The Secretary to the Treasury has forwarded me the Treasury file relating to the application by the State of Victoria of certain loan moneys raised under the Financial Agreement, and requested advice whether the evidence contained in the file is such as to establish that certain loans raised by the State of Victoria were of such a nature as to render the Commonwealth liable to pay a sinking fund contribution under the Financial Agreement.

Paragraphs (f) and (j) of clause 3 of the permanent provisions of the Financial Agreement provide that the Commonwealth and State shall each pay from revenue a sinking fund contribution of 5/- for each £100 of the amount of any new loan raised by a State or by the Commonwealth on behalf of a State during the period of 53 years from the date of raising after 30 June 1927.

This obligation is made subject to an exception that where the loan is raised by a State or by the Commonwealth for and on behalf of a State, to meet a revenue deficit accruing after 30 June 1927, no sinking fund contribution shall be payable by the Commonwealth, but the State concerned shall, for a period sufficient to provide for the redemption of the loan, pay from revenue in each year during such period a sinking fund contribution at a rate not less than 4 per centum per annum of the amount of the loan.

The Financial Agreement makes no express provision for establishing whether or not a loan raised by a State or by the Commonwealth on behalf of a State is to meet a revenue deficit.

I understand that in order to facilitate the practical working of the Financial Agreement certain conferences were held between Commonwealth and State officers in order to make arrangements acceptable to all parties whereby the respective obligations of the parties to the Agreement could be ascertained from time to time.

Among other things it was agreed that as soon as practicable after the close of each year the State should forward statements in a form agreed upon duly certified by the Auditor-General of the State covering the whole of the loan raisings, conversions and redemptions for the year.

Accordingly, on 10 September 1929, the Treasurer of the State of Victoria forwarded four statements lettered a, b, c and d, respectively, relative to loans raised by the Commonwealth on behalf of the State of Victoria. Statement (a) shows the loans raised during the financial year ending 30 June 1929, upon which the State and the Commonwealth each is bound to pay contributions to the Commonwealth Debt Commission of 5/- per centum per annum under the Financial Agreement.

Statement (b) shows the loans raised on behalf of the State of Victoria during the same year to meet revenue deficits.

Attached to the statements is a proviso signed by the Auditor-General to the effect that £350,000 included in statement (a) should have been included in statement (b).

Acting upon the view taken by the State Auditor-General the Commonwealth has declined to pay the sinking fund contribution of 5/- per centum and has requested the State to pay £4 per centum upon the amount in question.

It would appear from the file that certain lands purchased from loan moneys by the State of Victoria for discharged soldier settlement purposes were in the year 1927–1928 transferred for closer settlement purposes, and the Closer Settlement Fund received an advance from the Public Account of £350,000 for payment to the discharged soldiers settlement fund. In 1928–1929, £350,000 of the loans raised was regarded by the State Treasury as having been raised for closer settlement and was used to adjust the advance from the Public Account. The result was, as pointed out in Treasury minute of 9 January 1930, and addressed to the Secretary, National Debt Commission, that the Loan Fund had received two debits of £350,000 in respect of the purchase of the same property.

These circumstances are discussed in the report of the Auditor-General of Victoria published in 1929 and the following is an extract from that report which deals with >the subject:

During the year 1927–28 £350,000 was raised by way of loans authorised under the Closer Settlement Act (No. 2629) for the purchase of land. The transaction in the books shows a charge against loan proceeds for the purchase of land and a credit to the Discharged Soldiers’ Settlement Fund of £350,000. The entry reads:

For part purchase of land acquired under the Discharged Soldiers’ Settlement Acts, taken over during the period from 1st July, 1924, to 31st December, 1925, for settlement of civilians under the Closer Settlement Acts.

These lands had been acquired and paid for out of moneys borrowed under the authority of the Discharged Soldiers’ Settlement Acts, so that the State has borrowed £700,000 to acquire £350,000 worth of land. The second loan of £350,000 was applied with other moneys to the payment of interest.

The information on the official file is a memorandum from the Board submitted to the Treasury in February, 1928, calling attention to the difficulties of the Board to provide cash for administrative expenses and interest. It was estimated that £425,000 would be required from loan proceeds after using up all the repayments of capital. It appears, however, that £350,000 from loan proceeds was sufficient to cover the cash shortage, and this sum was raised and applied as already stated.

Apart from the fact that the entry appears in the books as an appropriation of loan moneys for the purchase of estates there was no attempt made to disguise the fact that the loan raised for the purchase of land was required for the payment of interest, but it is probable if the Board had made default in the payment of interest owing to the Treasury, that the deficiency in the Consolidated Revenue Account for the year 1927–28 would have been more than was stated in the accounts of the Treasurer.

It may be urged in extenuation of the procedure outlined that out of the whole of the repayments of capital by the settlers (shown in the accounts at roundly £4,500,000) only £174,100 has been applied to the reduction of the capital liability. The repayments of capital are ‘pooled’ with the interest payments and other receipts, and practically all the capital repaid in cash up to the 30th June, 1928, had been applied to current expenses and interest. The inflation of the ‘pool’ with loan moneys is a more illuminating phase of the misappropriation of capital. The Board’s cash receipts are relatively a small proportion of the cash disbursements, and as previously explained the income is diminishing while the liabilities and interest are increasing. Cash from some source is required to meet the deficiency but this cannot be regarded as a justification for raising loans authorized for a specific purpose and applying the proceeds to purposes for which loan moneys are not authorized.

The following is a copy of the Auditor-General’s comment upon the statements (a) and (b) above referred to:

1. In the year 1927–28, £350,000 was borrowed from the Public Account pending loan moneys which were raised in 1928–1929, when the Public Account was recouped. This sum was borrowed for the purpose of purchasing estates but it was brought to account in the Treasurer’s Revenue Statement as an interest payment from the Discharged Soldiers’ Settlement Fund. After crediting the receipts with this amount there was a deficit on the year’s operations of £163,352.14.2. The deficiency shown in the Treasurer’s Accounts (£163,352.14.2) stood at the 30th June 1929 as a charge against the Public Account. No contribution to the National Debt Sinking Fund has been made on account of this deficit.
2. Again in 1928–29, a further sum of £225,000 was borrowed from the Public Account pending loan funds for the purchase of estates and brought to account in the Treasurer’s Statement as an interest payment from the Discharged Soldiers’ Settlement Fund.
3. I am of opinion that the procedure adopted is contrary to the Commonwealth and States Financial Agreement and £350,000 included in statement ‘A’ should be included in statement ‘B’.

(Sgd) J A Norris, Auditor-General, 5/9/1929

The Auditor-General by a letter dated 20 April 1931, has stated as follows:

As the views I have expressed in my reports have been made available for the information of the Loan Council and of the officers of the Federal Treasury, I am of opinion that no good purpose can be served further by the proviso in my certificate of the 5th September 1929 which I now withdraw in order that the financial arrangements between the State of Victoria and the Federal Treasury may be completed.

It will be seen that the Auditor-General now seeks to withdraw the proviso in his certificate of 5th September 1929. He states that he does so ‘in order that financial arrangements between the State of Victoria and the Federal Treasury may be completed.’

So far as the Commonwealth is concerned, it does not appear that the withdrawal of the proviso, even if effective, could have any bearing on the financial arrangements referred to by the Auditor.

He does not state that he withdraws the proviso because on further consideration he has satisfied himself that it was wrong. He does state, however, as a reason for withdrawal, that the views expressed in the proviso have been made available for the information of the Loan Council and the officers of the Federal Treasury.

In other words, as the proviso has been made known to the Commonwealth and the Loan Council, he sees no reason for its continuing to stand in relation to the statements to which it was attached. The terms of the withdrawal itself are not such, in my opinion, as would, apart from all other considerations, render it necessary for the Commonwealth to disregard the certificate given by the Auditor-General in 1929.

The Financial Agreement imposes certain obligations on the Commonwealth and on the States arising out of a certain state of facts. The Commonwealth has applied the agreement according to the facts as they have been made to appear to it. I understand that the legality of the action of the State of Victoria in the application of the £350,000 has been the subject of advice by the State Crown Law Authorities. Their advice, however, so far as I am instructed does not touch upon the question now in issue. The State Under Treasurer advised, by letter dated 30 June 1930, that the question of the propriety of the application of the amount of £350,000 ‘is now being considered by the Victorian Committee of Public Accounts.’

Whatever the decision of the Committee may be I do not think that the Commonwealth is bound to accept its ruling as binding upon it if it considers that the decision is adverse to the facts.

Shortly, the question upon which advice is desired is whether the borrowing of the second £350,000 was for the purpose of meeting a revenue deficit.

Paragraph (d) of clause 4 of Part II of the Financial Agreement provides that:

(d) In respect of any loan raised after 30th June, 1927, by a State or by the Commonwealth for and on behalf of a State to meet a revenue deficit accruing after that date no sinking fund contribution shall be payable by the Commonwealth, but that State shall pay from revenue a sinking fund contribution at a rate of not less than 4 per centum per annum on the amount of that loan.

Similarly, paragraph (j) of clause 3 of Part III (Permanent Provisions) of the Financial Agreement reads as follows:

(j) In respect of any loan raised after the 30th June, 1927, by a State or by the Commonwealth for and on behalf of a State to meet a revenue deficit accruing after that date no sinking fund contribution shall be payable by the Commonwealth, but that State shall for a period sufficient to provide for the redemption of that loan pay from revenue in each year during such period a sinking fund contribution at a rate of not less than 4 per centum per annum of the amount of that loan. For the purposes of this sub-clause the sinking fund contributions of the State shall be deemed to accumulate at the rate of 4¹⁄₂ per centum per annum compounded.

It is stated in the file that the £350,000 in question has been used from loans raised for works, and the moneys are, in the view of the State Treasury, regarded as having been raised for Closer Settlement. I am informed, however, that the whole of the loan money from which the second amount of £350,000 was taken was borrowed by sales ‘over the counter’, at the State Treasury. It appears that these moneys were not borrowed for the conversion, renewal or redemption of maturing debt. Consequently for the purposes of the Financial Agreement, they must be treated as new loans, i.e. loans for works, or as loans to meet revenue deficits.

Further, as a public prospectus stating the purposes for which the moneys would be used was not issued in connexion with the borrowing of these moneys, it would appear that the moneys were borrowed for the purpose for which they were in fact used. Even if the moneys were stated to have been borrowed for one purpose and were used for another purpose, they should in my view be treated, for the purpose of the Financial Agreement, as having been borrowed for the purpose for which in fact they were used.

In the present case, it would appear that the utilization of loan moneys in this manner was not necessary for the purpose of effecting the transfer of the debit from the Discharged Soldiers’ Settlement Fund to the Closer Settlement Fund, but that one Fund could have been debited and the other credited with the sum in question without the utilization of the moneys borrowed. The net result of this utilization of the moneys so borrowed is to reduce the balance standing at the debit of Discharged Soldiers’ Settlement Fund and enable payment therefrom of £350,000 to Revenue, thereby reducing the amount of the State deficit.

I note that in the file it is stated by a State officer that the late Prime Minister promised that no objection would be taken by the Commonwealth to the course proposed. No confirmation of this promise has been made available, and in the absence of some confirmation I see no reason why the Commonwealth should agree to a departure from the provisions of the Financial Agreement.

I note also that the State Parliament in accepting the Financial Agreement provided in section 9(4) of Act No. 3554 that the provisions of that section should not apply with respect to loan moneys raised under the authority of the Closer Settlement Acts or the Discharged Soldiers Settlement Acts. The precise object of this sub-section does not appear to have been explained to or discussed in the Victorian Parliament. In any case, to the extent (if any) to which it is inconsistent with the provisions of the Financial Agreement, it appears to be either ineffective or to have the effect of vitiating the State’s acceptance of the Agreement: and I assume that the State would not contend the latter.

The opinions of the State Crown Solicitor contained in the file do not bear on the effect of the Financial Agreement, but deal merely with questions relating to the transfer of the debit from one fund to another fund.

After careful consideration I am satisfied that on the facts in the file the sum of £350,000 must be treated as having been raised to meet a revenue deficit within the meaning of the paragraphs of the Financial Agreement, above set out.

I am, therefore, of opinion that the State is liable to contribute thereon at the rate of 4 per centum per annum, and that the Commonwealth is not liable to make any contribution in respect thereof.

[Vol. 25, p. 156]