1927-28, subject to any agreement that might be entered into between the Commonwealth and the States. When that measure was brought down the

Government indicated that it would hold an open conference with the States to consider the question from all possible angles, including any proposals that the States themselves might put forward. Parliament approved of the bill in March, 1927, and thus made the way clear for an open conference. Shortly afterwards a conference was held at which the Commonwealth placed before .the States further proposals which aimed at a settlement through the transfer of State debts. The proposals, briefly stated, were -

The whole of the public debts of the States to be taken over by the Commonwealth.

Properly safeguarded sinking funds to be established in respect of existing State debts and new borrowings.

The management of debts and future borrowings to be vested in an Australian Loan Council.

The Commonwealth to make substantial contributions towards interest and sinking funds on State debts ; and

A final settlement to be made in respect of transferred properties.

These proposals were carefully examined by the States, and resulted in the agreement which is now the subject of this bill. The main features of the agreement are as follows: -

1.   The Commonwealth to take over all debts of States existing on 1st July, 1929.

2.   Prom 1st July, 1927, the Commonwealth to apply £7,584,912 annually, for 58 years, from its revenues towards the payment of the interest charges on State debts ; the States to contribute the balance of the interest payable.

3.   A sinking fund of 7s. 6d. per cent, to be established on the net debts of the States as existing at 30th June, 1927. To this sinking fund the Commonwealth to contribute 2s. 6d. per cent., and the States 5s. per cent, for 58 years.

4.   A sinking fund of 10s. per cent, to be established on all new borrowings after 1st July, 1927 ; the Commonwealth to contribute 5s. per cent., and the States to contribute 5s. per cent, for 53 years.

5.   The management of Commonwealth and States debts and the conduct of future borrowings for both Commonwealth and

States to be in the hands of a newlyconstituted Australian Loan Council, consisting of a representative of the Commonwealth and a representative of each State.

6.   A full settlement to be made in respect of " transferred properties," whereby the Commonwealth will relieve the States of all liability in respect of, approximately, £11,000,000 of debt, bearing interest at 5 per cent. This will mean an annual gain to the States of approximately £164,000, as the Commonwealth Government at present only pays interest at 3£ per cent, on the value of the properties.

7.   An amendment of the Constitution to be submitted for the approval of the people so as to obtain the necessary power to carry out the agreement.

It is essential that an arrangement of such a far-reaching character should be supported by constitutional authority. The Constitution as it stands at present is inadequate for this purpose, and it is necessary that an amendment shall be secured. This is the only way in which the Commonwealth can give the States a guarantee of the permanency of the arrangement. Until the Constitution is amended, the agreement cannot come into full operation. It was considered desirable, however, that its benefits should at once, as far as practicable, become operative pending submission to the people of the necessary amendment of the Constitution.

Senator Needham - Did the right honorable gentleman say that the agreement would be embodied in the Constitution ?

Senator Sir GEORGEPEARCE.No; a section authorizing such 7an agreement will be embodied in the Constitution if the people so approve. ' The agreement contains certain provisions which will apply during the temporary period of two years from 1st July, 1927 to 30th June, 1929. These provisions which are set out in Part II., briefly stated, provide that the Commonwealth shall pay to the States, towards interest on debts, £7,584,912 and 5 per cent, interest on the value of the transferred properties instead of 3^ per cent. They also provide for sinking fund contributions to be payable as from 1st July, 1927, except in the case qf New South Wales which State will commence its contributions on 1st July, 1928.

The agreement will involve a substantially increased burden on the Commonwealth revenue as compared with the payments provided for under the States Grants Act, 1927. This additional charge mainly arises from the sinking fund contributions which the Commonwealth will make for the redemption of existing States debts. As the people of Australia generally will reap the advantages of co-ordinated borrowing and the establishment of sinking funds, it is felt that, the Commonwealth is justified in making an immediate and substantial contribution from its revenues to secure those advantages. In the year 1927-28 the financial position will be as follows : -


The following table sets out in detail the amounts that will be received by each State'.

It will be noted that under the agreement every State will gain a substantial benefit.

I invite honorable senators to turn to the agreement while I explain briefly some of its chief features. It is divided into four parts, namely : - Part I., general provisions; Part II., temporary provisions; Part III., permanent provisions; and Part IV., miscellaneous provisions. The most important provision of Part I. relates to the constitution and powers of the Loan Council. A voluntary Loan Council has been in operation since 1924. Up till then there was cut-throat competition between the States, and during the financial stringency in 1923 interest rates reached 6 per cent, in respect of loans free of Commonwealth and State income tax. The Loan Council has since secured co-ordination in both the Australian market and the overseas market. Each State was free to withdraw from the Council at any time, and unfortunately New South Wales did so. That action to some extent minimized the benefits of the Council; nevertheless the results exceeded anticipation and made the States realize that they had nothing to fear from a permanently constituted Loan Council. The agreement provides that there shall be on the Loan Council one representative of the Commonwealth and one representative of each State. Where a vote is necessary each State representative will have one vote and the Commonwealth representative two votes and a. casting vote. One of the most important questions to be decided by the

Loan Council will be the amount of money that can be borrowed at reasonable rates and under reasonable conditions. The decision of this question will really not be difficult, since it will be governed by the state of the money market. In times of stringency, if it is found that the total programmes of the Commonwealth and the States exceed the amount which, in the opinion of the Loan Council, is available in the market at reasonable rates and conditions, the agreement prescribes the method of apportionment of the reduced amount amongst the various governments. If the decision of the Loan Council is unanimous, the allocation of the money available will be in accord with that decision. If, on the other hand, the Loan Council fails to reach a unanimous decision the Commonwealth will be entitled to have allocated to it not more than one-fifth of the reduced amount, and the States will be entitled to share the balance in proportion to their net loan expenditure during the preceding five years. Each Government will thus receive an equitable share of any reduced sum which may be borrowed, and competition will be avoided. This arrangement will also prevent an undue inflation of the "loan estimates of any particular State in the hope that even if a reduction is made in the amount asked for the State concerned will obtain sufficient for its actual requirements. Broadly speaking, the Commonwealth is to arrange all borrowing subject to the Loan Council. There is, however,' power in the agreement for a State to borrow money outside Australia in its own name, subject ' to the unanimous consent of the Loan Council. This amendment of the original agreement was made at the suggestion of the States themselves, because it was pointed out that some of them had established a certain goodwill in the London money market or elsewhere, and that by the withdrawal of the right to issue a loan in the name of a particular State the benefit of that goodwill would be lost.

Senator Foll - Will any amount so borrowed by a State be deducted from its proportion of loan moneys raised by the Loan Council for any particular year ?

Senator Sir GEORGEPEARCE.Yes. Any moneys so raised by a State will, be regarded as a portion of its allocation.

Senator Thompson - Is it proposed tocontrol borrowing by municipal authorities?

Senator Sir GEORGEPEARCE.No. The provisions of Part IL, to which I have already referred, will only operate during the temporary period of twoyears. ' In the event of the Constitution amendment not becoming law, and of the agreement not being validated on or before the 30th June, 1929, provision is made for the States to reap the benefit of all sinking fund contributions made by the Commonwealth during the temporary period of two years.

The provisions of Part III. of the agreement will not come into force unless, before the 1st July, 1929, the Constitution has been altered and the Commonwealth Parliament has passed a law validating the agreement. Subject to this procedure, the Commonwealth will take over the debts of the States as at the 1st July, 1929, and will assume the liabilities of the States to the bond-holders. Further provisions under this part include a payment by the Commonwealth of a fixed contribution towards interest charges for 58 years, amounting to £7,584,912; the establishment of sinking funds with joint contributions by the Commonwealth and the States ; the settlement of the transferred properties question by the Commonwealth relieving 'the States of all liability in respect of debts bearing interest at 5 per cent., equivalent to the agreed value of the properties, totalling £10,924,323. The sinking funds to be provided will be controlled by the National Debt Commission, which will regularly apply all money paid into the fund to the re-purchase or redemption of the debts of each State. In the same way the National Debt Commission will immediately cancel all securities as they come into its hands, and thereafter during the prescribed sinking fund period, the States concerned will pay to the Sinking Fund Commission an amount equal to 4£ per cent, per annum on the cancelled debt. The sinking fund will thus receive the ' benefit of compound interest at the rate of 4-J per cent, on the prescribed contributions. The annual contribution by the Commonwealth to the sinking fund on debts at the 30th June, 1927, will be £801,680. The annual payment in respect of new debts will be determined by the amount of new borrowing.

Part IV. of the agreement contains miscellaneous provisions, the most important of which deals with the proposed alteration of the Constitution. It is proposed that a new section shall be inserted in the Constitution in the following form : - 105a. (1) The Commonwealth may make agreements with the States with respect to the public debts of the States, including -

(a)   the taking over of such debts by the Commonwealth ;

(b)   the management of such debts;

(c)   the payment of interest and the provision and management of sinking funds in respect of such debts;

(d)   the consolidation, renewal, conversion, and redemption of such debts;

(e)   the indemnification of the Commonwealth by the States in respect of debts taken over by the Commonwealth ; and

(f)   the borrowing of money by the States or by the Commonwealth or by the Commonwealth for the States.

(   2 ) The Parliament may make laws for validating any such agreement made before the commencement of this section.

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

(4)   Any such agreement may be varied or rescinded by the parties thereto.

(5)   Every such agreement and any such variation thereof shall be binding upon the Commonwealthand the States parties thereto, notwithstanding anything contained in this Constitution or the Constitution of the several States or in any law of the Parliament of the Commonwealth or of any State.

(6)   The powers conferred by this section shall not be construed as being limited in any way by the provisions of section 105 of this Constitution.

The precise wording of this clause has been determined after submission to the Crown Law authorities of not only each State, but also the Commonwealth, in addition to outside counsel.

Senator Duncan - Have all the States agreed upon it?

Senator Sir GEORGEPEARCE.They have. "When the clause is approved by the people there will be an absolute guarantee to the States that this or any agreement made in the future under the powers to be conferred by the constitu tional amendment, will have constitutional force and effect, notwithstanding any legislation passed by any parliament of Australia.

The benefiits of this agreement cannot be over-stated. It makes the way clear for a permanent and satisfactory settlement of a problem that has hitherto proved impossible of achievement. It safeguards the position of State finances, as it ensures definite Commonwealth assistance on a satisfactory basis, and the States will no longer be dependent on the will of the Commonwealth Parliament. It provides for the giving of immediate relief to the finances of the States. It provides also for the economic management of debt and borrowing operations, and entirely eliminates any danger of cut-throat competition in the future. Above all, it will result in the enhancement of Australia's credit, and thus substantial savings of interest will ultimately be secured to the peoplp through the issue of new conversion loans on better terms than would be possible in the absence of co-ordinated debt management and adequate sinking fund provisions. To those who may cavil at that statement, I commend the position which is enjoyed by New Zealand and Canada, two sister dominions, whose assets and potentialities cannot be said to be better than ours, but whose securities are regarded more favorably than ours on the English and American money markets, because they have constituted one financial authority which speaks for the whole of the dominion.

In conclusion, I desire to say that the agreement has been the subject of most favorable press comment both in Australia and overseas.It has been signed by the representatives of the governments of the six States and the Commonwealth. Those governments represent not one party, but all parties. It has been ratified by four parliaments, namely, those of Victoria, Queensland. South Australia, and Tasmania. The Parliaments of New South Wales and Western Australia will deal with it very shortly. In view of the fact that it has received the endorsement of the governments of all of the States and the parliaments of four of the States, and that it has passed the House of Representatives, I commend the bill to the

Senate as a fair and substantial fulfilment of the promise which was made by the Government when it brought forward its proposals for the abolition of the per capita payments. We have dealt with the States both justly and generously. I ask the Senate to endorse our action by agreeing to the passage of the bill.

Debate (on motion by Senator Needham) adjourned.

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