Liability management
The major liabilities on the Australian Government's balance sheet relate to unfunded public sector superannuation and government debt securities. Together these liabilities comprise more than three quarters of total Australian Government liabilities.
Total liabilities are expected to increase by $12 billion over the budget year and forward estimates to around $221 billion, mainly due to the continued growth in unfunded public sector superannuation.
Public sector employee superannuation liabilities
Public sector employee superannuation entitlements relating to past and present employees constitute the largest financial liability on the Government's balance sheet. The Government's superannuation liability is estimated to be around $108 billion as at 30 June 2008.
The Australian Government has never fully funded its superannuation liabilities. However, the Commonwealth Sector Superannuation Scheme and the Public Sector Superannuation Scheme were closed to new members in 1990 and 2005 respectively. From 1 July 2005, the Public Sector Superannuation Accumulation Plan was introduced and provides fully‑funded accumulation benefits for new civilian employees.
Despite these reforms, the value of the Government's existing superannuation liability is projected to continue growing (in nominal terms) into the future, reaching $124 billion by the end of the forward estimates and around $147 billion by 2020. This is largely due to growth in the membership of the Military Superannuation and Benefits Scheme and continued growth of entitlements accruing to existing members of the closed civilian schemes and previous military schemes.
Chart 2 illustrates the estimated growth profile of the Government's public sector superannuation liability over the next 40 years.
Chart 2: Public sector superannuation liability(a)
- The Public Sector Superannuation Scheme and the Commonwealth Superannuation Scheme (the main civilian schemes) and Military Superannuation Schemes form the dominant part of the Government's total unfunded superannuation liability.
- Includes the Military Superannuation and Benefits Scheme and the Defence Force Retirement and Death Benefits Scheme.
Source: Department of Finance and Deregulation and Australian Government Actuary.
Government securities
The Government will continue to issue Treasury Bonds because of the important role they play in the operation of the Australian financial system.
Over recent years, persistent fiscal surpluses have removed the need to borrow for budget funding purposes. However, Treasury Bonds have continued to be issued in order to maintain an active Treasury Bond market and to support the market in Treasury Bond futures contracts. These two markets are used in the pricing and hedging of a wide range of financial instruments and in the management of interest rate risks by market participants. They thereby contribute to a lower cost of capital in Australia. Without them, the financial system would be less diverse and less resilient to the shocks that can emerge from time to time either from domestic sources or from overseas. As demonstrated over recent months, the markets for Treasury Bonds and Treasury Bond futures contracts provided important anchors for Australia's financial system as it responded to the impact of credit and liquidity concerns sparked off by the sub‑prime housing crisis in the United States of America.
The Government will continue to monitor closely the operation of the Treasury Bond and Treasury Bond futures markets to ensure they continue to function effectively.
In 2008‑09, the volume and timing of fixed coupon Treasury Bond issuance takes account of the need to have an appropriate range of Treasury Bonds available for inclusion in Treasury Bond futures baskets. The program maintains a pattern where new 5‑year and 13‑year Treasury Bonds are launched in alternate years, with total issuance over a 2‑year period of around $5 billion in each line to offset maturing bond lines.
In 2008‑09, there will be $2.0 billion of issuance into the May 2021 Treasury Bond line. This will bring the total volume on issue for this bond line to $5.0 billion. In addition, a new June 2014 Treasury Bond line will be issued to support the operation of the 3‑year Treasury Bond futures contract, of which $3.3 billion will be issued during 2008‑09. The remaining issuance necessary to bring this bond line up to $5.0 billion will be undertaken in 2009‑10.
Total Treasury Bond issuance during 2008‑09 will be $5.3 billion, while scheduled maturities during this period, net of Australian Government holdings, will be $5.1 billion. As a result, the total stock of fixed coupon Treasury Bonds on issue, net of Australian Government holdings, will be around $49.6 billion as at 30 June 2009 (Chart 3).
Chart 3: Fixed coupon Treasury Bond outstandings expected
at 30 June 2009
- Treasury Bonds on issue are net of Australian Government holdings.
Source: Australian Office of Financial Management.
The Government also has on issue three lines of inflation linked Treasury Indexed Bonds. The total original face value of Treasury Indexed Bonds on issue as at 30 June 2008 is expected to be around $6 billion. These bond lines are expected to mature without replacement, with the first of these lines (with a face value of around $1.5 billion) maturing in August 2010.
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