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Australian Office of Financial Management

CHAIR —I welcome representatives from the Australian Office of Financial Management. Mr Hyden, I understand you do not have an opening statement to make, so we will go straight to questioning.

Senator JOYCE —Thank you very much. Does the AOFM have the highest paid public servants?

Mr Hyden —Certainly not.

Senator Sherry —I think if you look at AFMA’s and ASIC’s annual report, you will get a pretty good indication who is at the top of the scale.

Senator JOYCE —Someone said, ‘AOFM? You would be surprised. They’re the highest paid ones.’ Surprised? I would be fascinated.

Senator BUSHBY —There was an article about a year and a half ago that listed the heads of a number of the agencies and the top bracket paid. I think the AOFM may have featured in that in an overall sense, but not the highest level.

Mr Hyden —I do not recall having seen that article. My salary fits into the Treasury salary scale, so it is not outside the norm in that regard.

Senator JOYCE —What is our current—you know I always ask this—gross debt, as we speak?

Mr Bath —As at 1 June, it was $143.5 billion, consisting of $121.8 billion of Treasury fixed coupon bonds, $11.1 billion of Treasury indexed bonds and $10.6 billion in Treasury notes. You can add to that $500 million for a tender we did yesterday in Treasury bonds and another, I think, $600 million today.

Senator JOYCE —You add to that another $500 million?

Mr Bath —Yes, in Treasury bonds that we would have issued yesterday and another $600 million, I believe, in Treasury notes that we issued today.

Senator JOYCE —So $600 million is another bill? We are up about $144.6 billion?

Mr Bath —That sounds right, yes.

Senator JOYCE —What is our general rate of issuance? I have been watching. It is about $1¼ billion up to $2 billion a week?

Mr Hyden —Normally we have two bond tenders a week. That is not necessarily every week, but most weeks we would have two bond tenders. Generally, they are $500 million to $700 million, so $1.2 billion on average a week. Not every week but most weeks we would have a Treasury note tender as well. The size of those depends on our actual cash needs for that week, so it can vary. In recent months we have been largely rolling over the same amount of those each week.

Senator JOYCE —Mr Hyden, how long have you been with AOFM? How many years?

Mr Hyden —I have been there for six years.

Senator JOYCE —What about you, Mr Bath?

Mr Bath —It will be eight years in August.

Senator JOYCE —Have either of you ever seen a time where we have been issuing securities at this rate?

Mr Hyden —We have been issuing them at this rate over the last 18 months.

Senator JOYCE —Over the last 18 months?

Mr Hyden —Since February last year.

Senator JOYCE —Is your issuance accelerating, plateauing or going down?

Mr Hyden —It has been quite even—a level amount through that period. That will continue next financial year at about that same amount. But thereafter with the prospect of a reduced budget deficit and eventually going to surplus, the rate of issuance will decrease.

Senator JOYCE —If there is not a reduced budget deficit then the issuance will keep going on at that rate—will it not?

Mr Hyden —The issuance depends primarily on the size of the amount to be financed for the budget. It also depends on maturities of stock previously issued. With the increase in issuance that we have had over the last 18 months, that means we will have higher maturities in future years for some time. It is a balancing act between those two factors.

Senator JOYCE —When do you reckon you will get to the first week where you actually have less gross outstanding than you did the week before? Every week we seem to owe more than we did the week before. At what point do you think we will get a week where we actually pay some back?

Mr Hyden —Whenever we have a maturity of an existing line of stock, we would have a greater reduction in the volume of debt than the increase in debt from new issuance. For example, the 10 August line will mature in August. In that month or on the day that it matures, we would have an outflow of $7.6 billion that we have to pay out. So the debt will go down by that amount.

Senator JOYCE —You hope.

Mr Hyden —Hopefully we have maturities once or twice a year where we have large steps down and then a gradual building up in between. That is because we spread out the issuance.

Senator JOYCE —What has happened to the yield curve since the last time we met? Has it gone up or down?

Mr Bath —Rates have fallen over the last month or so. To give you some sort of perspective, I refer to the chart that I suspect Senator Bushby will ask for an update on.

Senator BUSHBY —Are you able to table that while we are talking about this?

Mr Bath —We can if I can find it. When did we last meet? February. Rates have been broadly arranged, so long bond rates of 10 years or thereabouts have moved around about 5½ per cent. They have traded up towards six per cent. We issued a new 12-year bond in March or April. It traded slightly above six per cent as it was a new line. Those bonds are now just under 5½ per cent. I have not checked the rate today, but the last entry on the chart that I have got for Senator Bushby is just under 5½ per cent. Our shorter bond yields have fallen quite significantly, so our bond that matures in June 2011 has been down to around about 4.17 per cent or thereabouts. It is currently around about 4¼ per cent. It is about 25 basis points under the cash rate. Then there is a positive gradient to the yield curve from 11 June out until our longest bond, which is 22 July. So they range from about 4¼ per cent up to about 5½ per cent.

Senator JOYCE —We know we have an appropriations bill that authorises you to go up to $200 billion. When do you reckon you will hit that?

Mr Hyden —I do not know that we have a precise estimate of when we would reach that limit, but we are not seeing it as this financial year on our current data. By this financial year, I mean the coming financial year—2010-11.

Senator JOYCE —Yes. I hope you do not get there in the next couple of weeks. But you are not expecting to crack $200 billion in the coming financial year either?

Mr Hyden —No.

Senator JOYCE —If we are drawing down $1¼ billion or $2 billion a week, that would be good because the way it is looking at the moment we could be there in about 35 or 40 weeks.

Mr Hyden —Are you saying into the subsequent financial year?

Senator JOYCE —Yes. Basically from where we are now, which is $144 billion, we have $55 billion or $56 billion up our sleeve. We are issuing at about $1¼ billion. That would have to be around about 40 weeks.

Mr Hyden —We have two lines of nominal bonds maturing next financial year and one line of indexed bonds, so they represent a substantial deduction from the total amount.

Senator JOYCE —To the best of your knowledge, who is buying the bonds at the moment? Have we got any further information there? Are they being purchased by people overseas?

Mr Hyden —The share of the holdings of our bonds overseas is about the same as it has been over longer periods—around 65 per cent in the March quarter.

Senator JOYCE —About 65 per cent held overseas?

Mr Hyden —Held by non-residents. This is on the ABS statistics that came out earlier this week. The figure has fluctuated a little from quarter to quarter, but I think that 65 per cent is in line with where it has been over several years now.

Senator JOYCE —Would the largest foreign source be China?

Mr Hyden —I do not know that we have any clear figures on that. China, Japan and the United Kingdom would be major holders.

Senator JOYCE —The UK would be using a lot of vehicles as trust vehicles, and other companies are basically using the UK as a trading house?

Mr Hyden —Yes. A lot of the bonds we issue are held by nominee or custodian companies, including in Australia. We are not able to get information from them as to where the residents of the ultimate owners of those bonds are. But some held in Britain would be held through nominee companies.

Senator JOYCE —What is happening with these Aussie infrastructure bonds? Are they ever actually going to amount to anything or are they just going to be a name?

Mr Hyden —As far as we are concerned in the AOFM as the issuer, we will not be distinguishing them in any way from other Commonwealth government bonds that we are issuing, so they will be standard Treasury bonds or Treasury indexed bonds.

Senator JOYCE —Just with a different name on the cover?

Mr Hyden —They will not even have a different name on them.

Senator JOYCE —They really just exist?

Mr Hyden —Well, they will be identified as infrastructure bonds by the Treasury in the budget papers.

Senator JOYCE —But for all intents and purposes, they are exactly the same line as any other bond?

Mr Hyden —That is right as far as the financial markets are concerned. That is in relation to wholesale bonds. The government has said it is also considering some form of retail infrastructure bonds, but no decisions have been made on that so far.

Senator JOYCE —When Senator Conroy was talking about having these Aussie infrastructure bonds and everybody was feeling very patriotic and thought that that was the sort of thing they wanted, all they were really getting was just another bond. It is exactly the same bond. If you do differentiate it, there are extra costs that come into place for differentiation—are there not?

Mr Hyden —Yes. To put it the other way around, there are benefits in having them integrated with our other bond issuance.

Senator JOYCE —Are you aware of municipal bonds in the United States and how they work?

Mr Hyden —In general terms, yes. They are just bonds issued by local governments.

Senator JOYCE —They are not part of the federal government debt in the United States, are they?

Mr Hyden —No.

Senator JOYCE —Basically, it is caveat emptor—the people who buy the bonds take the risk. If the bond goes bad, you lose your money.

Mr Hyden —That is correct.

Senator JOYCE —Are they liquid? Do they move?

Mr Hyden —I think there is a wide variety of circumstances, but some of them are quite large issuers and it is a liquid market.

Senator JOYCE —Can anybody set up a bond, or do they have to get approval by the fed? How does it work?

Mr Hyden —I could not answer that, I am afraid.

Senator JOYCE —What is Australia’s total debt position within the public and the private sectors? Why I am asking this question is I am looking at the total exposure right across the board and how Australia’s gross debt fits into that.

Mr Hyden —I cannot give you any figures off the top of my head on that.

Senator JOYCE —What about the state government debt? It was $164 billion. Is it still about $164 billion?

Mr Hyden —I think we do have some figures on that. I am not quite sure where. State debt on issue at the end of the current financial year is estimated at $163 billion.

Senator JOYCE —Estimated at $163 billion. By the end of the financial year, we would be pretty close to $150 billion gross?

Mr Hyden —Yes.

Senator JOYCE —Somewhere between $310 billion and $320 billion will be total gross debt between both the federal and the state governments?

Mr Hyden —That is correct.

Senator JOYCE —When we started going down this path of debt, I asked this of Dr Henry—and it all seemed far off then. He stated to me that if we got to, I think, 60 per cent to 80 per cent of GDP, Australia would have a problem. Our GDP is about $1.2 trillion—is that right?

Mr Hyden —Yes.

Senator JOYCE —I am just doing this quickly. That means $960 billion is a problem for us, if that is 80 per cent of GDP. I am taking their top level. So $960 billion would be 80 per cent of $1.2 trillion?

Senator Sherry —Well, I think the officer would need to verify. You have put forward a number of figures that Dr Henry put. I am not suggesting that you are in any way deliberately misleading.

Senator JOYCE —No, I am not.

Senator Sherry —I think it is reasonable to expect if you are going to claim someone said something to provide some evidence of that before the witness responds.

Senator JOYCE —I will take that on notice, though I am sure I can do that. But $310 billion is about one-third of the way there at the end of this financial year.

Mr Hyden —Our debt, including the debt of the states, is still relatively low compared with many other OECD countries. With regard to the US federal government by itself, the debt this week reached the point of 90 per cent of GDP. There are some others somewhat higher than that. The UK is heading up towards 80 per cent of GDP. So the level of debt we have now relative to GDP is about the peak, given that the budget deficit will be reducing.

Senator JOYCE —What is very important there, of course, are two things: one is how we are in our region. Is our debt as a portion of GDP higher than China’s?

Mr Hyden —It is similar; about the same.

Senator JOYCE —So their debt as a portion of GDP is similar to ours?

Mr Hyden —Yes, maybe slightly higher, as I recall.

Senator JOYCE —What about Singapore?

Mr Hyden —I cannot off the top of my head give you a figure for Singapore, but—

Senator JOYCE —In our region of South-East Asia, which countries would definitely be higher than us?

Mr Hyden —I am not sure that I should try and answer that without checking. In a global span and particularly amongst advanced economies, our debt is fairly low.

Senator JOYCE —But that takes into account places such as Europe. We see it on the news every night. We know what is happening there. We are slightly disconnected from the European economy at the moment—are we not, thank goodness?

Mr Hyden —Well, in global financial markets, Europe and the US are quite important.

Senator JOYCE —They are the global financial markets. But with the structure of the economy and what is driving it, we are more linked now to China, India and South-East Asia than we are to Belgium, Germany and France.

Mr Hyden —In terms of the economy and what is driving the economy, it is certainly true that our exports to those countries are much larger than the Europeans’.

Senator JOYCE —So if we are comparing apples with apples, we would be comparing our debt to other countries in South-East Asia, and our debt compared to other countries in South-East Asia is high.

Mr Hyden —Yes. Our economy is being driven significantly by the strong growth in Asia. But in terms of where we can market our debt and sell it to, the investors are looking at the other advanced economies.

Senator JOYCE —When we look at the global meltdown, as is happening in Europe—I do acknowledge that that is part of a global market—will that affect the price of debt if it continues? Will what we are seeing in Greece have an effect on the price of debt? If it goes on to Portugal, Italy and Spain, will the ructions there affect the price of our debt here?

Mr Hyden —It is a volatile and rather uncertain situation at the moment so it is hard to make predictions. But, in terms of what we have seen so far, I think the impact has been substantially an increase in demand for our debt, and that has been one factor tending to push down the yields on our debt, particularly at the short end. So we currently have some of our bonds trading in the secondary market at less than the cash rate, and that is essentially a reflection of the high demand.

Senator JOYCE —I suppose that is good news. Does that mean the money is taking flight from there and trying to be deposited in Australia, in a way?

Mr Hyden —I think it means that some investors are rebalancing their portfolios a little away from Europe and maybe also from the United States and a little more towards us. It only needs a small proportion of those large portfolios to come our way to have a significant impact on us.

Senator JOYCE —With the current draw-downs in facilities, when is it, in your timeline, that you expect the debt to peak at a gross level? What will that gross number be?

Mr Hyden —I am not sure we have some figures on that. The budget is projected to go into surplus in three years. The gross amount of debt on issue will level out at that time and so will start reducing, say, in 2013-14.

Senator JOYCE —What is that number? Is it $222 billion?

Mr Hyden —It is $220 billion, roughly.

Senator JOYCE —And what will be the state debt, then, at that point in time?

Mr Hyden —The figures I have are only on a financial year basis because that is how we project. We have the budget figures for the year, and that is all we could get at the moment. To get an estimate of when in the financial year, we need to have figures on the expected flow of funds in and out of the Commonwealth’s account over the course of the year, and we do not get that until much closer to the event.

Senator JOYCE —I know you have the date 10 August. You have $7.6 billion or something that you are expecting to reduce it by. With the NBN, is there an expectation that you will be issuing bonds to cover that? They would have been the Aussie bonds, but the Aussie bonds are just any old bonds. What are your predictions of what you are going to be issuing for that?

Mr Hyden —The government’s equity contributions to the NBN are included in the forward estimates, or the budget figures.

Senator JOYCE —Of the gross figure?

Mr Hyden —And the forward estimates. So they are part of the budget funding, or budget deficit and surplus, so they are included in the figure I gave you.

Senator JOYCE —They are included in the $222 billion. When do you expect to start issuing? When do you expect there to be a pick-up to cover what we presume is somewhere in the range of $43 billion or maybe less? It may be $30 billion; who knows? You would have to have an expectation that these funds will be required. I know they are in the budget, but when will they be required?

Mr Hyden —The current year’s budget—the year that is just finishing—already has some funding for the NBN.

Senator JOYCE —How much?

Mr Hyden —My recollection was $4.7 million, or something like that.

Mr Bath —But that is not included. It is not requiring additional issuance because there are funds in the Building Australia Fund.

CHAIR —Senator Joyce, I will come back to you if there is time at the end.

Senator JOYCE —But it is $4.7 billion? I am just confirming that.

Mr Hyden —It is $4.7 million.

Senator JOYCE —Million or billion?

Mr Hyden —Million.

Senator CAMERON —You do not want to stuff that up, do you?

Senator BUSHBY —Thank you for assisting us again tonight. Senator Joyce has asked some of the questions I wanted to ask, but I do have others. Thank you, firstly, for updating the graph. It is good to see. I was going to ask whether the reason for the fall in yield was because people were looking for a safer option, given what was going on in Europe, but I think you have already answered that to some extent. Are there other factors at play that would have contributed to that?

Mr Hyden —It is always hard to be sure just what is driving the market, but that appears to us to be the main factor—a general increase in risk aversion. We are seen as a lower risk investment prospect.

Senator BUSHBY —As the rest of the world goes backwards, I guess we are left standing in that sense. Nothing has necessarily changed here, but circumstances have changed elsewhere and that leaves us looking better relative to the other options. I see you are nodding.

Mr Hyden —It is a general equilibrium type situation, where factors all over the world interact with one another.

Senator BUSHBY —What is the current upper borrowing limit permitted by law? How much are you allowed to go to at this point?

Mr Hyden —This is the $200 billion.

Senator BUSHBY —So that will need to be adjusted before you get to the projected $220 billion peak?

Mr Hyden —Yes.

Senator BUSHBY —What is the anticipated gross value of securities that will be on issue at the end of next financial year—essentially, 13 months from now?

Mr Bath —I have $209.4 billion as at 30 June 2011.

Mr Hyden —That is a market value figure.

Mr Bath —It is market value, that is true. But it is consistent with the $222 billion number that we quoted earlier.

Senator BUSHBY —So we are getting pretty close to the peak at that point.

Mr Bath —Broadly speaking, it will peak a millisecond before the budget goes into surplus.

Senator BUSHBY —Particularly until the point when we actually balance the budget, to that point our debt is increasing?

Mr Bath —That is right.

Senator BUSHBY —It is an absolute clear fact that, until you are actually balancing your budget, you are having to borrow money to cover the costs?

Mr Bath —That is correct. The stock of debt will still be outstanding when we do go into surplus. It is just that it will stop growing.

Senator BUSHBY —And that is actually a misconception I have seen in some media commentary on the government’s budget. I am quite sure that the government was quite happy to let it stand when they talk about us being out of debt in three years when the reality is we are—

Mr Hyden —They talk about net debt.

Senator Sherry —That is right. We have never been out of gross debt, do not forget.

Senator BUSHBY —No, but in three years—

Senator Sherry —It was government gross debt when you were in office just over three years ago. We have always been in gross debt.

Senator BUSHBY —I know that.

Senator Sherry —We are talking about the level of gross debt.

Senator BUSHBY —You have money going over. There is always some there because it is more of a timing matter. There are all sorts of things going on. Are you saying, Mr Hyden, that we will be out of net debt in three years?

Mr Hyden —Out of net debt? Into negative net debt.

Senator BUSHBY —Negative net debt in three years?

Mr Bath —It is longer—sorry.

Senator BUSHBY —I think more than likely we were actually thinking it was a real surplus as opposed to actually having paid off the debt that we have accumulated while we have been in deficit.

Mr Bath —I think it is beyond the forward estimates period.

Senator BUSHBY —It is beyond the forward estimates. I do not think there is any projection at this point as to when we might be able to—

Mr Hyden —Sorry, I am confusing going into surplus with net debt.

Senator BUSHBY —Which is exactly the point I am making about what the media reports have been doing. Some of the commentators have actually confused going into surplus with actually being out of debt in a net position. I just want to establish for the record that up until the point when we do go into surplus, as we discussed and clarified, we are actually accumulating debt. Debt is getting higher and continuing to get higher until such point as we are out of deficit, which you have already—

Mr Hyden —No. The gross amount of debt will peak around about the time the budget goes into surplus and then it will start falling.

Senator BUSHBY —That is right. Exactly.

Mr Hyden —But it will take some time before we go into negative net debt.

Senator BUSHBY —Until you go into surplus. It is getting higher, until you reach that point. So long as you are not in a balanced budget situation.

Mr Hyden —No.

Senator BUSHBY —So long as you are in deficit, you are actually accumulating debt.

Mr Hyden —That is right.

Mr Bath —I will just qualify that, Senator, if I may. There are assets that we have been accumulating. We could, for example, meet the tail end of a deficit year by running down the stock of assets, for example. But notwithstanding that final technicality, the point you make is correct.

Mr Hyden —I will just clarify those figures. I think the question was really about the end of next year—2010-11. We said that there would be $209 billion market value of debt on issue. That corresponds to a face value of $202 billion. But there is a small amount of debt that is indexed bonds which was previously issued before the cap was introduced and is not counted towards that cap. So at the end of June next year, we would still be below the cap on our current projections.

Senator BUSHBY —Still below the $200 billion. So on the basis of that projection, you are not actually going to need any legislative change to the cap. But I imagine that a prudent government, given where you are projected to head not long after that, would be taking steps to actually adjust that cap.

Mr Hyden —The government has said that it will introduce legislation to amend the cap at an appropriate time.

Senator BUSHBY —It will clearly need to unless something major changes in the budgetary position between now and then.

Mr Hyden —Well, it is always possible that the budgetary position could change.

Senator BUSHBY —Things could deteriorate. Things could improve. There are circumstances that we face that we do not yet know. I might move on. Senator Joyce also asked some questions about the country of residence of those who own the Commonwealth securities. You gave some figures which I found interesting. I have been to your website and pulled off the statement of beneficial ownership by country of residence of Commonwealth government securities and state government securities guaranteed by the government. My analysis of that—I admit that it is very much a layman’s analysis—showed that roughly for almost 60 per cent of the owners of Commonwealth and state government securities, their country of residence was unknown. If 60 per cent are unknown—I know that this may well be the answer because it includes Commonwealth and state—you indicated that 65 per cent of all securities were held overseas. But we have a figure in your table which says that 60 per cent are unknown. If 60 per cent are unknown, how do you know that 65 per cent are held overseas?

Mr Hyden —That the information comes from different sources is, I think, the short answer to your question. The 65 per cent figure comes from surveys that the statistician undertakes—the ABS. The figures we have published are ones that we have collected from the register—from Austraclear and from other sources, including Euroclear. The statistician is able to collect more information because under the Census and Statistics Act he has the power to require the provision of information whereas we do not have that power. So we have had to collect information on a voluntary basis. And we did not get the cooperation of domestic custodian and nominee companies, which said that in the absence of a legal requirement they would not provide the information to us.

Senator BUSHBY —That explains the variance between the two figures as reported tonight. I guess my question, though, is: given that the ABS does actually publish that information, why do you not take that information and build it into your figures for your table?

Mr Hyden —Well, the statistician will not give us any more information than he publishes. So if we did that, we would not be able to publish anything different to what the statistician does. The statistician’s quarterly figures are simply on a resident/non-resident basis. They are not broken up by country. The statistician does publish annually figures that give some detail by country, but that comes out with a considerable lag and does not have a lot of detail by country. Finally, I should say that the legislation requires us to provide information in terms of the beneficial ownership of the stock. We felt that meant that we needed to try to get that information as best we could. I suppose I should add that we would not be able to combine other sources of information with the statistician’s information unless we had access to the statistician’s information at a very detailed level so we could see what was already in there and what was not.

Senator Sherry —There is effectively a firewall built around the ABS in terms of anyone being able to access. They are obviously on soon. You could ask them about it.

Senator BUSHBY —It sounds like maybe the ABS would be better placed to be directed to put this table together than the AOFM would be.

Senator Sherry —You could ask them, but I suspect we would have to change the act because the basis on which the data is being gathered is obviously confidential and it is published in the aggregate.

Mr Hyden —I think the statistician faces very much the same constraints we do. In addition, the statistician, under the Census and Statistics Act, has a requirement to respect the confidentiality of the data.

Senator BUSHBY —But I do not think that what you are asked to report on in your table, which I think is now a statutory requirement, actually exposes confidential information in any shape or form. If you did know the country of residence of the 60 per cent that you cannot identify, that would not be exposing the beneficial owners to any breach of confidentiality, I would not have thought. You are not saying who they are. You are just saying what country they are in.

Mr Hyden —Firstly, I do not think the statistician can provide information to us, so it is just what he publishes. Secondly, he is concerned to protect confidentiality in relation to not only the ultimate beneficial owners of stock but also the intermediaries who provide information to him. For example, in some parts of the market, there may be only two or three custodian companies who hold stock on behalf of people in a particular country. If a total were published for that country, of those two or three custodians, they would know what is happening in their own figures and they might be able to deduce what is happening for their rivals. They regard that as commercially confidential.

Senator BUSHBY —You mentioned, though, that the ABS does annually publish a greater degree of information even though there is a lag. To what greater degree do they publish other than the quarterly one they do? What extra information is in the annual one?

Mr Hyden —They publish by country, but for a very limited number of countries. For example, they do not publish any information on holdings by investors in China. They say they have that information but it is not for publication. Similarly, France, Italy, Korea and a range of other countries like that would be quite significant holders of our bonds.

Senator BUSHBY —Absolutely. So why do they publish for some countries and not for others? Is that a statutory requirement placed upon them, or is it a value judgement that they make for reasons that are either publicly known or not publicly known?

Mr Hyden —It is a statutory requirement.

Senator BUSHBY —It actually identifies which countries they need to publish for?

Mr Hyden —No. The statutory requirement is to protect commercial-in-confidence.

Senator BUSHBY —So they would make an assessment?

Mr Hyden —I am not quoting the precise wording of it because I do not have it in my mind, but it is a general provision in the Census and Statistics Act, which is one of those very old acts that goes back over 100 years. It requires the statistician to exercise judgment.

Senator BUSHBY —So it is a judgment call on his part rather than government setting out which countries?

Mr Hyden —This is not a new requirement, and the statistician, I think over the years, has built up his own practices as to how he applies that.

Senator BUSHBY —We will move on from there at this point.

Senator Sherry —The ABS is appearing next.

Senator BUSHBY —I know.

Senator Sherry —Rather than get things second-hand—and I am not suggesting that the information is not accurate—we have the ABS coming.

Senator BUSHBY —I understand that. That is why I was going to move on a little. I understand now the source that you use, which is the voluntary request to those who purchase securities. Do you actually have any other information or knowledge that would assist in identifying the country of beneficial ownership for the 60 per cent that you cannot identify in this table?

Mr Hyden —No.

Senator BUSHBY —There is nothing else that is available to you or that you are aware of?

Mr Hyden —We have put everything into this.

Senator BUSHBY —So you do not actually know? Nobody at the AOFM would actually know the country of residence of those beneficial owners or any of them in that 60 per cent?

Mr Hyden —We are aware of the figures published by the statistician. We are also aware of figures that the IMF collects from a rather different angle. But we cannot marry those figures together in a way which provides a more detailed answer to the questions we are being asked to answer.

Senator BUSHBY —This table does apply to the Commonwealth and states. The total outstanding on the bottom as at 31 March 2010 of both Commonwealth and states is almost $205 billion. That does not seem to marry up with the numbers that we were talking about earlier. If we have $533,000 million on issue, that would suggest there is only $60 billion left that is guaranteed by the Commonwealth. Is that because not all state government debt is guaranteed by the Commonwealth?

Mr Hyden —That is correct, yes. Only two states availed themselves of the guarantee and they did not apply the guarantee to all of their bonds on issues. So the figures are shown there. The $205 billion includes $132 billion of the Commonwealth, $24 billion from New South Wales and $49 billion from Queensland.

Senator BUSHBY —That explains it. So the remainder of the state government debt that Senator Joyce asked about is not guaranteed by the Commonwealth?

Mr Hyden —That is correct.

Senator JOYCE —It still got to $57 billion or something, didn’t it? It is $57 billion that you have guaranteed.

Mr Bath —As at 31 March, $73 billion was guaranteed by the Commonwealth.

Senator BUSHBY —I want to ask some questions about residential mortgage backed securities. In the context of your announcement of 25 May, can you update the committee on where it is at in terms of its investments in RMBS? In particular, how much has it invested since the onset of the subprime financial crisis? How much has it traded, if any? Where is it at with the investing of the $8 billion announced by the Treasurer last October?

Mr Bath —In total, we have purchased $9.02296 billion. We have sold just under $80 billion, which we announced a few months ago.

Senator BUSHBY —Sorry, what was that?

Mr Bath —It was $80 million, I beg your pardon.

Senator BUSHBY —I thought you said $80 billion.

Mr Bath —I am sorry. We sold just under $80 million. That was essentially done just to slightly rebalance the portfolio and—

Senator BUSHBY —Did you make a profit on that?

Mr Bath —We actually sold them at par in a yield sense, so we made a profit on them in the sense that we held them at a running yield of between—you are testing my memory now—160 basis points over the bank bill rate to 195 basis points over the bank bill rate for about a year. We were funding them at probably a good 40 or 50 basis points under the bank bill rate. So we made a holding return profit, but we sold them essentially at their par value, adjusting for any accrued interest on the day. What was your third question?

Senator BUSHBY —The third question is: how much is invested? Has it traded any? Where is it at with the investment of $8 billion announced by the Treasurer last October? That presumably means that you have invested $1.02296 billion.

Mr Bath —Effectively that is right. There is just under $7 billion to be invested.

Senator BUSHBY —So that has not changed since 25 May?

Mr Bath —No. That is right. We just announced a slightly different change to our investment strategy.

Senator BUSHBY —Would you take us through that, please.

Mr Bath —Yes. Over the 18 months or so since we have invested, we have been happy to respond to changing market conditions. So in the first phase we essentially, if you like, held the market at around 130 basis points over the bank bill rate for the most senior pieces. The secondary market was trading out to over 200 to 300 basis points over the bank bill rate. That meant that, by and large, we were the only investor in a lot of these transactions. In fact, on average for the first six to 12 months of the program, we were probably about 80 per cent of purchases. The market improved significantly through 2009 such that secondary market spreads came into about the level where we were buying tranches in the primary market. In fact, transactions were conducted without our support in late 2009. This trend continued in early 2010. There were several deals conducted during that time. As at the end of March, we conducted an analysis that showed that our share of the investments had dropped from the 80 per cent I quoted earlier at the beginning of the program to around 20 per cent for the first three months of March.

Senator BUSHBY —Which is why you still have $7 billion that you have not invested?

Mr Bath —That is part of the reason. But through April we did not transact a single deal. Until 25 March, we had invested $10 million into a single transaction. So what we had seen is that there was a bit of a stalemate in the market. Issuance was not going on. There were a number of reasons we could—

Senator BUSHBY —It was not going on at all or it was not going on with the AOFM?

Mr Bath —There were what we would call private deals that did not involve us. For example, one bank had a portfolio of mortgages in what is called a warehouse facility, where another bank has provided part of their balance sheet. For whatever reason that suited the two of them—it suited them to convert the warehouse facility into a term RMBS deal. But I do not think it was publicly offered. It may have been, but it did not fit our characteristics because it was essentially a bespoke deal that was a function of the legacy mortgages that were in that warehouse facility. That is one example.

There are other similar ones where individual transactions that were conducted several years ago were due to be called or refinanced and those transactions were undertaken without our involvement. So given that our mandate is to invest a total of $16 billion into mortgage backed securities to drive competition in the mortgage sector and to get finance to the small business sector, having had significant improvements through late 2009 and early 2010 and having that stall in late March or early April, we took the view that we should be looking to get the market moving again. We suspected that there was some unmet demand, particularly for shorter dated RMBS securities. So we entered into an arrangement with, as it turns out, Suncorp, but we made the decision—

Senator BUSHBY —Did they approach you?

Mr Bath —They approached us in the sense that they put a deal to us through our reverse inquiry channel, as we call it. But we asked them to modify the deal to tap what we thought would be unmet demand for a short data transaction. So, if you like, the way these deals work is that there is usually an amount of subordination—let us say five per cent to 10 per cent—at the bottom of the capital structure. Let us just put that to the side for the moment. They are not the AAA securities, generally speaking, that we buy. But the top part of the transaction will typically have what is called a weighted average life of three years. So it is not structured like a bond that we would issue, which has a fixed maturity date and you get all your capital back at that maturity date. You get your principal and interest gradually through time in the same way that the underlying mortgages repay in the style of a credit foncier. So we tend to talk about weighted average lives in the mortgage backed security space.

The transaction that Suncorp originally proposed to us had, I think, a weighted average life of three years. We suggested to them that there might be unmet demand for a particularly shorter dated security. We said that we would be prepared to purchase a longer dated transaction to facilitate that. You can imagine the top tranche that had a three-year weighted average life. We were prepared to split it into two components—roughly two-thirds of it into a note that paid back with a weighted average life of one and a half years, and we were prepared to buy the other one-third at a weighted average life of six years. Provided that the weighted average cost of funds across the two of them was less than 130 basis points, they would see that as a good outcome. We indicated to them that we were interested in supporting this transaction and getting the market moving again, and that we would be prepared to buy the longer tranche at between 110 and 130 basis points. They were able to then market the shorter dated security knowing that we were prepared to buy the longer dated security. Provided that they were able to sell the shorter dated note at less than 130 basis points over the bank bill rate, they would be better off. I want to stress that it was not a Suncorp specific deal. They were just the first bank to bowl a proposal to us after we had decided in early May that we wanted to get things moving again.

Senator BUSHBY —So the primary motivation was to get things moving again?

Mr Bath —That is right.

Senator BUSHBY —And you wanted to affect the price at all?

Mr Bath —That is right. Also to—

Senator BUSHBY —Tighten it up?

Mr Bath —Tighten pricing so that it would then be passed on to competition in the mortgage sector.

CHAIR —Senator Bushby—

Senator BUSHBY —Can I finish the RMBS? I have a few more questions on this, if I can.

CHAIR —Senator Cameron and Senator Pratt both have questions.

Senator BUSHBY —I will try. I would like to go into the approach a bit more. There has been some criticism of the approach by some industry players, who say that it fails to balance the desirability of driving the margin tighter with the need to see continued private sector participation and that, by tightening the price, you may actually make it less attractive to investors. What is your response to that?

Mr Bath —We were at pains to stay out of that top note that I explained to you. While we were prepared to buy all of the six-year note, we made it very clear that we were not going to participate in the super senior  1½ year note. Therefore, it would find a market price without our intervention. So we were aiming to give investors that message through our operational notice, which I believe you have in front of you; essentially we were not going to try to manipulate the price of the top note. We were prepared to buy all of the second piece—the long dated piece—at a level that is still a very good margin. Bear in mind that these may be the same investors who were perhaps a little bit negative about the program 18 months ago when they were able to find investments at 200, 300 and 400 basis points over the bank bill rate, but we were buying them at 130 over the bank bill rate.

Senator BUSHBY —To what extent was the motivation for the change or doing this a need to actually expend the $8 billion? You mentioned you have a charter to expend it. Do you feel obliged to approach the market with a view to actually spending the $8 billion?

Mr Hyden —No, we do not. The Treasurer made quite clear when he announced the government’s provision of the further $8 billion that the government was not necessarily expecting that it should all be invested. If the need for the Commonwealth to be investing reduces—the market becoming sufficiently competitive—we would not keep on investing. We see this as something of an exit phase. The market has improved quite a bit. It is not quite to the stage where we have the fully competitive amount of competition in the housing lending market that the government would like, but there has been improvement. The sort of pause that was evident in the market was not necessarily a sign of the market deteriorating. In fact, it may to some extent have been that the market was improving. Arrangers were not so anxious to go to issuance because they could get more ready accommodation from the warehouse providers. To some extent, they may have been waiting to see if the yield improves—that is, falls—from their point of view so they could be more competitive. So I think our action was designed to give things a bit of a push along. But that is viewed in terms of getting to the stage where we have a reasonably competitive housing market rather than just a desire to invest the amount that has been allocated to us.

Senator CAMERON —What has been the impact of the uncertainty in the financial market from the Greek and European financial crisis on sovereign bond issuance in the last four weeks?

Mr Hyden —Well, clearly, there has been a lot of turmoil and uncertainty in markets, particularly in Europe. The impact on us has been limited. There has been a strong demand for our securities. I think that has certainly continued. I think it has probably strengthened over the last four weeks or so, not necessarily so much directly from what has happened in Greece but from the uncertainties about what is happening in Europe more generally and the greater risk aversion and wariness that investors have to sovereign issuance in Europe at the present time. I had a question earlier from Senator Joyce on this. We have actually seen some fall in the yields on our bonds, particularly at the shorter end, which I think is coming largely from increased demand from global investors, who are sort of rebalancing their portfolios a little.

Senator CAMERON —There has been a lot of scaremongering and alarmist nonsense that Australia is a sovereign risk. There is continued talking down of the economy from the opposition while we are working hard to keep the economy moving and going strong. Do you see any drop-off in international take-up of sovereign bond issuance since the announcement of the RSPT?

Mr Hyden —No. We have not seen any drop-off. On the contrary, I think, as I said, there may have been an increase in demand. It is hard for us to gauge from the actual tenders as to who the buyers are because they buy through intermediaries—Australian dealers. But anecdotally, talking to people in the market, one has the impression that there has been an increase in demand.

Senator CAMERON —So for a country with a high sovereign risk, what does that do for its bond issuance?

Mr Hyden —Higher risk appeals to a different sort of investor. Investors certainly look for a higher yield to compensate them for the risk. We are very much at the high quality, low risk end of the spectrum, even in terms of AAA, the select group of highest quality countries, where we are well-regarded within that group.

Senator CAMERON —So we are AAA low sovereign risk?

Mr Hyden —Well, AAA is a standard that the credit rating agencies apply. I have been using the term ‘sovereign risk’ in terms of the risk of sovereign debt issuance. It is, of course, often used in a wider context of the risk about changes in policy or the legal framework by the government affecting investments in that country.

Senator CAMERON —Senator Joyce continues to talk about gross debt. Why would the Reserve Bank and the Treasury continue to deal with net debt? What do you look at in terms of issuance of bonds? How would bond issuers around the world deal with this?

Senator JOYCE —Are you going to put them out?

CHAIR —Senator Joyce, I really think that none of us in here 100 per cent of the time ask really good questions. I do not think we should attack each other if—

Senator JOYCE —You are very protective of your colleague. I am showing that up, Madam Chair.

CHAIR —Well, he said the same to me about you, so we will continue with the question.

Senator CAMERON —I do not get upset about what is said by Senator Joyce about me.

Mr Hyden —These things, like many economic and financial concepts, depend on the question. So different concepts will be more relevant to different purposes. From the point of view of the credit of the country, the riskiness of its financial position and its ability to meet its obligations, net debt is maybe more relevant. The short-term or even long-term financial assets are available for meeting the payments the government has to meet. So it is sensible to take them off—subtract them—from gross debt. When one is looking at things like the liquidity and size of the market, which is what is relevant to individual investors, we will want to talk about the gross debt. So both concepts are relevant.

When one is looking forward into the future and projecting budget outcomes, which Treasury does, and then converting that into the financial position of the Commonwealth, net debt is the first step along that path because net debt corresponds basically to the budget outcome, or the change in net debt represents the change in the budget outcome. So if one is going into gross debt, one has to look at how that change in the budget outcome is allocated between debt and assets. You have the same net debt whatever the allocation between debt and assets is, but the gross debt might be quite different. So if, for example, as the previous government did, we built up large cash amounts and then put it into the Future Fund, that does not affect net debt. When we have uncertainty, as in years ahead, as to what specific decisions may be made in that regard, we cannot really make a projection about gross debt, whereas one can be more confident about net debt. The gross debt figures that I have quoted and that we are using assume that all of the budget surpluses, if you like, or the funding requirements of the budget are all allocated to reducing debt.

Senator PRATT —What evidence is there that the government’s investment in Australian residential mortgage backed securities has impacted on interest rates?

Mr Hyden —I do not know that they were intended to have a measurable impact on interest rates. They were designed to maintain competition—

Senator PRATT —Yes, that was my next question.

Mr Hyden —in lending for housing. There is a connection there in that more competition in the market will tend to have an impact on interest rates. The financial crisis has brought some greater concentration in lending for housing with the major four banks. Some of that has come from amalgamations and takeovers, so it does not necessarily represent a change in the underlying structure of the market. But there has been a weakening of the lending coming from smaller lenders. The RMBS that we have purchased have helped offset that and have kept that sector going and I think helped maintain competition over this period. As the market improves, we would expect, having kept competition alive, that the market will become more competitive. It would be hard to identify what component of movement in rates over this period has come from our activities or what it would have been in the absence of that competition.

The major banks, of course, are very keen to build up their balance sheets at the present time coming out of the financial crisis, so that is something which perhaps makes them hold rates a little higher. But I think they have been constrained in that by the competition from the other parts of the sector.

Senator PRATT —That makes sense. Thank you.

CHAIR —Senator Joyce or Senator Bushby.

Senator BUSHBY —I have almost finished with the RMBS questions. I am happy to leave it, thank you.

Senator JOYCE —You were saying that we have currently underwritten $73 billion now of state debt.

Mr Hyden —That is right, yes.

Senator JOYCE —That has increased lately, has it? For some reason, that has gone up from where it was. From what I can recollect, it used to be $57.7 billion or something.

Mr Hyden —The states are still able to issue debt with a guarantee or to get a guarantee on debt until I think the end of the current year, or October.

Mr Bath —October.

Mr Hyden —So there was some extra guaranteed debt being issued. On the other hand, they are also seeking to establish new lines of stock without the guarantee so they will have liquid lines to issue into when they do not have them. So there is some increase.

Senator JOYCE —So we are still getting state governments requesting the guarantee to get money?

Mr Hyden —There is still some use of that guarantee, yes.

Senator JOYCE —What states? Queensland, I imagine.

Mr Hyden —Queensland had $47.8 billion at the end of December and $49 billion at the end of March so that in three months it has gone up $1.2 billion. I suspect that may have been more than the earlier part.

Senator JOYCE —Queensland’s debt, as it currently stands, is about $50 billion.

Mr Bath —That is Commonwealth guaranteed debt.

Senator JOYCE —We are talking about net and gross debt. Your gross debt is going to be $222 billion and the net, you say, is going to be about $96 billion or something. Can you just go through all the figures in some precision that takes us from $222 billion down to $96 billion? I recollect that there is one table that says ‘other’. It has $65 billion in it.

Mr Bath —The majority of the assets that go from gross to net debt or that are used as the offset are not on the AOFM’s balance sheet. We can tell you the ones that are on our balance sheet.

Senator JOYCE —What are the ones that are on your balance sheet?

Mr Bath —There is about $9 billion of mortgage backed securities.

Senator JOYCE —Mortgage backed securities?

Mr Bath —I can tell you exactly, if you bear with me for a moment. This is as at Monday night, 31 May. We had $22.9 billion of term deposits with the Reserve Bank. We had $4.045 billion of negotiable certificates of deposit with commercial banks. We had $3.55 billion in short dated state government bonds that we use in our liquidity book. I will retract the $9 billion because some of the capital has come back to us. We have not actually settled on the Suncorp deal, so it is closer to $7.73 billion in mortgage backed securities. As I said, they are the assets that are on the AOFM’s balance sheet. But outside that you have other debt like assets that are used in the calculation of the net debt figure. So any fixed interest or cash-like assets that are held by the Future Fund would be a large part of it.

Senator JOYCE —What do we use the Future Fund for? What does that mean, therefore?

Mr Bath —I believe that the money is there to defray the cost of public sector superannuation liabilities.

Senator JOYCE —Senator Cameron is quite happy for you to use that money to pay off the debt. Would you be able to do that?

Senator CAMERON —I raise a point of order. I did not say that.

Mr Bath —I would not be able to use it to pay back the debt.

Senator JOYCE —You would not be able to use it to pay back the debt, though?

CHAIR —Senator Cameron had a point of order.

Senator CAMERON —I know it is getting late and I know Senator Joyce has been struggling most of the evening, but he should—

Senator JOYCE —Point of order.

CHAIR —No. There is a point of order here.

Senator Sherry —You cannot pull a point of order until the first point of order has been ruled on.

Senator CAMERON —The point of order is that Senator Joyce is asserting that I made certain claims which are not true.

CHAIR —That is no real point of order. What is your point of order, Senator Joyce?

Senator JOYCE —That he called a point of order.

Senator CAMERON —I told you he was struggling.

CHAIR —That might be a good time to call the session to an end. I thank our officials for coming along and putting up with this. Thank you to AOFM for coming in this evening.

Proceedings suspended from 9.14 pm to 9.28 pm

CHAIR —I welcome representatives from the Australian Bureau of Statistics. Do you have an opening statement that you would like to make?

Mr Pink —No. I do not. Thank you very much, Chair.

CHAIR —Thank you. We will get straight into it, then.

Senator EGGLESTON —I just have a few fairly straightforward questions. Firstly, the ABS had some funding cuts two or three years ago which were said to have meant that you had to change your methodology in collecting statistics. Could you update us on that situation? Are you happy with your funding and methodologies?

Mr Pink —We are certainly happy with the methodologies and funding, Senator. We had a reduction in our work program because of a range of issues that were affecting the budget leading up to 2008-09. That meant that we did reduce the work program in that year. That meant some reductions in a range of our statistical outputs. In the following budget, the bulk of that funding was reinstated, and all of the collections that had been reduced as a consequence of the problems in 2008-09 were reinstated in 2009-10 with the exception of the census, where, because of the long lead times in planning and testing for the census, the decision was taken back in 2008-09 that the census in 2011 would be a repeat of the census in 2006.

Senator EGGLESTON —Sorry, I did not quite catch that.

Mr Pink —The census in 2011 is essentially a repeat of the census that we ran in 2006. So there was no opportunity to explore whether there would be any changes in the content of the 2011 census. That saved some considerable amount of money—on average, about $5 million a year for three years. All of the other changes that were implemented in 2008-09 have been reintroduced in 2009, 2010 and 2011. In fact, we reversed the decision to reduce the sample in the retail survey more quickly, because of the obvious need for governments and the markets to understand what was happening with particularly household spending in the second half of that period.

Senator EGGLESTON —So you have restored your operation to its previous functional levels? That is effectively what you are saying, is it?

Mr Pink —In 2009-10 we have also received additional funding to in fact expand the program. Most of that additional funding has come to provide new information or improved information associated with a variety of the COAG reform initiatives.

Senator EGGLESTON —Can you give us some examples of that?

Mr Pink —Well, Indigenous is a very good example, where in the 2009-10 budget and in the census period we have additional funding coming through that will allow us to implement some different strategies in the census numeration processes, particularly but not exclusively associated with seeking to get better quality outcomes in terms of our Indigenous counts. Then, in the postenumeration period, we will be undertaking some additional analytical work that will also help us to improve some of the population estimates and population data in relation to the Indigenous peoples.

Senator EGGLESTON —When you collect Indigenous statistics, are we talking about a race item on the census or are we talking about collecting statistics from remote communities, which is what people often mean when they talk about—

Mr Pink —Well, we collect statistics from remote communities. But the concept is self-identification, so people who identify themselves as Aboriginal and Torres Strait Islanders are part of the Indigenous population.

Senator EGGLESTON —Most of whom are really located in big cities and towns rather than remote communities, it would seem. So are you happy with your staffing levels?

Mr Pink —We are still struggling to come up to the staffing levels that we need to support the expanded work program. We are working pretty hard to find people with the skills and capability that we need. Through 2009-10 we are going to be around 100 staff below the level that we would have wanted to undertake all of the work in that year, so it is a constraint of supply rather than one of not having the funding.

Senator EGGLESTON —So how many staff would you have wanted? What percentage are we talking about that your staff deficit represents?

Mr Pink —Well, it is 100 in about 2,600. So we wanted 2,700 full time equivalents and we had through the year on average about 2,600.

Senator EGGLESTON —What difference does that make on the ground?

Mr Pink —Well, in the short term we have reshaped the work through the year to be able to ensure that we continue to provide all of the committed outputs. But what it does mean is that some areas of work that can be deferred for a short period of time, such as some of the work we do associated with maintaining and upgrading our infrastructure, has been put on hold. That is a situation that we would like to see recovered in 2009-10 and beyond.

Senator EGGLESTON —I see. Thank you very much. I want to turn to a specific issue. I notice that there was an article in the Weekend Australian on 10 April which was headed ‘Immigration spike only a statistical illusion’. It said:

The recent spike in immigration numbers is at least partly due to a pen stroke — a change in the way the Australian Bureau of Statistics calculates its figures.

Tens of thousands of people who were not considered migrants before the ABS's change in 2006 are now included in the count.

Would you like to tell us a little more about that?

Mr Pink —Yes, I can, but I will pass over to my colleague Denis Farrell. The main change in the methodology was in relation to the way in which we counted people who were in the country for a given period. The change was that now if you are in the country for 12 out of 16 months you will be counted as a new addition through the migration data. Previously, if I am correct—because it happened after I came back from New Zealand—I think it was 12 months.

Mr Farrell —Yes. The methodology changed—just to explain before and after—prior to the September quarter 2006. If somebody came into the country and within 12 months left the country, they were treated as a temporary resident. They could come and go on several occasions even though their main place of residence may have actually been in Australia. Post that period, we changed the methodology to count how long they are in Australia within a 16-month period. If it is in excess of 12 months, they are treated as a temporary resident. So to the extent that that change occurred, there is an increase. But there has also been a dramatic increase in population in that time as well in terms of migration, particularly in the area of education, as you are aware.

Senator EGGLESTON —Yes.

Mr Farrell —The point of this is that the ABS did not just do that on its own behalf. We consulted very widely with people—academics, departments and others—on the methodologies that we were using to actually measure migration in that context.

Senator ABETZ —Can I interrupt and ask whether those consultations about the methodologies were international as well?

Mr Farrell —Not to my knowledge. There was general agreement that it was appropriate to adopt a new method. That new method was introduced in the September quarter 2006.

Senator EGGLESTON —Thank you very much. You calculated Australia’s population would reach 36 million by 2050. Do you still stand by that figure, or is this somewhat altered by that error?

Mr Farrell —We do projections twice each five-year cycle. We did them in 2008 following the 2006 census. We actually did 72 different series of projections based on a combination of different assumptions around fertility, mortality, life expectancy and migration. There are three main series that we produce. I could go through what those assumptions were. Population projections are very much based on the assumptions that you make. The assumptions that you make can vary from time to time. The reason we do them twice every five years is to account for that factor. Usually when we do them, we do them on the basis of the prevailing fertility, mortality and migration levels. We vary around that level both upwards and downwards to produce different models. People use those models for different reasons.

Senator EGGLESTON —What is the margin of error on your projected population? Is it plus or minus five per cent or something like that?

Mr Farrell —It is not really something you can say. These are not forecasts or predictions. They are projections based on assumptions. So it depends on what the actual fertility rate is and what the actual migration level is at the end of the day that drives how good, bad or otherwise those projections might be.

Senator EGGLESTON —Coming back to your earlier information—that you now have built up your workforce again—does that mean that the broad range of statistics that you are producing is now restored to its previous levels of reliability? Can we say that confidently?

Mr Pink —I will answer that: yes, they are. Sample sizes that were reduced in a number of the series—retail and the labour force in particular—have been restored to the previous sample sizes, so reliability is back to where it was previously.

Senator EGGLESTON —Thank you. I think that is all I have, really.

Senator JOYCE —What are the ABS’s long-term projections for population growth? What does the ABS predict that Australia’s population will be by 2050?

Mr Farrell —We do not make a prediction. We build a set of assumptions and we project the population based on those assumptions. It is not actually a prediction or a forecast.

Senator JOYCE —What is your assumption of what it will be?

Mr Farrell —What period did you say?

Senator JOYCE —2050.

Mr Farrell —Offhand I do not have it. We will have a look and get back to you on that. Offhand I cannot answer.

Senator JOYCE —That is all right. Can you also give me the assumptions of what you think the cities will be at that point in time?

Mr Farrell —We can. I do not have them at hand.

Senator JOYCE —Can I get that on notice as well?

Mr Farrell —Yes, certainly.

Senator JOYCE —Is there any appreciable difference between the ABS projections of Australia’s population and those produced in the Intergenerational report either in results or methodology?

Mr Farrell —The Intergenerational report was prepared some time after the projections done by the ABS. The assumptions were taken independently. There are some differences—they are not substantial—around the three main series. They fall somewhere between the middle assumption and the higher assumption that the ABS uses as the three main series that we produce.

Senator JOYCE —I want to go to some questions about the Treasury paper that was released last Monday entitled Disparities in average rates of company tax across industries. On page 5 of the Treasury paper, it says about gross operating surplus—GOS:

GOS is a measure of the surplus from the production of goods and services available for distribution to those that hold a claim to corporations (ABS 2000). However, GOS is not the most appropriate measure of a corporate income tax base as it excludes income unrelated to production — such as property income, land and natural resource rents, net interest receipts, and capital gains or losses — which rightly forms part of company income and profits.

Emphasis added. But when I go to the Australian National Accounts: Concepts, Sources and Methods, paragraph 11.48, the ABS defines the gross operating surplus as follows:

Both gross operating surplus (GOS) and gross mixed income (GMI) measure the surplus accruing from processes of production before deducting any explicit or implicit interest charges, land rent or other property incomes payable on the financial assets, land or other tangible non-produced assets required to carry on the production.

So the Treasury seems to be saying that the gross operating surplus includes things like interest rates and land rents whereas your definition seems to suggest it does not. Can you clear up the definition of gross operating surplus for me? Please do not say, ‘Repeat the question.’ But I can if you need me to.

Mr Pink —I am looking at the definition of gross operating surplus as we include it in the quarterly national accounts. There it says that we are calculating gross operating surplus before deduction of consumption of fixed capital dividends, interest, royalties and land rent and direct taxes payable but after deducting the inventory valuation adjustments; so gross operating surplus does include most of those elements.

Senator JOYCE —So you are saying that the two definitions are the same?

Mr Pink —Well, I believe I am, if I understood as you were going through reading out the Treasury one.

Senator JOYCE —I will read out the Treasury one. On page 5 of the Treasury paper, it says:

GOS is a measure of the surplus from the production of goods and services available for distribution to those that hold a claim to corporations (ABS 2000). However, GOS is not the most appropriate measure of a corporate income tax base as it excludes income unrelated to production — such as property income, land and natural resource rents, net interest receipts, and capital gains or losses — which rightly forms part of company income and profits.

Treasury are saying they exclude those amounts. You are including them.

Mr Pink —Yes. We are.

Senator JOYCE —You are. So there is a difference?

Mr Pink —We will take that on notice and come back because I do not know what is in the Treasury document, but we will certainly reference it and clarify it for you.

Senator JOYCE —Even just going to something as simple as percentage of tax on taxable income, the numerator in that is the tax paid and the denominator is the taxable income, is it not?

Mr Pink —Well, based on the definition of whatever the taxable income is.

Senator JOYCE —You would have heard the debate lately with regard to the so-called pie charts that were issued by Wayne Swan’s office; we found that out. How can they come up with a description of taxable income which does not actually take into account the proper denominator—that is, that their taxable income is not actually taxable?

Senator Sherry —Who came up with it? Treasury?

Senator JOYCE —In question time today you would have found out that your Treasurer came up with it.

Senator Sherry —Well, I was in here, so it should be unsurprising that I did not see question time today. But who came up with it, in your question?

Senator JOYCE —The Treasurer, Wayne Swan, or his office in that pie chart—that complete fiasco, the one that we were bringing around here the other day.

Senator ABETZ —This one.

Senator JOYCE —Yes, that one that he issued is wrong. It is completely and utterly wrong because he bodged it up in his office.

Senator Sherry —That is an argument, not a question, and an assertion. I will take it on notice.

Senator ABETZ —Before I entered the room, did you provide us with a bit of an update on the census?

Mr Pink —Yes, one aspect.

Senator ABETZ —I will see what the Hansard says on that, thanks. In relation to your population estimates, I think you, Mr Pink, indicated that there were 70-something assumptions.

Mr Pink —Mr Farrell.

Mr Farrell —There were 72 series of population projections, yes.

Senator ABETZ —Seventy-two series?

Mr Farrell —Yes. Based on a combination of the assumptions.

Senator ABETZ —And how many assumptions?

Mr Farrell —Fertility—

Senator ABETZ —The three assumptions?

Mr Farrell —Well, four, yes.

Senator ABETZ —Four assumptions. What you put in determines what you might get out?

Mr Farrell —Yes.

Senator ABETZ —At the moment there is a forecast of 36 million people by 2050. Is that the figure or is that a figure from a parameter of, let us say, between 30 million and 45 million, for example, depending on what assumptions you make?

Mr Farrell —Yes, your set of assumptions and your model based on the population base that you start with. So we used the estimated resident population at a point in time. Then we applied the assumptions around fertility and mortality, life expectancy and migration.

Senator ABETZ —Does that give you a range, as opposed to the exact figure of 36 million?

Mr Farrell —Well, for each combination of variables, it gives you a number at each point in time. You are estimating annually through to a particular period of time—say, 2050. So you get a specific number. You start with a specific number. You use specific assumptions. You model them through the period year by year.

Mr Pink —So if you change the assumptions, you get a different number at the end of the period. It can vary quite significantly with relatively small changes in things like the fertility rate. Over a 40- or 50-year period it can have quite an impact on the total population.

Senator ABETZ —Yes. And especially, for example, the birth rate of migrants may well be higher, if I can use that, than the existing Australian population.

Mr Farrell —It can be, but it is done in gross terms. Using birth rates and age cohorts it is quite complicated.

Senator ABETZ —I accept that. Let us try to get us something a bit simpler. When you good people talk about persons, do you mean full-time equivalents for the purposes of the definition of a medium business and a big business?

Mr Farrell —That is not a population question.

Senator ABETZ —No. That is not a population question. I am moving on. I am sorry if I did not make that clear. What is your definition of ‘person’?

Mr Ewing —In business statistics, it would be full-time equivalent people.

Senator ABETZ —When you describe big business or large business as being more than 200 employees, you are talking full-time equivalents?

Mr Ewing —That is correct.

Senator ABETZ —Therefore, when you have the definition of small business as employing less than 20 persons, that is less than 20 full-time equivalent persons?

Mr Ewing —That is correct.

Senator ABETZ —I just wanted to clear that up. Thank you for that. Do you think that is the best definition of small business? Some people argue that it depends on the amount of turnover a business has. Why do we come up with a category based on employment as opposed to turnover, for example?

Mr Ewing —I think it is partly for reasons of international comparability, that employment tends to be more readily available and easier to measure across different countries with different administrative or survey arrangements, so it tends to be a standard that is easier to apply, though I think, as you rightly say, for certain sorts of businesses other measures of size may be more appropriate.

Mr Pink —Even in the context of the US, whilst they collect data that complies with that international approach, their own view of small businesses is 100 and less employees.

Senator ABETZ —Where have I heard that figure before? We will not go there. The ABS has a category of small business. Does it also have a category of micro business?

Mr Ewing —I would have to take that on notice. I am not sure.

Senator ABETZ —I think you do, and it is employing less than five full-time equivalents. But I would be interested if you could—

Senator Sherry —Senator, I certainly know the ATO does. I am not sure where the cut-in point is.

Senator ABETZ —In fact, you might be right.

Senator Sherry —I know they have got it, but I am not sure what the definition is.

Senator ABETZ —It was just at the back of my mind. That figure may well have been obtained by me from the ATO. Thanks for that, Minister. I turn to what is I assume your most recent publication, but correct me if I am wrong. It is entitled Australian industry, which was put out on Friday. Do you know the document I am talking about?

Mr Farrell —Yes.

Senator ABETZ —Excellent. Thank you very much. You gathered some very interesting data in that. The ABS is part of Treasury, is it not? Did Treasury or the Henry review have access to the workings and initial calculations or drafts of this document at any stage, to your knowledge?

Mr Farrell —That publication is the result of something called the annual integrated collections, which is an economy-wide survey. That release on Friday did not have a pre-release, so that edition of that publication was not released to anybody outside the ABS.

Senator ABETZ —That edition?

Mr Farrell —That edition. That publication is really—

Senator ABETZ —Well, that is not what I am asking. Was any of the information that was being gathered for the purposes of this publication at any stage shared with Treasury or the Henry review as the information was coming together?

Mr Farrell —No. What I meant by a previous edition was the survey is run annually, so it is released annually.

Senator ABETZ —Sorry. I thought you were trying to make a distinction between the draft and the final draft.

Mr Farrell —No.

Senator ABETZ —I accept that. Thank you for that. I do not know if you have the document in front of you or available to you.

Mr Farrell —No. I do not have it with me.

Senator ABETZ —Let us see how we go. On page 7 of that document we are told that the operating profit before tax of the mining sector in 2008-09 was $63.636 billion. Is somebody able to confirm that or not?

Mr Farrell —Sorry. I do not have the publication with me. We produce a very large number of publications.

Senator ABETZ —Of course you do. I am not critical of that. I was just hoping to potentially obtain some assistance in relation to this document’s interpretation.

Mr Farrell —All we can do is take it on notice.

Senator ABETZ —Does anybody recall the figure of $63.636 billion as being the operating profit before tax for the mining sector?

Mr Farrell —I am sorry, no.

Senator ABETZ —All right. Fair enough. For the purposes of this document, what is meant by mining? It is not a trick question. Does it include oil and gas that is obtained offshore?

Mr Farrell —Well, firstly, the classification by industry is the ANZSIC, the Australian and New Zealand standard industrial classification. Mining is one of the industries that is defined within that classification. I also do not have a copy of that classification with me. I do not know whether Mr Ewing has.

Mr Ewing —No, I do not.

Mr Farrell —My memory is that oil and gas are part of it. The offshore component would depend on the circumstances.

Senator ABETZ —Looking at your website earlier this evening, that was my interpretation, but I did not want to jump to any conclusions without having that verified to me. But, in general terms, the categorisation of mining includes the oil and gas sector. It would include, would it not, the offshore? What is the difficulty there?

Mr Farrell —The difficulty is where offshore it is and what waters it is in.

Senator ABETZ —If it is in Australian waters? If it is within our economic zone?

Mr Farrell —My understanding is that if it is within our economic zone it is included, but that is not always absolutely clear.

Mr Ewing —There are some joint ventures or stuff that is part of a deal with East Timor and some of that oil and gas stuff is in an area where I understand there is an exception.

Senator ABETZ —Yes. I remember taking that legislation through the Senate. It is highly complicated.

Mr Ewing —I think that is the one area I am aware of where the general residence assumption is varied.

Senator ABETZ —Was it Sunrise?

Mr Ewing —Bayu-Undan.

Senator Sherry —Is there a shared revenue zone?

Senator ABETZ —Let us move on. This document tells me at page 7, if I am reading it correctly, that the operating profit before tax is $63.636 billion, yet when I go to the document entitled Stronger, fairer, simpler: a tax plan for our future: an overview put out by Treasurer Swan, I have a bar graph for resource profits as coming in at about $90 billion for 2008-09. I am just trying to get a handle as to what the difference between those figures might be and what it might be due to. As I go on, you can take some of the questions on notice if you are unable to answer them now.

Mr Farrell —Yes.

Senator ABETZ —Just remind me: do we date the global financial crisis to the collapse of Lehmann Brothers in September 2008?

Mr Farrell —Yes.

Senator ABETZ —So the profit figures for 2008-09 would be the financial year in which we would say the global financial crisis occurred?

Mr Farrell —Yes. In the company’s report on this, we run the statistical collection in respect of that financial year, but you would be aware that many companies do not operate on a July to June financial year, and those companies that report on a different financial year may have reported on a different financial year based on their financial accounts. So it would vary from company to company.

Senator ABETZ —It would, but the totality of profit and income is still that $63.636 billion, if that is the right—

Mr Farrell —Within the context of that collection, yes.

Senator ABETZ —It stands for type-of-activity unit.

Senator ABETZ —That is right. Unfortunately you do not have the chart on page 43, where there is the heading, ‘contribution to sales and service income’ and then the left-hand column is the TAU. What does that tell us? Is it a case of the higher the percentage the better or the higher percentage the worse in relation to contribution to sales and service income?

Mr Farrell —Let me explain what a TAU is so that you get the context. The register of businesses we use for our collections comes from the Australian Business Register. At the very top end of the size of businesses, the structures of companies are much more complex, and the structures for organisational and other reporting purposes may or may not suit the reporting for statistical purposes, so we changed the structure of the businesses at the top end into type-of-activity units for the purposes of statistical reporting. So we are talking about the very large companies in Australia with very complex structures.

We work with those companies to identify the best methods for reporting for statistical purposes for those organisations. We restructure them for statistical purposes, and the units that come out of that process are called type-of-activity units. Good examples might be a mine which has substantial construction activity or other businesses that cut across industries and would otherwise contribute very differently according to those types of activities.

Senator ABETZ —So what are you telling us on page 43, where you have a heading ‘Contribution to sales and service income’ and then list the various sectors, and down the left-hand side you have got the TAU percentage?

Mr Farrell —I really need to look at it, Senator.

Senator ABETZ —All right. If you can take that on notice, because in that chart mining is 89 per cent and, if I read the chart correctly—if the term is right—is making the highest, what, contribution?

Mr Farrell —Yes.

Senator ABETZ —Yes, the highest contribution?

Mr Farrell —Without seeing it, I suspect what you are talking about is specialisation and coverage, and what that means is, if you put all the mining companies together, what proportion of the total mining activity in Australia would that cover—that is, those companies that are predominantly involved in mining. It might end up being, say, 85 per cent, because some of the mining activity might be done by companies that are actually classified primarily to construction activity. Now, I am partly guessing because I cannot see the document, but I strongly suspect that is what we are talking about there.

Senator ABETZ —All right. If you could be so kind as to read the Hansard later and take it on notice for me, I will try to digest the written word when it comes back to me. Thanks for that. Do you keep any statistics on royalties paid to the various state governments in relation to mining?

Mr Ewing —In the government finance statistics we would collect that information.

Senator ABETZ —And I am sure you do not have in your back pocket the amount that may have been paid in 2008-09?

Mr Ewing —No, I would not have that.

Senator ABETZ —So it is in the government finance statistics?

Mr Ewing —Yes.

Senator ABETZ —All right. I will have a look there for that. The Commonwealth Grants Commission for whatever reason believes that, in 2008-09, $8.3 billion was paid in royalties to the various states, which is an interesting figure. I have never been good at maths, but if you take the $63.636 billion profit that is in your document and round that up to $64 billion, and round down the $8.3 billion to $8 billion so it is easier to calculate, then the royalties represent about one-eighth of the profit before tax, which is around 13 per cent and, giving the averages, comes to about the 14 per cent figure which found its way into Mr Swan’s pie chart. That would therefore seem to verify that top figure in Mr Swan’s pie chart—when I say his ‘pie chart’ I am referring to the Treasurer’s Economic Note from Sunday, 9 May 2010, just to identify the document—which I found of some passing interest. So, when we have in this document here the operating profit before tax, does that take into account profit before the payment of royalties or after the payment of royalties?

Mr Farrell —I will take it on notice.

Senator ABETZ —All right. Thank you. If I may go through this document, on page 5, for example, we are told that in 2008-09:

Mining recorded the largest percentage increase … and the largest absolute increase—

in total income. All these statistics are outlined, such as the fact that mining recorded the largest absolute increase for EBITDA. It says:

Mining experienced a result counter to the decreasing trend in OPBT, showing substantial growth …

It also says:

MINING this year has overtaken MANUFACTURING as the largest contributing industry …

I can go through. It seems to me that in 2008-09, according to the Australian Bureau of Statistics, the mining sector still performed exceptionally well. Yet in this room I think it was a week ago in the morning we had Treasury telling us in that mining had let down the Australian economy during the global financial crisis.

Senator Sherry —Is there a question here, Senator Abetz?

Senator ABETZ —Yes. Yet the day after that evidence, the Australian Bureau of Statistics comes out with a whole array of statistics, and it does not matter what you look at, mining outperformed every other category of the Australian economy.

Senator CAMERON —They had 19 per cent unemployment.

Senator ABETZ —So, if it is not asking too much, could the ABS just verify for me their assertions in relation to chapter 1, Overview in relation to the mining sector, and also in chapter 2, Industry performance, which included on page 18:

Most industries have reported relatively stable profit margins over time. The main exceptions to this, which each recorded large decreases in their profit margins between 2007-08 and 2008-09, were Rental, hiring and real estate services (from 44.0% to 16.3%), Education and training (private) (from 24.5% to 9.8%) and Information, media and telecommunications (from 15.7% to 9.1%).

So they were all down substantially.

Mining returned the largest profit margin (37.1%), however this margin has been steady over time.

0Senator Cameron interjecting

So every single statistical analysis provided to the Australian people the day after Treasury gave us these statistics—

Senator Sherry —Chair, we are getting a lot of rhetoric. If you have a question, fine. It is getting late. We are getting interjections as well, which is not helpful, either, Senator Cameron. It is late at night. If we have a question, let’s have the question.

CHAIR —Can you come to the question, Senator Abetz.

Senator ABETZ —I am requesting, please, of ABS to verify these statements, which seem to contradict the evidence provided by Treasury. I may well be misinterpreting all these statements and, if that be so, if I could be advised on notice as to what I am misreading in relation to that document.

Moving on, do you have any analysis of the total amount of company tax paid by the mining sector for the year 2008-09? I was told I would find the royalties in government finance statistics. Would that be the same place where I would find that analysis by the ABS?

Mr Ewing —No, it would not be.

Senator ABETZ —Where should I be looking, if at all?

Mr Ewing —I would have to take that on notice, but I suspect in the distribution of income accounts. But I am not sure they are broken down by industry. It would have the amount of tax paid in total within the economy, but I would have to look into whether it is broken down by industry. I could not guarantee that.

Senator ABETZ —If you could provide it to me in any event, but if it is not broken down, you must add, I would assume, all the various industry components to give you the total figure. Is that a fair assumption, if it is only a total figure?

Mr Ewing —Unless it is collected from an administrative source like the tax office’s total tax. It may or may not be. I would have to take it on notice and let you know whether we can break it down by industry.

Senator ABETZ —I was going to ask if you could disaggregate the figure and advise me as to what the mining component was—that would be very helpful. Trying my luck even further, if you could try to differentiate between the oil and gas sector and the mineral sector, that would be of substantial benefit to me. That is the end of my questions, thank you very much.

Mr Ewing —Could I make a small point of clarification please?

Senator ABETZ —Yes.

Mr Ewing —I point out that a lot of the numbers the ABS compiles are compiled in the context of the system of national accounts on the basis of economic concepts rather than accounting concepts under which businesses report and are taxed, so there may be some variation between the numbers published by the ABS and those which might be relevant to considering what taxes and so on are paid or might be payable by companies under different circumstances.

Senator CAMERON —That is very interesting.

Senator ABETZ —So where is this information gleaned from then? For example, the wages and salaries paid by, let us say, the agriculture, forestry and fishing sector is determined to be $6.122 billion?

Mr Ewing —Those figures would have been collected from the Annual integrated collection that Denis referred to before and they are probably collected on a business reporting basis. But I know that a number of the figures that are published in the national accounts, for example, that refer to gross operating surplus are adjusted to reflect national accounts and economic concepts that are somewhat different from accounting. In providing you with the answers to the questions you have asked, we will have to be careful to point out where those figures relate to economic concepts and where they relate to accounting concepts.

Senator ABETZ —All right. And the operating profit before tax?

Mr Ewing —That would have come from the same source. The publication you are referring to is based on the Annual integrated collection.

Senator ABETZ —So that is a collection of actual data?

Mr Ewing —Actual data from a survey of some 16,000 businesses across the economy.

Senator ABETZ —Whereas some of the other aspects that I have been asking about would relate to broader economic concepts?

Mr Ewing —In some instances some of the numbers you were referring to, such as distribution of tax and so on, within the income distribution account would be adjusted to a national accounts basis to be consistent with the rest of the SNA.

Senator ABETZ —So I get this clear, the figures in your document, Australian industry, released last Friday are from data collected?

Mr Ewing —They are from the Annual integrated collection, the data collection.

Senator ABETZ —So those figures can be relied upon without the caveat, but some of the figures that I might be supplied in relation to other matters that I have asked for will need that caveat. Is that correct?

Mr Ewing —Again, I do not have the publication with me, but I am saying that in supplying you with the data we will accompany them with appropriate definitions and caveats that will enable you to interpret them, in terms of their relationship to each other, in a coherent way.

Senator ABETZ —That would be very helpful. I apologise in advance to the poor people in the ABS who will have to undertake that task, but if they do undertake the task I can assure them it will be valued by me. Thank you.

CHAIR —As there no further questions for the ABS, I thank the minister and ABS for coming along. I conclude this estimates hearing by thanking the secretariat for their assistance during estimates this year, and of course Hansard and Broadcasting.

Senator Sherry —Thank you, Chair, ABS, Hansard.

Committee adjourned at 10.19 pm