Budget Review 2012–13 Index

Richard Webb

The value of Commonwealth Government Securities (CGS)—Treasury Bonds, Treasury Indexed Bonds, Treasury Notes and Aussie Infrastructure Bonds—that can be issued is limited.  The Commonwealth Inscribed Stock Act 1911 limits, to $250 billion, the total face (as distinct from market) value of the stock and securities on issue under this Act and the Loans Securities Act 1919.[1] The Budget contains a proposal to increase the limit to $300 billion.[2] The reasons given relate to timing, namely, within-year differences between the times when outlays are paid and revenue is received, and the timing of bond maturities and their refinancing.[3]

A determinant of the value of CGS on issue is the need to finance budget deficits. Over the period 2008–09 to 2011–12, estimated cumulative deficits (measured in underlying cash balance terms) amounted to $174 billion.[4] Over the same period, the market value of CGS rose from $58 billion at 30 June 2008 to $266 billion at 30 June 2012, an increase of 355 per cent.[5] The projected surpluses from 2012–13 to 2015–16, if realised, will help to reduce the value of CGS on issue.[6]

A second determinant is the need for a liquid market for government debt, that is, a market where CGS can be readily bought and sold. The Howard Government entertained redeeming all CGS but, following a review of the CGS market, decided to keep it open even though the Budget was in surplus.[7] More recently, a panel of market participants and regulators recommended that the CGS market should be maintained at around 12 to 14 per cent of gross domestic product.[8]

A factor that influences market—as distinct from face—values of CGS is current and expected interest rates. Market value differs from face value because as interest rates rise , bond prices fall, and as interest rates fall, bond prices rise to ensure that the yield (interest as a percentage of market price) on CGS already on issue equals the prevailing market interest rate. The Reserve Bank influences interest rates through monetary policy. A major consideration in Reserve Bank decisions is inflation: when expected inflation is too high (or low), the Reserve Bank raises (or lowers) interest rates. The budget papers show the consumer price index—an inflation indicator—as rising by 1.25 per cent in 2011–12, 3.25 per cent in 2012–13, and 2.5 per cent in each of 2013–14, 2014–15 and 2015–16.[9] This suggests that the influence of inflation on the Reserve Bank’s interest rate decisions may decline over the forward estimates period and that the market value of CGS could increase.  However, other factors, such as the economic outlook for the Euro zone, may also influence interest rates.

The Budget estimates that the face value of CGS on issue at 30 June 2012 will be $235 billion but does not contain estimates for the forward years.[10] The Budget does, however, include estimates of year-end market values as shown in the Table, which also shows the per cent change in those values.

Table: Market value of CGS on issue

Year	2011–12	2012–13	2013–14	2014–15	2015–16
Market value at 30 June ($ millions)	265 844	274 231	281 332	281 348	279 234
Per cent change	31.766	3.155	2.589	0.006	-0.751

Sources: Budget Paper No. 1: 2012–13, op. cit., p. 9–4, and Australian Government, Final Budget Outcome 2010-11, p. 17.
Note: the estimated value at 30 June 2011 is $201 755 million. 

The Table shows that, after increasing by 32 per cent in 2011–12, the market value of CGS (in nominal dollars) is not expected to fall until 2015–16, although it will fall in real terms in 2014–15 and again in 2015–16 assuming inflation of 2.5 per cent in those two years. 

CGS are the single biggest component of liabilities. However, the Government also owns assets. Looking only at gross liabilities—which include CGS—may thus give a misleading picture of government finances. Net debt is an indicator of the Government’s financial viability.[11] Net debt is the difference between liabilities in the forms of deposits held, CGS, loans, and other borrowings, and assets in the forms of cash and deposits, advances paid, and investments, loans and placements. After reaching 9.6 per cent of gross domestic product in 2011–12, net debt is expected to fall to 9.2 per cent in 2012–13 and to fall thereafter to 7.3 per cent in 2015–16.[12]

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