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Tuesday, 19 August 1980
Page: 318

The manner in which the Budget deficit in 1979-80 was financed is summarised in Tables 1 and 2.

Table 1 is the presentation of Budget financing transactions, as published monthly in the Statement of Commonwealth Government Financial Transactions, rearranged to indicate the concept of Domestic Borrowings and its composition (see beloW). While Table 1 shows aggregate financing transactions, and the securities or financing instruments involved in those transactions, it does not bring out the net changes in the holdings of government debt of the various sectors with which the Budget sector transacts. These changes, which are relevant to analysis of the monetary implications of the financing of the Budget, reflect both net proceeds of government securities' sales (subscriptions to new issues less redemptions) and subsequent market transactions in those securities. They are shown in Table 2.

The concept 'Domestic Borrowings' is designed to indicate the increase in the indebtedness of the Commonwealth to domestic non-Budget sectors arising from Budget financing either by the issue of Commonwealth securities to domestic non-Budget sectors or by the use (running-down) of Commonwealth cash balances with the Reserve Bank. However, in the presentation in Tables 1 and 2, not all intra-Budget sector transactions are netted out so that the figure shown for Domestic Borrowings reflects not only transactions between the Budget sector and domestic non-Budget sectors but also certain transactions within the Budget sector itself.

During 1979-80, there were sizeable transactions which, in essence, involved a transfer from Loan Fund to the Loan Consolidation and Investment Reserve (LCIR) - and so were infra-Budget sector transactions - which are reflected in Domestic Borrowings. In the absence of conversion offers in December and February, the LCIR (which usually converts its maturing debt) redeemed maturing securities in its portfolio to an amount of $291 million; the LCIR held $207 million of the December 1979 maturity and $84 million of the February 1980 maturity. The increase in LCIR cash is reflected in Table 1 as an increase of $291 million in Other Financing Transactions, while the reduction in the LCIR's bond portfolio is reflected in reductions of $291 million in net proceeds of other loans in Australia in Table 1 and Government Sector domestic borrowings (bond holdings) in Table 2. To make the figures coincide more closely with the concept of Domestic Borrowings in the sense of net Commonwealth borrowing from the domestic non-Budget sector, adjustments should be made to the tables to exclude these transactions, i.e., in 1979-80 Domestic Borrowings in the sense mentioned above were about $1728 million.

Table 1 - Government Financing Transactions 1979-80 ($ million)

Total Financing Transactions (= Budget deficit) .... 2034

LessNet overseas borrowings ...... 187

LessOther financing transactions^)...... 410

Domestic Borrowings......... 1 437

Financed by: - Loan Raisings in Australia - Net proceeds of Australian Savings Bonds and Special Bonds . . 174

Net change in Treasury Notes on issue..... 20S

Net proceeds of other loans in Australia..... -77

- 302

Residual Financing -

Use of cash balances........ 635

Borrowings from Reserve Bank(6)...... 500

- 1 135

(a)   Other financing transactions include funds obtained from coinage transactions, amounts borrowed by Commonwealth Government trust accounts, net amounts available from Commonwealth Government trust account transactions in government securities (including the redemption of securities held by the LCIR), and amounts available from moneys held in trust.

(b)   This item cannot be compared directly with the item 'Reserve Bank' in Table 2 (Domestic

Borrowings). The Table 1 entry refers solely to Treasury Bills whereas the Table 2 entry encompasses all net changes in domestic borrowings by the Government from the Reserve Bank. Thus, for example, Reserve Bank purchases of Treasury Notes direct from the Commonwealth are recorded for the purposes of Table 1 with other Treasury Note sales under 'Net Change in Treasury Notes on Issue' whereas, representing part of the Reserve Bank contribution to domestic borrowings, they -re recorded in Table 2 under the 'Reserve Bank' item.

Brief comments on the main items in Table 1 are provided below.

Net Overseas Borrowings

In October 1979, an institutional loan was undertaken in the Japanese capital market, the proceeds of which amounted to $155 million. This was followed in November by the Commonwealth's fourth public bond issue on the Tokyo capital market which raised the equivalent of $109 million.

In February 1980, two borrowings were undertaken in Germany, by way of a public issue and private placement. The proceeds of these two borrowings were $130 million and $78 million, respectively.

Repayments during the year of previous drawings on behalf of Qantas and TAA amounted to $38 million and $57 million, respectively. Repayments on behalf of the AIDC amounted to $30 million. A repayment of $1 million was also made to Eximbank. Other securities to the value of $144 million were redeemed in the USA, UK, Canada, Switzerland, Germany, the Netherlands and Japan. These redemptions included an amount of $33 million for the early repayment of a Swiss loan raised in 1968. In addition, repayments of $5 million were made on borrowings from the International Bank for Reconstruction and Development, and repayments amounting to $9 million on borrowings previously undertaken in the USA for defence purposes.

In summary, total gross overseas borrowings amounted to $471 million'11; total redemptions and repayments amounted to $284 million, giving net overseas raisings of $187 million.

Other Financing Transactions

The major components of this category were: $291 million from the redemption of maturing securities by the Loan Consolidation and Investment Reserve; $61 million as proceeds from Australia's share of gold purchased from the IMF under its fourth redistribution (at the official price of SDR35 per ounce) and sold to the Reserve Bank at market prices; net receipts of $31 million from the Postal and Telecommunications Commissions, representing the Commissions' employer contributions to the Commonwealth Superannuation Scheme deposited with the Commonwealth; $27 million received from the Commonwealth Superannuation Fund towards the liability assumed by the Government in respect of the Fund's share of the liability for benefits existing at 1 July 1976; $25 million from the realization of National Debt Sinking Fund investments with the Reserve Bank; $9 million in net proceeds from coinage transactions; and $8 million from switching transactions between the Loan Consolidation and Investment Reserve and the Reserve Bank.

These transactions were partly offset by the investment of $45 million by the Income Equalization Deposits Trust Account with the Primary Industry Bank of Australia in the form of deposits.

Loan Raisings in Australia

Australian Savings Bonds (ASBs) raised $806 million gross in 1979-80; redemptions of these securities amounted to $586 million, and redemptions of the superseded Special Bonds $46 million, resulting in net proceeds of $174 million.

Gross proceeds from the issue of Treasury Notes amounted to $7870 million; redemptions amounted to $7665 million. As at 30 June 1980 total Treasury Notes on issue (including Reserve Bank holdings) amounted to $1615 million, an increase of $205 million over the year. In December 1979 a tender system for selling Treasury Notes was implemented, replacing the previous arrangements whereby Treasury Notes were on continuous issue.

(1)   The amounts shown in the text as the proceeds of individual raisings are the SA equivalents of the principal amount (at face value, where applicable) calculated by applying the exchange rate used by the Reserve Bank at the time of receipt of proceeds. The total gross overseas borrowings figura represents cash proceeds and therefore includes an adjustment for the issue of any securities at e discount/premium from face value and is net of any commissions.

No government public 'cash loans' were held in 1979-80. A conversion loan was held in August; conversions totalled $46 million. Holders of Treasury Bonds maturing in December and February were required to redeem their holdings. On 30 April a 'tap' system for selling Treasury Bonds was implemented, replacing the system of periodic cash and conversion loans. Holders of Treasury Bonds maturing on 15 May were offered the option of re-investing the proceeds of their maturing securities in the tap stocks on issue on 15 May or the then current series of ASBs, Series 16. The three tap stocks on issue at various times during the last two months of the year raised a total of $874 million. Total redemptions and repurchases during the year, which amounted to $1044 million, exceeded Treasury Bond raisings by $170 million.

An amount of $73 million was received into Income Equalisation Deposits (IEDs) in 1979-80; redemptions of IEDs and the superseded Drought Bonds amounted to $17 million.

States' domestic loan raisings were $36 million. However, the proceeds of domestic loan raisings in 1979-80 (excluding Australian Savings Bonds and Treasury Notes but including IEDs) were $77 million less than repurchases and redemptions.

Residual Financing

Borrowings from the Reserve Bank in the form of Treasury Bills amounted to $500 million. Cash balances held by the Commonwealth were run down by $635 million.

Table 2 shows domestic borrowings from banks and non-banks and, within each category, provides information on the major institutional groups. Such a categorisation is useful as the economic effects of financing transactions depend importantly on which of the non-Budget sectors hold the stock of government debt and the changes in those holdings. Private sector holdings of Commonwealth debt constitute the bulk of the liquidity base of the economy. Private sector take-up of Commonwealth debt instruments reflects a large number of influences on domestic liquidity conditions, including the size of Domestic Borrowings, interest rates, private sector external transactions and Reserve Bank transactions with the private sector. Other things being equal, take-up of government securities by the non-bank private sector provides an offset to the direct increase in banking sector liquidity and the volume of money that would otherwise accompany an increase in the domestic liquidity base.

Changes in debt by the main forms of security are also shown. This, too, is relevant information for the analysis of the economic impact of Budget financing transactions, although a full exposition would go beyond the fairly direct effects of those transactions reflected in Table 2. Other relevant effects include those on the maturity structure of the stock of government debt in private portfolios, the level and structure of interest rates and associated expectations.

Table 2 - Domestic Borrowings 1979-80 (p) ($ million)

(a)   Includes movements in holdings of Treasury Bonds, Australian Savings Bonds, Income Equalisation Deposits, Drought Bonds, etc., and associated Inscribed Stock.

(b)   Includes movements in the holdings of government securities of Commonwealth Government, State Governments, State Government and non-financial Commonwealth semi-government authorities and redemptions of securities held by the LCIR (but excluding special loans, changes in holdings of internal Treasury Bills and cancellations of some securities). For given Domestic Borrowings, increases in such holdings reduce private sector and Reserve Bank portfolios of net government debt. If changes in Government sector holdings are subtracted from Domestic Borrowings, this gives a concept termed Net Domestic Borrowing Requirement, data for which are published quarterly in the Reserve Bank's Statistical Bulletin. Subject to a few minor qualifications, the Net Domestic Borrowing Requirement shows the change in indebtedness of the Budget sector to the private sector and the Reserve Bank.

(c)   Includes net take-up of Treasury Bills, Treasury Notes and other government securities, as well as the Commonwealth Government's use of cash balances. (Such cash balances are an asset of the Commonwealth so that their use increases the net indebtedness of the Budget sector.) See also footnote (6) to Table 1 .

(p)   Preliminary.

Table 2 indicates that total private sector holdings of government securities increased by $1034 million in 1979-80; Treasury Notes holdings rose by $235 million while other securities (mainly Treasury Bonds and Australian Savings Bonds) rose by $798 million. A brief account of factors affecting these portfolio movements is contained in the Monetary Conditions section of Statement No 2; Table 14 of that Statement provides quarterly data in the format of Table 2 above.

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