Damon Mcknight
The Australian federal government borrows money through the Australian Office of Financial Management (AOFM), which acts as an intermediary between the government and its lenders. The AOFM borrows money on behalf of the government by issuing Australian Government Securities (bonds) via electronic tenders (competitive auctions). The money borrowed by the government is used to fund its spending, investment, and debt payment obligations. The government's debt level is influenced by its surplus or deficit, which is determined by the federal budget. As of 2021, the Australian government's borrowing to cover the COVID-19 response and recovery was expected to reach $1.3 trillion in the next three years.
| Characteristics | Values |
|---|---|
| Agency responsible for managing government debt and borrowing money on behalf of the Australian government | Australian Office of Financial Management (AOFM) |
| Mechanism used by the AOFM to borrow money | Issuing Australian Government Securities (bonds) |
| Who can submit bids for bonds | Registered Bidders (usually banks) |
| How often are auctions held | Every couple of days, depending on requirements |
| Level of Australia's gross debt | $579.2 billion |
| Share of Australian government debt held by non-resident investors | Two-thirds |
| Interest paid by the government on its borrowings in the last financial year | $14 billion |
| Interest payments as a percentage of GDP | 0.7% |
| Amount of money the Australian government is expected to borrow to pay for COVID-19 response and recovery | $952 billion |
| Amount owed by the federal government to the RBA | Nearly $130 billion |
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What You'll Learn
The Australian Office of Financial Management (AOFM)
The AOFM sets up online auctions for these bonds, and investors lodge bids by indicating the interest rate they will accept. Most AGS are issued via electronic tenders (competitive auctions), and only registered bidders (usually banks) can submit bids for bonds at tenders. The AOFM sets the amount available for purchase and makes allocations based on the highest bids received at the end of the 15-minute auction.
The AOFM forecasts daily government cash flows using advice from agencies such as the Australian Taxation Office, the Department of Finance, and large spending departments (Treasury and Defence). These forecasts form the basis of the AOFM's annual issuance (borrowing) program. The AOFM also provides clear, publicly available guidance on its borrowing plans, including weekly tender issuance details, to ensure the smooth functioning of the AGS market.
The AOFM manages the government's debt portfolio, ensuring it is managed at the least cost, subject to the government's policies and risk references. It also implements government initiatives related to the Australian securitisation market. As of June 2023, the outstanding value of AGS issued by the AOFM was $889.8 billion. The AOFM has been deemed "largely effective" at managing the Australian government's debt and the associated costs and risks.
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Government debt and borrowing regulations
The Australian Office of Financial Management (AOFM), a part of the Treasury Portfolio, acts as the government's debt manager and borrows money on behalf of the Australian government. The AOFM borrows money by issuing Australian Government Securities (bonds) via electronic tenders (competitive auctions). The amount available for purchase is set by the AOFM, and allocations are made based on the highest bids received at the end of the 15-minute auction.
Australian government borrowings are subject to limits and regulations by the Loan Council, except when the borrowing is for defence purposes or is a 'temporary' borrowing. The net government debt is the gross government debt less its financial assets, often expressed as a percentage of Gross Domestic Product (GDP) or the debt-to-GDP ratio. The federal budget determines the government's net debt position, with a surplus allowing the government to pay down its debt and a deficit requiring the issuance of more debt.
The AOFM provides publicly available guidance on its borrowing plans, including weekly tender issuance details. It manages its operations to account for potential financial market scenarios and ensures the government can meet its spending, investment, and debt payment obligations.
Before 1979, the Australian government borrowed using individual cash loans and the TAP system, where the private market financed public debt at a fixed yield. If the market did not finance all the debt, the Treasury could borrow from the Reserve Bank of Australia at a concessional rate.
The COVID-19 pandemic and its economic impact have resulted in unprecedented government borrowing and spending to support the local economy. As of 2021, the states and territories were projected to owe $371 billion within three years, with their share of Australian government debt expected to double by 2024.
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The Loan Council
The 1927 Financial Agreement discontinued the per-capita payments system that had existed since 1910 and restricted the borrowing rights of the states by subjecting such borrowing to control by the Loan Council. The 1928 Act was ratified by all jurisdictions and amended the Australian Constitution to ensure the legality of the Loan Council.
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Foreign currency liabilities
The Australian Office of Financial Management (AOFM), which is part of the Treasury Portfolio, acts as an intermediary between the government and its potential lenders. The AOFM borrows money on behalf of the government by issuing Australian Government Securities (bonds). These bonds are essentially government promises to repay borrowed money, plus interest, to investors.
The Howard government oversaw the unwinding of the federal government's foreign currency liabilities, ending a long period of significant exposure to currency risk. The debt portfolio is now managed to a benchmark with a zero foreign currency component.
Australia's net foreign liability position is not a cause for concern. The country benefits from strong institutional arrangements, the ability to issue debt in Australian dollars, and deep and liquid foreign exchange hedging markets. Most external debt is longer-term debt and issued in Australian dollars. Debt issued in foreign currencies is well hedged.
Foreign currency gains and losses refer to the fluctuations in the value of one currency relative to another, resulting in either a profit (gain) or a loss. These gains and losses can occur in various situations involving transactions or investments in foreign currencies. When a company or individual has assets, liabilities, or income denominated in a foreign currency, they need to translate those amounts into their functional currency for accounting purposes.
The Australian Taxation Office (ATO) has specific rules for how foreign currency gains and losses are treated for tax purposes. The calculation of tax liability for foreign currency gains and losses depends on the type of asset or liability and the circumstances in which the gain or loss was realised.
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Government bonds
The Australian Office of Financial Management (AOFM), which is part of the Treasury Portfolio, acts as an intermediary between the government and its potential lenders. The AOFM borrows money on behalf of the government by issuing Australian Government Securities (bonds). These bonds are essentially government promises to repay borrowed money, plus interest, to investors.
Every couple of days, the AOFM sets up online auctions for these bonds. Investors lodge bids by indicating the interest rate they will accept, and the AOFM makes allocations based on the highest bids received at the end of the 15-minute auction. The AOFM provides clear, publicly available guidance on its borrowing plans, including weekly tender issuance details. This transparency helps to ensure the smooth functioning of the AGS market.
As of April 3, 2020, the AOFM had $579.2 billion of these bonds on issue to investors, with just over half held by non-residents, including foreign banks, central banks, and investors. The remainder is held by Australian entities, including banks, super funds, and other institutional investors.
The interest rate is fixed for the life of the bond, and in March 2020, the government took out a 12-year loan worth $1.2 billion at an interest rate of 0.8185%. Given the inflation rate at the time was around 1.8%, the government will effectively pay less than $1.2 billion to pay off the debt in 2032.
Before 1979, the Australian government borrowed using individual cash loans and a mechanism known as the TAP system, where the private market would finance public debt at a fixed yield.
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Frequently asked questions
The Australian Office of Financial Management (AOFM) borrows money on behalf of the government by issuing Australian Government Securities (bonds). These bonds are essentially government promises to repay borrowed money, plus interest, to investors.
The AOFM sets up online auctions for these bonds every couple of days, depending on requirements. Registered Bidders (usually banks) submit bids for bonds at tenders. The AOFM sets the amount available for purchase and makes allocations based on the highest bids received at the end of the 15-minute auction.
According to the AOFM, just over half of Australian government bonds are held by non-residents. These include foreign banks, central banks, and investors, including big pension funds. The remainder is held by Australian entities, including banks, super funds, and other institutional investors.
As of 2021, the Australian federal government owed nearly $130 billion. In the next three years, borrowing to pay for COVID-19 spending and cover revenue shortfalls is expected to blow out to $1.3 trillion, with most of it ($952 billion) owed by the Commonwealth.
