SUB-NATIONAL GOVERNMENT DEBT MANAGEMENT IN AUSTRALIA

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1 SUB-NATIONAL GOVERNMENT DEBT MANAGEMENT IN AUSTRALIA Presentation to CUFE Public Finance Workshop CSES Dr Bruce Rasmussen Deputy Director CSES 1 December

2 Australian public sector debt levels are low by international standards Net Public Sector Debt: Australia and G7 2

3 and low historically for Australia Australian Government gross public debt 3

4 Functions by level of government: overlapping funding and provision Main level of government Category Federal State Local Prisons Energy Education x x Sports/Arts x x Health x x Telecommunications Rail x x Roads - highways x x x Roads - local x x Ports Water/Waste x x x x x 4

5 State borrowing and infrastructure expenditure, to ($m) 60,000 50,000 40,000 75% of public GFCF 30,000 20,000 Gross fixed capital formation Net borrowing 10, ,000 5

6 Brief History of the Australian Loan Council Rationale: At Federation in 1901, the Commonwealth was primarily made responsible for external affairs and national economic policy, while the States retained considerable residual powers and responsibilities eg for public infrastructure To resolve conflict between the Commonwealth and the States borrowing requirements, Australian Loan Council was established Composition: Prime Minister and each State Premier although in practice the Commonwealth and State Treasurers form Loan Council Normally chaired by Commonwealth Treasurer Each State has one vote (total of 6) Commonwealth had two votes plus a casting vote 6

7 Founded on two initial agreements between the Commonwealth and the States 1927 Financial Agreement (legislative and constitutional) Regulates borrowing by the Commonwealth and States Provides for the Commonwealth to borrow on the States' behalf Sets limits on the States' borrowing powers 1936 Gentlemen s Agreement (non-legislative) Set limits to borrowing by State authorities 7

8 Loan Council as a flexible instrument of control over borrowing by the States In the period since 1950 the tension between the two levels of government has focussed on the Commonwealth need to control fiscal policy and pressure on States for expenditure on infrastructure Loopholes in the agreement have been successively exploited by the States and then at least partially closed by the Commonwealth 1936 borrowings by State authorities brought within Loan Council 1984 definition of borrowings broadened to capture finance leases and supplier credit agreements within so called Global Borrowing Limits 1992 definition again broadened to any form of deficit financing including operating leases and so called temporary borrowings 8

9 Progressive move from regulation to control by market discipline Under the 1992 arrangement, each State nominates a Loan Council allocation (LCA), reflecting its own expected budget balance and if relevant a deficit reduction strategy Adjustments are negotiated with the States consistent with the Commonwealth government s macroeconomic policy objectives Tolerance limits are agreed to allow some flexibility Each State reports to the Loan Council on an annual and quarterly basis regarding its budgetary situation Credit ratings expected to impose discipline on the States borrowing 9

10 In general, a downgrade in credit rating imposes a significant political cost Moody s ratings: Australian States State Foreign currency Domestic currency NSW Aaa Aaa Victoria Aaa Aaa Queensland Aa1 Aaa Western Australia Aaa Aaa South Australia Aaa Tasmania Aaa 10

11 Effectiveness of market approach depends on rigorous and transparent reporting Australian states report financial operations : According to an Australian equivalent of International Financial Reporting Standards (IFRS) Accrual accounting basis more difficult to conceal future accrued liabilities Provide balance sheet of assets and liabilities Requires more comprehensive reporting of liabilities irrespective of definitions of borrowing Inclusion of contingent liabilities eg loan guarantees Inclusion of public private partnerships (PPP) if balance of risks and benefits of ownership reside with the government, making it more difficult to conceal off balance sheet financing 11

12 Conclusion Australia and its States currently have low levels of public debt In Australia, states carry much of the responsibility for infrastructure Infrastructure expenditure has been increasing and with it, borrowing by the States Loan Council has been a remarkably durable and flexible institution for managing Commonwealth State borrowing Recent trend has been to rely increasingly on market discipline to restrain borrowing rather than regulation This depends on rigorous and transparent reporting by government of borrowing and other liabilities 12