The Hawke Years I

CHAPTER 10

It must be considered that there is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to initiate a new order of things.  For the reformer has enemies in all who would profit from the old order and only lukewarm defenders in all those who would profit by the new order.

Machiavelli

The 1983 election defeat of seven key Dries was described by The Age as "a lethal blow to Dries". ⁽²⁵⁵⁾  It also reported John Hyde:  "[The losses] may weaken [the dry] voice in Canberra, but it always had a momentum outside Parliament.  We were just a vocal sector of it."  Hyde had responded to the journalists with more bluster than prescience but he was to prove to be nearer the mark than The Age, at least until the late 1990s.

Briefly, the ex-parliamentary Dries remained vocal.  Before the election they had agreed, as they had done in 1980, that they would try to demonstrate that, far from failing, genuine liberalism had not been attempted.  Two days after the election The Australian ran a statement that John Hyde had prepared before the poll:

We talked of fighting inflation first, but missed our money supply targets three years in a row so that inflation was going up in Australia when it was coming down in the economies of our major trading partners.  Monetarist policies were certainly not tried in Australia.

We talked of the need for balanced budgeting, but this year the budget deficit will be of the order of $5,000 million.

We talked of free enterprise and the benefits of a competitive market economy yet continued to regulate airlines, shipping, the sale of agricultural produce, petrol retailing and so on in the best socialist tradition.

We talked of the benefits of trade but actually increased barriers to trade in several areas.

The Government had backed the relative efficiency of the private sector but the public sector was now a slightly higher percentage of the economy than it was in 1975.  It warned of the dangers of uncosted commitments but promised bicentennial road programs, railway lines and even talked of turning the rivers inland.

In short the policies that have for seven years guided the Government have essentially been those of socialist parties the world over and our economy now shows it.

It would be tragic if our rhetoric were mistaken for our substance, so that liberal policies were judged to have failed when we did not, except for very short intervals, try them.  There was no one person to blame.  It was the fault of the entire Government.

Such words left John Hyde wide open to the accusation of bitterness.  Hyde escaped far better than he had anticipated and possibly deserved.

John Hyde did not suspect it, but Australia was about to embark upon one of the most significant and exciting passages of Government in its short history.  It was to have another period of genuine radical leadership without the errors of the Whitlam years.  Because they deemed them to be in the national interest -- there can have been no other reason -- Labor Governments espoused and practiced policies that repudiated socialist tradition and were initially unpopular.  To an unusual degree, Prime Minister Hawke and his Cabinet took the public into their confidence, defending rather than disguising policies.  Exceptional political virtue in these times did not all reside with the Government.  On many issues, to their own potential political cost, the Opposition supported the Hawke Government in its reforms and was often ahead of it in its advocacy.

It is easy to find fault with Governments and Oppositions.  One has only to consider media policy favouritism to appreciate that the Hawke Cabinets were not paragons of political virtue.  Nevertheless, when all that was wrong is given its due, it can still be said that the Hawke Governments and that Liberal and National Parties in Opposition can be distinguished from their counterparts of other times by their stewardship of the interests of the whole nation.

By September 1985, 30 months after Hawke's victory, an article in the National Times following interviews with eight of the directors of what it called "The New Right Thinktanks" included the following:

A turn-about has ... occurred in the traditional expectations of the major political parties.  The Hawke Ministry has fulfilled few expectations of a Labor Government.  The blade of Hawke's razor gang is far sharper than Fraser's ever was and Labor acts upon much that Fraser only talked about.

Treasurer Paul Keating has delivered a financial reform package that included deregulation, one of the main concerns of the New Right.

Another New Right favourite, privatisation of Government bodies such as the ABC and the Commonwealth Bank, is also publicly canvassed.

THE INHERITANCE

Before the poll the Fraser Government had been told that there was a considerable budget blow-out but had managed to keep this out of the media.  When Hawke won office in 1983 he "discovered" that he was faced with a deficit of $10 billion.  This enabled him to announce with much recrimination that, because he had been misled, he would not be able to keep many of his least responsible election promises.

The Hawke Governments inherited:  a budget deficit which eventually came in at $8 billion, serious wage pressures, 10% unemployment, a public-sector borrowing requirement of 7% of GDP, annual inflation of some 7.5%, liability to service foreign debt of 1.3% of GDP, and a currency in long term decline.  The Australian dollar had fallen from US$1.41 in 1974 to US$0.86 in March of 1983.  The trade-weighted index of our currency's worth tells a more reliable story.  Beginning at 100 in 1970 it had risen to 105 in 1975 fallen to 86 in 1980 and to 76 in March 1983.

On the positive side for the new Government, the recession had almost bottomed, the drought had broken and Hawke inherited a body of semi-established ideas, of which the Campbell Report on the financial system was the most important.  Its most difficult political task was, therefore, to gain acceptance from its own support-base.  Another significant element in politically disaster-free decision-making was that many of the arguments were on the table and the public's reactions were already conditioned by the publicity that the Dries had achieved during the Fraser years.  Nevertheless, nobody at a Crossroads meeting immediately after the mini-budget the new Government brought down in May expected that Hawke would for long be able to prevent its virtue being compromised by the unstable coalition of vested interests that he had to lead, especially the ACTU.  Eventually they were right -- all Governments fall to pieces -- but this one was to govern better for longer than anybody that weekend had anticipated.

GOVERNMENT PERSONNEL

Many remarked the quality of the new Cabinet.  Many of its members had been recruited to politics in the days of the Vietnam War protests.  One does not have to accept their analysis of the war to believe that Vietnam had motivated young idealists of high quality who in later years became available for Labor Party endorsement.

Keating was a mixture of a man, in some ways flawed, but with exceptional capacity to get Treasury's policies implemented and he made truly excellent use of the guiding back up of the Treasury team.  He could, as he so often boasted, see "the big picture".

Peter Walsh was appointed Resources and Energy Minister and then, in 1983, Minister for Finance.  In the latter role he became responsible for maintaining the integrity of the budget process.  The attributes that Walsh brought to the Finance Ministry were as simple as they are rare.  He is a genuine egalitarian;  he is intelligent;  and extraordinarily intolerant of hypocrisy.  He really did want to help people who had difficulty coping with life.  He knew that the Government could not do this if the economy did not grow and if resources were squandered upon middle-class trendies, inefficient businesses, farmers with assets often exceeding $1 million, over-manning and inefficient work practices.  Recognising the disingenuous arguments of interest groups and the partial arguments advanced for narrow causes for what these were, he could be savage.

His contempt for the Country Party predated his entering parliament.  Its sin was to nurture a culture of complaint among farmers and, posing as their allies, to offer remedies that were not in the national interest and often not even in farmers' interests.  Minor parties, the world over, tend to depend on the support of groups that, if they ceased to feel persecuted, would end the reason for the minor party.  Because it is in their interests to do so, they pump up indignation, rarely explaining hard options to their supporters.  In Australia at least, they don't represent the downtrodden.  Walsh later extended his contempt for the Country Party to the Democrats and Greens.

Hawke gave him responsibility through the Expenditure Review Committee for reviewing the financial implications of every Government policy.  He had the backing of a dry and competent department.  Although the Coalition's backbench Dries had enjoyed the support of some of Fraser's ministers, they had never had the support of anyone with as clear an appreciation of what the Good Fight was for, comparable tenacity within the inner workings of Government, or Prime Ministerial support.

When Walsh wrote a political biography he called Confessions of a Failed Finance Minister, Rolf Gerritson, in its foreword, wrote that fiscal frugality and socio-economic equity obsessed Walsh.  Walsh failed only by his own standards.  From May of 1990, upon his leaving the ministry, he published a biting and witty column in the Australian Financial Review under the by-line Cassandra.

When John Hyde had the honour of being the only Liberal invited to Peter Walsh's farewell-to-Canberra party he had the opportunity to meet for the first time several of the officers from Finance.  Their respect for Walsh was apparent;  as was their sense that they had been part of a team that had won and lost in a worthy cause.

Walsh tells me that John Dawkins, his predecessor at Finance, was as tough but had had a harder task.  John Button cared about economic efficiency and, although too inclined to address reform in corporatist ways, encouraged much industrial efficiency with commendable persistence.  John Kerin came to the agriculture portfolio with an agricultural economist's rigour and distaste for rural marketing monopolies.  Hawke was a superb team manger who ran Cabinet well and gave his abler ministers room to reform.  Hubris was to undo Hawke and Keating, as it undid Thatcher, but in the meantime much was to be accomplished.

Hawke could articulate the benevolence of reform.  Despite tiresomely emphasising the need for consensus, he proved to be a leader who changed public perceptions, if one who was content to allow his ministers to carry many of the arguments.

Like most leaders, Hawke misused his powers for ends that would not pass Revel's wide definition of politically corruption.  The allocation of television licences, the Kodak subsidy and the favoured status of the Australian Council of Trade Unions (ACTU) are examples.  He brought to national leadership the reputation of a hard-drinking loud-mouthed economically-disruptive ACTU leader.  He was widely believed to be no paragon of personal virtue.  He had a penchant for circuses such as the America's Cup.  He kept company that was seen at the time to be dubious.  He was easy to demonise and was loathed in some circles.  Despite all of this baggage, he led a ministry that consciously and successfully encouraged Australians to sublimate their interests to their ideals.  How the Hawkes and Reagans induce such behaviour and the circumstances that make it possible are among the more important so far unsatisfactorily answered questions of political science.

CORPORATISM

Hawke, however, began by instituting significant elements of a mode of governance that only half a century before had at least been associated with, if not a cause of, the descent of Italians and Germans into tyranny.  Calling it "consensus" and "accord" he adopted in practice, but not in title, much of "corporatism" or "corporativism", which had been popular in the 1930s but discredited by its association with Fascism.

Italy formally adopted corporatism from 1925.  Until then, under Finance Minister Alberto De Stefani, that nation had enjoyed liberal economic management.  De Stefani had reduced taxes, regulations and trade restrictions and had allowed businesses to compete with each other.  But his opposition to protection and business subsidies alienated industrial leaders, as advocacy of such policies has done at throughout most of Australia's history.  He was forced to resign and Mussolini then developed the corporative state in which legislative bodies are composed of delegates from vocational organisations (functional groups) rather than of representatives of political parties elected from geographic districts.  By 1939, Italian per capita private consumption had dropped below 1929 levels.  Corporativism, none the less, had found favour in Italy, Spain, Portugal and Germany and to some extent with the Franklin Roosevelt administration in the United States.  Mussolini regarded Roosevelt's New Deal as "boldly ... interventionist". ⁽²⁵⁶⁾

Denis Mack-Smith author of Mussolini wrote of Corporativism:

One of Fascism's least uninteresting contributions to economic history is the corporative system by which it was intended to replace or transcend the out-of-date ideas of liberalism and socialism.  The corporations ... were trade unions that included both employers and employees.  The expectation was that each corporation, as well as regulating its individual trade, would minimise industrial strife and mobilise productive potential in the interests of the whole community. ... This was an attractive suggestion, because a prolonged period of social peace would in theory enable Italy to maximise production and compete in international markets.

Such a harmony of interest could, in [Mussolini's] view, survive only in a fascist system where "the individual has no existence at all except in so far as he is subordinated to the needs of the state", where it would be for the state to prescribe a "just wage" instead of relying on the laws of supply and demand.

At first, a limited number of "fascist strikes" were permitted to pressurise the captains of industry into accepting state control.  Then in 1926 Mussolini created a special ministry of corporations and explained that a new corporative machinery, as well as fixing wages and conditions of work, would eventually regulate the whole economy.

Corporatism's no-more-satisfactory rival "Communism" was not to lose its ideological appeal for more than forty years after formal adherence to corporatism ended abruptly in 1945.  This essential feature of Fascism was, however, to outlast Communism, albeit in a piecemeal way.  Since the war, Austria, Sweden, and Ireland have formally included some interest groups among those with legislative authority.  In Australia, under "The Accord" that sought legitimacy by way of "summits", there was a period where the ACTU had what amounted to more than a seat at the Cabinet table -- it was a seat with veto rights.  In most western communities, Governments gave the representatives of at least unions and business preferred access to Government.

Although corporatism was almost never defended by name, its practices were.  In 1987 representatives of the ACTU toured Europe and reported to Australians in the document Australia Reconstructed.  The Hawke and Keating Governments allowed most of its recommendations to wither on the vine and a joke did the rounds that the mission had purchased, no doubt at great expense, Mussolini's lost diary.

Australia Reconstructed advocated tripartite consultative and planning bodies.  It went into ecstasies about the "successful consensus based economies" of Sweden and Austria long after the gloss had gone off at least Sweden and its GDP per head had slipped below the OECD average. ⁽²⁵⁷⁾  The consensus eulogised was not between individuals, but between unions, representatives of management, and Government.

It said,

A national agreement on industrial democracy between peak union and employer councils and the Government would provide the basis for subsequent industry and enterprise-level agreements ... Employers and unions, as a matter of priority, must (my emphasis) then reach agreement ... Legislation will also be necessary to provide a system of industrial democracy.

It called for the authority of the state to impose the consensus of the great organised collectives upon the small individuals and for a complex industry development plan, worked out between the big three but binding on everybody.  Among other things, the plan would determine investment in new product, process and enterprise development, management and work practices, and training.  The Foreign Investment Review board was to target foreign money to industries recommended by industry councils.

Sweden was performing at the time even worse than Australia.  Denis Mack-Smith had written this about how Italian corporatism worked out:

A plethoric corporate bureaucracy -- with higher salaries than the civil service and often duplicating work done elsewhere -- was already by 1930 becoming a grave burden on the national economy. ... Though lacking much substance, corporativism became a happy-hunting ground for place-seeking academics who endlessly discussed its theory and practice.  They were helped when fascist economic theory was codified by Mussolini in the "Charter of Labour". ... Every business and factory would be obliged -- in theory -- to hire labour from lists provided by the Government, and preference had to be given to Fascists.

[By 1934] an expensive and cumbersome corporative bureaucracy had become a powerful vested interest that was determined to perpetuate itself, but its functions were not clear except that it cost a lot of money and sometimes acted to clog the wheels of industry. ... Mussolini ... supplanted them with alternative agencies that often cut across each other in a constricting administrative tangle.

Corporatism is not consistent with democracy.  Every citizen is a member of some identifiable collective, but representation cannot be given to every group -- some people are, therefore, inevitably more equal than others.  In practice, only those with the ability to organise can be recognised.  In practice, corporatism is the consensus of the powerful with the most powerful possessing effective veto powers.  The ACTU, the Business Council, BHP, the AMSWU, Coles Myers, the Steel Council, the Arbitration Commission, The Australian Wheat Board, ACCOS, the various arts councils etc, etc, cannot represent rank and file Australians.

Dries, who are essentially pluralist, were consistently chary of Corporatist methods, but they were caught off-guard by events they had not anticipated.  Some of them, a bit belatedly, with their tongues only gently in their cheeks, likened Australian Corporatism to Government by guilds and the practices of Tudor England.

THE PRICES AND INCOMES ACCORD AND THE ECONOMIC SUMMIT

Like most professed socialists, the Labor Government would have liked to ease the economy out of recession by Keynesian means -- that is, by increasing demand with public borrowing and reducing costs with unanticipated inflation.  However, that was ruled out on two counts.  One was that the markets were already awash with Government paper so that more could be sold only at higher interest rates that would depress activity.  The other was that Australian inflation, which was already above that of our trading partners, was anticipated -- there was thus no possibility of monetary illusion.  Only policies that reduced real costs could work.  The Treasury was firmly anti-Keynesian.  Supply side reforms -- tariff reduction, deregulation and privatisation -- would in time raise productivity and thereby reduce unit costs, permitting higher living standards on a sustainable basis, but these policies had long lags.  The Government's only possible recourse for the shorter term was real wage reduction.

With apparent initial success, Hawke tried to control potentially damaging wage pressures by  striking the deal with the ACTU that became The Accord.  It discounted minimum wages for the 10% devaluation of 1983 and for promised social-wage policies.  The deal, which Ralph Willis had been trying to negotiate, had been signed in February as soon as Hawke won the ALP leadership.  Peter Walsh says the ACTU wished to see Hawke replace Hayden as party leader and was "at best disloyal to Hayden and at worst treacherous".  Graham Richardson confirms that view. ⁽²⁵⁸⁾  Much of the credit for turning the Labor Party from the wild-eyed visionaries who had governed from 1972 to 1975 into the party that in 1983 was fit for office must go to Bill Hayden.  He deserved better.

The accord was corporatist and Coalition Dries doubted its wisdom but they said little initially.  Corporatism was not an issue that they had adequately considered and they were in temporary disarray after the election, either having recently lost their seats or preoccupied with the immediate problems of Opposition.  What is more, they appreciated that The Accord had changed Labor Party and union rhetoric.  It formally recognised something Labor and the unions had vehemently been denying, namely, that, if unemployment and inflation were to be reduced, then the wages overhang had to be addressed.  The senior members of the ALP and the unions had not in fact experienced Road-to-Damascus conversions, rather they had found an acceptable rationalisation for what they already knew.  The union hierarchy also perceived a means of increasing its influence.  At one point, the ACTU Secretary was brought into the budget process at the Cabinet table -- a singular affront to the democratic representation of an equal citizenry.

Hawke had come to office promising "consensus".  After the rancorous Fraser years this was well received but the consensus on offer was that of the influential -- big Government, big business and big unions.  In April, less than two months after its election, the Hawke Government stage-managed the National Economic Summit.  Representatives of the Commonwealth and State Governments, unions, several large companies and organisations representing industry, farmers, miners, aborigines, welfare agencies, conservationists and ethnic communities met in the House of Representatives chamber.  The term "summit" and the venue were no doubt intended to flatter invitees whose blessings upon The Accord were sought.  It was not a representative meeting but a highly theatrical gathering of the elite.  Neville Wran, one of its better supporting cast, said its three issues were "jobs, jobs, jobs".  Nevertheless, when Labor lost office over 12 years latter, inflation was down from around 8% to 2 to 3% for reasons that had nothing to do with the Summit, while unemployment had risen from about 10% to about 11%.

The Summit's one virtue was that contributed to public understanding of the nation's underlying economic problems.  Its final communiqué was necessarily a generalised document open to a wide range of interpretation.  Some, as might be expected, gave it self-serving "spin", but others, such as the National Farmers' Federation, used the opportunity to direct attention to the fundamental causes of Australia's economic problems.  Immediately after the conference, it issued a statement reminding them of authoritative statements that precluded the belief that fiscal or monetary stimulus could address these in the long term and of the need for international competitiveness. ⁽²⁵⁹⁾

Simon Crean, then President of the ACTU, said, "the Accord was struck between two partners but its implementation envisaged tripartism." ⁽²⁶⁰⁾  It was much the most important tripartite arrangement but there were others such as the steel plan.

The business and union organisations had no mandate to trade off some community interests against others.  At Hawke's first Summit almost every force that should countervail an overweening Government sat in the House of Representatives, their cooperation cheaply purchased for a semblance of authority.  The Business Council of Australia did, however, specifically reject the tripartite approach.  It was not, they correctly said, in the "interests of a democratic market-based economy".  The consensus of the powerful usually degenerates into agreement about division of the spoils at the expense of all others.  Nevertheless, since it is the powerful that most disrupt economies, especially in a country such as Australia that was already highly corporatist, reaching agreement over the spoils can, as it had in 1920s Italy, provide short-run efficiencies.

Noting these, some commentators contended that a free labour market and one dominated by a few powerful unions could both reduce unemployment whereas the intermediate position could not.  The conventional wisdom of the time was that the Accord was delivering wage restraint at a time of poor productivity growth.  Two Treasury officers, Simes and Horne, however, threw doubt on even this by showing that:

• the greatest gains in real unit costs had been made during the period of the Fraser Government's so-called wages freeze;  and
• given the state of the economy and the high level of unemployment, most, if not all, of the reduction in real wages after 1982-83 would have occurred even if there had been no Accord.

Michael Costa and Mark Duffy wrote in 1991:

When account is taken of ... international experience, the impact of double digit unemployment in Australia in the 1980s, the rapid decline of trade union membership and the increased use of common law and other legal remedies (such as 45D of the Trade Practices Act) in the industrial arena, it is extremely difficult to credit the Accord as being the major cause of Australia's recent wage moderation.

And more significantly:

But in so far as real wage reduction is seen as "success", the criteria for judging success requires re-examination.  It is one thing to increase employment by continually cutting labour costs, but real "success" should be determined by the rate at which both employment and wages rise. ⁽²⁶¹⁾

Of course!  Hawke was successful, but not because of the Accord.  It had aimed to reduce inflation and unemployment simultaneously and signally failed on both counts.

Africans have a saying:  "When elephants mate the grass gets crushed".  Before Hawke came to office, representatives of big companies, big unions, and industries had successfully waited on, fawned on, and threatened ministers, but the rhetoric of Liberal and Labor Governments had eschewed favouritism in principle.  Hawke had tried to make a virtue of it.

Objections to the Accord concerned the longer term.  Social contracts have a dreadful record, in which the British episode that ended with the "winter of discontent" was but one failure.  Union, employer and government representatives tend in relative privacy to serve not the whole community but their own narrower constituencies.  A tripartite committee's survival depends upon it not doing anything that is unacceptable to one of its members.  Each tripartite element, therefore, holds a veto.  Inevitably they become concerned for their own continued authority.  They try to control some variables but cannot control the dependent variables.  Their economic distortions cause some people to lose and social friction, indeed anger, is inevitable.  They become a club of increasing exclusivity with its own arcane knowledge -- in Australia, the Industrial Relations Club is the most notorious.

Hawke's Accord extended Fraser's wages freeze but the benefits were short-run.  By 1986, inflation was over 9%, unemployment was 8% and the A$ traded at 60 cents US, down from parity only four years before.  Moody's downgraded Australian Government debt.

BUDGETARY POLICY

On the Sunday following the election, John Stone, the Secretary to the Treasury had presented the incoming Government with the usual economic briefing.  It estimated a $9.6 billion impending budget deficit.  Of course, Hawke and Keating had had a very fair idea that the budget was out of control.  Such things tend to be fairly open secrets.  By telling the National Press Club before the election that, if the Fraser Government's budget deficit proved bigger than expected, he reserved the right to modify the ALP's policy, Hawke, anticipating victory, had positioned himself to break his party's irresponsible promises.  His "modification" was to prove radical.

After the Keating Government in 1996 also had misrepresented its budget position, Howard promised a Charter of Budget Honesty by which the electorate is acquainted with the state of fiscal management on the day the election is called and implemented the promise on gaining office.  Some more cynical Dries ask, however, whether the nation is actually well served by a practice that denies incoming Governments an excuse to repudiate the nonsense they promise in Opposition.  In the meantime, the Hawke Governments had begun the practice of publishing the forward estimates of budget outlays.

In May 1983 Keating presented the Government's first economic statement promising to attack the budget deficit.  Edna Carew wrote:

He was heard in silence at first, but the interjections mounted as he read the tougher parts.  Hawke smiled throughout the hour-long presentation of the statement that signalled the birth of Labor's economic rationalists. ⁽²⁶²⁾

John Hyde had lost his seat at the 1983 poll and he listened on the radio with a weird mix of delight and shame.  For the first and almost the last time Hyde wished he had been back in the House to soak up the atmosphere, sitting on the backbenches free to cheer when his colleagues groaned.  After the dreadful 1982 budget Hyde had called on the Government to bring down such a statement, to run full term and to hope.  Mice, however, roar to such little effect that the Government had added a further $300 million to the projected deficit.

Keating's mini-budget was for the main part a catalogue of expenditure savings and eliminated tax breaks that the previous Government should have made.  What was more, the savings benefited future budgets.  Rushed and inadequate to the task though it was, it was far better than the puerile efforts of our Razor Gang.  Along with smaller savings, it undertook to means test the over-70s pension and, in spite of union opposition, to start to take away the benefits of occupational superannuants who got two bites, so called double dipping.  In effect, it scrapped the Commonwealth commitment to the Darwin to Alice Springs rail line and the bicentennial water program, capital outlays that could not have withstood rigorous cost-benefit tests.

Following the rhetoric of the May statement, the 1983/84 budget figures were disappointing but that budget did introduce an assets test on the pension and extend the incomes test to people over 70.  As existing benefits were preserved (grandfathered), the gains accrued to future budgets.  This Government was looking ahead!  Over furious union opposition, it taxed lump sum superannuation payments.

The 1984/85 budget increased commonwealth outlays to a record 31.1% of GDP. ⁽²⁶³⁾  Nevertheless, by taking advantage of annual economic growth of about 4% and by discipline, the deficits were turned to substantial surpluses in 1987/88, 88/89 and 89/90, only for that advantage to be squandered at the end of the decade.  By 1989, Commonwealth outlays had been reduced from 29.9% at the time of the last Fraser budget to 24% of GDP. ⁽²⁶⁴⁾

Governments find expenditure discipline difficult.  Every outlay has champions.  Some ministers are team players giving up their preferred programs in favour of an agreed bottom line.  Others defend their departments' empires with spurious arguments or advance token or phoney cuts that yield little or nothing.  Rarely can the necessary savings be made from a few dramatic cuts.  Unlike businesses, Governments do not have a simple goal.  In politics, personalities and ideological preference always intrude.  Australia was fortunate in Peter Walsh.  Three contrasting examples, each taken from his memoirs, illustrate budget trimming.

For political reasons, Labor grandfathered the pension rights of those already in receipt of a pension but it did deny the asset- and means-tested free benefit to future applicants.  When Labor won the following election it gave the lie to the political myth that a Government cannot take away a pension right and expect to survive.

To encourage Australian filmmaking, investors had been permitted by the Fraser Government to deduct 150% of their investments from taxable income.  Many of the resulting films were commercially unsuccessful.  To a chorus of screams from the arts community, this was reduced to 133%, to125% and finally to 100% with a $90 million budget subsidy in 1988.  The $90 million was phased down in later years. ⁽²⁶⁵⁾

The wine industry had long enjoyed the favour of Federal Governments, a favour that much displeased the more heavily taxed beer and whisky manufacturers.  As working-class people tend to be the beer drinkers, the tax differential between beer and wine was regressive.  Fraser and some members of his backbench and ministry had fancied themselves as wine buffs.  To listen to them talk was to get the impression that they believed that improving the quality of Australian wine was a moral imperative, justifying the picking of winners.

In the face of predictions that the industry would be destroyed, the 1984 budget provided for a 10% sales tax on wine. ⁽²⁶⁶⁾  At the following election, the Barossa Valley was one of the few places that the Labor vote actually increased and the wine industry has prospered.  Ironically from his point of view, the wine industry has in fact been a spectacular winner.  The captains of industry complain that politicians in Canberra know little of the real world.  There is some truth in that criticism but the main reason that industry captains are not listened to is that politicians have difficulty sorting their truths from the lies.

Some outlays came from left field.  A Repetitive Strain Injury (RSI) epidemic started in the Victorian Division of Australian Tax Office.  For some time the Murray River seemed to be a barrier to its spread but once in NSW it spread as rapidly there as it had in Victoria.  It was seven times more prevalent in the public sector than in the private and the Clerical and Administrative Officers Association was no doubt a significant vector.  The episode demonstrated the unwisdom of asking doctors to protect taxpayers.

Others were built into the system.  One of these was ever-increasing transfers to the Northern Territory administration.  Another was the rules of MPs retirement allowances enacted in 1979 and known unofficially as the McMahon/Cameron amendment after its principal sponsors.  It allowed MPs of any age upon retirement or defeat to commute their entire pensions and for a surviving spouse to receive 5/6 of the would-have-been pension upon the ex-MP's death.  Labor was able to do something about the Northern Territory but, because caucus support was wanting, the second was to haunt the Howard Government years later.

Peter Walsh tried to get his party to accept that free tertiary education was a middle-class rip-off and that tertiary fees should be reintroduced.  Initially the idea was rejected but in due course the HEC Scheme, which gave tertiary students access to subsidised Government loans with which to pay heavily subsidised fees, was adopted.  Fifteen years later the Howard Government could not muster the courage to apply a means-tested commercial rate of interest to HEC loans.

During the 1984 election campaign, Hawke promised the electorate that expenditure, the deficit and revenue would not be increased as a proportion of GDP in the life of the next parliament -- "the trilogy".  The tax cap was broken in each of the three budgets but, as in several OECD countries of the time, expenditure and the deficit were reduced.  The dry fiscal agenda was becoming de rigueur electorally and the 1985 budget saw what was the beginning of a period of exceptional discipline that was given greater effect the following year and greater again the year after that.

In 1986 a currency crisis had salutatory consequences.  When the budget had been almost put to bed, the Expenditure Review Committee returned to budget cutting.  To appease the financial markets it aimed for zero real expenditure growth. ⁽²⁶⁷⁾  In the event, Commonwealth real-terms outlays came in at 0.2% negative and as a proportion of GDP 0.7% negative.  The deficit was reduced to 1% of GDP.  The introduction of an "administrative charge" for higher education was one of the late savings.  It returned only $58 million to the Treasury but was an important first step toward more equitable and more efficient higher education -- an important dry gain.

The political climate for tougher fiscal action had been achieved and by the time of the 1987-88 budget the Hawke Governments had cut $2.5 billion, net of new commitments, from outlays.  The discipline produced a budget surplus that, with a recovering economy, rose to 2.2% of GDP in 1989-90.  That was, however, according to Walsh, to be the last year of rigorous fiscal discipline.  In defence of that contention he cites the Family Allowance Supplement that followed a rash promise by Hawke that no Australian child would live in poverty.  It had not been thought through and, "for feminist ideological reasons related to the supporting parents' benefit", the Government set the income cut off point not far below average weekly earnings.  It was so badly designed that its withdrawal combined with the withdrawal of Medicare benefits caused there to be a point in the tax scale where an income increase actually caused taxpayers to have 10% less to spend -- an effective marginal tax rate of 110%. ⁽²⁶⁸⁾

The 1987 budget, that had provided for approximate balance, in the event, produced a surplus of a little over $2 billion.  The May 1988 Economic Statement reduced outlays by 1.5% in real terms but principally at the expense of the States. ⁽²⁶⁹⁾  Otherwise it focussed less on outlays but it did end fertiliser subsidies.  This saved only $50 million but it was significant because the National Farmers' Federation accepted the cut without complaint as part of the Government's drive to lower protection.  Other sectional lobbies, if put to the test, might behave as well.

At first, the 1987 budget was reported almost entirely in terms of the Government's choosing, but a week after it was delivered Walsh let fly in public saying what might have been.  The burden of his remarks was that more fiscal restraint was needed if Australians were to be reasonably sure that the debt would not become insupportable.  He raised the spectre, in the event of poor commodity prices, of the International Monetary Fund knocking on our door.  Many sources including the think tanks and the Leader of Opposition had made the same point and back-of-an-envelope calculations could confirm its approximate truth.  If these had been widely reported Walsh would not have felt a need to speak out, yet he was roundly criticised by the media, not for being wrong, but for speaking out of turn.  Amid all the speculation about the political consequences of his words, their truth or falsity was barely discussed.  The media told them that Walsh had put an end to the budget's dream run.  They reported Mr Keating's anger on the front page as though the state of his liver mattered more than economic prospects.  Senator Walsh's effect upon the morale and electoral prospects of the Government, the Opposition, and his own prospects was written about at length and well, yet it did not occur to editors that, while who governs is important to politicians, how they govern is more important to the rest of us.  Journalists remind us that informed evaluation by a free and competent press is central to democracy;  it is a great pity that they so often do not provide it.

The 1988 budget provided for a surplus of $5.5 billion that was achieved, and the 1989 budget sought a surplus of $9.1 billion ⁽²⁷⁰⁾ that fell only $1 billion short.

The Government was, in Peter Walsh's judgement, by then reaping the rewards of past discipline.  During this period of high Commonwealth surpluses Australia experienced the highest employment growth since reliable records had been kept.  It was a time when the worldwide economy faired well, nevertheless, so much for Keynesian pump priming.  John Hyde recalled a briefing by John Stone at which he had asserted that, if Fraser were to cut the deficit, employment would almost certainly improve.  Hyde also recalled his misplaced scepticism.

The extent to which fiscal discipline deteriorated is demonstrated by an episode concerning the taxation of part-pensioners.  The 1989 budget included a statement that beyond 1995 no aged pensioner would pay tax.  It was an irresponsible promise because its cost to revenue was excessive and it would have meant that some people owning a house, a car, $170,000 in the bank and a cash income of $31,000 would be exempt from tax.  It was disingenuous because no Government would deliver such nonsense.  The promise re-emerged during the 1993 election campaign but received only four lines of press and was not noticed by the Opposition.

In constant 1984-85 dollars, the last McMahon budget had spent $2700 per Australian, the last Whitlam budget:  $3450, the last Fraser budget:  $3650.  The 1989-90 Hawke budget had called for per capita expenditure of $3800.  The election campaign, nevertheless, committed Labor to new expenditure of only a small $346 million in the first year "all ostensibly offset by either savings or revenue enhancement." ⁽²⁷¹⁾  Because of the coup by which Peacock took the leadership of the Liberal Party from Howard and revelations about how it was conducted, Hawke did not fear losing the election and was not as tempted to make populist commitments as he might have been.

With the economy in recession the 1990 budget, however, called for a 4.9% increase in real outlays and produced a surplus of only $1.9 billion, down from $8 billion in the previous year and $5.9 billion two years before.  In 1991-92, real outlays were increased by a further 5.4%, although only a 2.6% increase had been budgeted.  In 1992-93 they were increased again by a further real 5.6%, most of it having been caused by decisions taken in the previous year.  Peter Walsh wrote of the period:

Aggregate outlays figures, especially year on year, can be distorted by asset sales, capital repayments, classification changes, one-off payments and, of course, the business cycle.  But even after allowing for all of those the early 1990s were an undisciplined period. ... ⁽²⁷²⁾

He was in a better position than most to comment.

As the economy slid into recession, the fiscal prudence of earlier years had stood by the Government but too much of the new expenditure called for on-going outlays and too much had too little to do with economic activity and employment.  For instance, the Human Rights and Equal Opportunity Commission had its budget increased from $7.7 to over $17 million during this period.  The Better Cities program, to cost $650 million over four years, was founded on the false premise that people did not wish to live in the outer suburbs and called for expenditure well beyond the likely duration of the recession.

THE FINANCIAL SYSTEM

Treasury's 1983 post-election briefing had informed the new Government that in expectation of devaluation $3 billion had left Australia in five weeks, $2 billion of it in the last hectic days of the campaign.  The Government responded with a 10% devaluation.  The extent, if not the fact, of the outflow was probably a surprise.  Like the then projected $9.6 billion deficit, the devaluation was employed by Hawke to justify repudiating populist election promises.  There was a "crisis" and caucus would just have to wear its consequences.

John Hyde doubts whether members of the 1983 Cabinet could today say to what extent they were creatures of the circumstances and to what extent they exploited them to provide the sort of Government that they wanted.  It hardly matters.  They acted skilfully as well as responsibly and were able to distinguish good advice from bad.

Defending the currency had not been an option.  The issue had been by how much to devalue.  Although the devaluation stopped the immediate capital flight it could not prevent future speculators reaping easy profits.  That banks should make easy profits was anathema to caucus.  Not wishing again to be faced with a similar situation or its converse, an up-valuation, either of which would leave a Government with no option but to confirm speculators' profits and Reserve Bank (ie. public) losses, Hawke took a further step toward a freely floating currency.  He introduced a "moving peg" by which at the start of each day the Reserve Bank announced the price at which it would buy the $A and another at which it would sell.

In Opposition, Labor had damned the Campbell Committee Report but the Treasurer now announced the formation of the Martin Committee to review it and to recommend policy for the financial system.  The Martin Committee was, as Keating himself said, intended to get the Campbell debate back on the table. ⁽²⁷³⁾  Expressed more cynically, it was intended to present Campbell's recommendations in a light that Labor could accept.  Martin reported in February 1984.

Two months before he reported, however, the Government dramatically floated the Australian dollar and removed all exchange controls except those concerning a few tax havens.  The Fraser Government had already removed controls on several important interest rates including bank deposits.  Changing technology, the international affiliations of the merchant banks, and access to the international banking system enabled immediate transfer of very considerable sums.  The "peg", although it prevented the currency getting way out of line, did not prevent all one-sided speculation.

Some economic irrationalists argued that, if the currency had not been floated, then exchange rate risk was eliminated -- as if Canute could have stopped the tide!  The choice was between an $A changing its value minute by minute or changing in larger licks periodically.

Floating the dollar gave the Reserve Bank better control over domestic monetary policy and ability to protect Australia against imported inflation.  Even so, the irrationalists argued that Australia was giving away control over domestic policy.  In a perverse way they made a point.  Most obviously, a floating currency tends to signal that a Government has set interest rates inappropriately or spent profligately -- not uncommon pre-election behaviour.  Moreover, over a slightly longer run, all forms of irresponsible or corrupt Government tend to be reflected in weakening currencies.  After all, the wise currency trader tries to factor in everything that will affect future economic performance and there is little that is more important to that than the quality of Governments, and Oppositions too if they look like winning.  Thus a floating currency tends to more quickly expose all bad governance including the nasty little deals between Governments and vested interests that so weaken economies.  Floating currencies deny policy-makers as much separation of cause from effect as is afforded by fixed exchange rates.  They, consequently, find it more difficult to do unconscionable or foolish things.  It was a pity that the irrationalists had not explained themselves more fully.

Nevertheless, because the Australian dollar is so heavily affected by our terms of trade -- that is, the ratio of the prices at which we buy and sell in overseas markets -- too much that is political should not be read into every movement.  All a Government can do to improve the terms of trade is to deregulate and remove trade barriers, allowing us to adopt the activities that offer the best possible terms, and to improve productivity wherever it can.  At the political level, the float obviated attempts to hold the dollar at inappropriate levels and unseemly arguments such as had occurred prior to the 1972 election and after the 1975 election.

A market-determined currency had been recommended by Campbell and it was, be it admitted, mainly on this count that it was preferred by most Dries, although they had maintained a consistent scepticism of the ability of committees to determine any price including that of money.  Today few people question the wisdom of floating the dollar but at the time the policy change was viewed with trepidation by some, including the Secretary to the Treasury.  A rate of exchange fixed to any reliably-managed widely-traded currency, such as the US dollar, or a common currency such as the Euro, is not necessarily wet.  Indeed, such policies place great pressures on Governments to manage their micro-economies well if they do not wish to suffer a flight of capital and ultimately of even their citizens.  New Zealand has experienced this effect.

Although the timing of the float and abandoning of exchange controls had been determined by events, their fact had not.  Under Hawke and Keating, the Government and the Reserve Bank with its dry governor, Bob Johnson, were actively working toward an A$ valued by the market.  In October some technical changes had been made and the forward market had been de-controlled.  Deregulation was being pursued methodically and persistently.  During the year following the float the Treasurer wallowed in more praise than normally surrounds any peacetime politician.

Nevertheless, by mid-1984 the A$ had fallen heavily. ⁽²⁷⁴⁾  Keating cited the declining dollar as evidence that further reform was needed.

In January 1984, the Government invited foreign banks to apply for Australian banking licenses.  In June it announced that 40 non-bank financial institutions could deal in foreign currency.  In August, it permitted banks to pay interest upon cheque accounts and on funds taken for less than 14 days, lifted the foreign investment guidelines for merchant banks and raised the maximum individual shareholding in trading banks from 10% to 15%.  It also abolished the so called 20/30 rule that required life insurance and pension funds to hold 30% of their assets in public securities and 20% in Commonwealth securities.  In September, applications were called for further bank licenses ⁽²⁷⁵⁾ and, in February 1985, the Treasurer announced Government approval of 16 new trading bank licences.  The Martin Report had recommended six but Keating regarded the greater number not as selling out to the financiers but as bringing much needed competition to them from which borrowers and lenders could but benefit. ⁽²⁷⁶⁾  In April, Keating announced the deregulation of small bank loans, leaving only bank housing loans regulated. ⁽²⁷⁷⁾

In April 1986, interest rates on new home loans were finally deregulated.  This was a major victory for Keating.  It also vindicated Howard who had long argued such a course. ⁽²⁷⁸⁾  During the next year, restrictions on foreign investment in insurance and stockbroking were removed.  In January 1988, the Government lifted the foreign investment guidelines on investment in oil and gas projects. ⁽²⁷⁹⁾  The Campbell recommendations were almost all in place.

Edna Carew wrote quoting Paul Keating: ⁽²⁸⁰⁾

[Keating] explained moves to deregulate the finance industry and reform the tax system as part of Labor's strategy for achieving economic growth;  they were not, as some had accused, a sign that Labor was adopting conservative, right-wing thinking.

I maintain today that in continuing this growth objective, the Hawke Labor Government is operating completely in concert with the tradition of the Labor movement ... in adopting practical, pragmatic measures to create growth and jobs, the Labor Party of 1985 is doing nothing out of the ordinary from what the Labor Party in Government has sought to do throughout its long history.  Those who allege that the current administration has questionable Labor credentials fail to understand the very essence of the Labor tradition and have been misled into thinking that the views and objectives of that developed in the party's aberrant period of the 1950s and 1960s more correctly reflect the party's true direction.

Keating was disingenuous in his exclusion of the 1970s but, given the political exigencies, he may perhaps be excused that fudge.

TAXATION

Labor had been highly critical of the Fraser Government for allowing income tax avoidance, implying that the Government had been in bed with wealthy mates.  It, however, despite union opposition, began its own attacks on tax avoidance by taxing newly accruing lump-sum superannuation payments at 30%. ⁽²⁸¹⁾  Reducing tax minimisation is, moreover, like squeezing a balloon -- each area of correction encourages new avoidance techniques to bulge out elsewhere.

After the "success" of the economic summit in April 1983 the Government organised a Tax Summit at which three (of an original nine) alternative proposals for a reformed tax system were considered.  The Treasurer championed "Option C" calling for several measures to broaden the income tax base and for a 12.5% broad-based consumption tax.  This was defeated by the clamour of interest groups and Hawke's fear of the electoral consequences.  Because the business community were known to be the main proponents of tax reform, when Bob White on behalf of the Business Council demanded more than business deserved or might reasonably expect, others, most importantly the ACTU, were quick to follow and any workable package was dead.  Hawke abandoned his Treasurer and "Option C", stitching up a deal with Simon Crean and Bill Kelty.  It was not his finest hour!

Many people, among whom John Stone is one, fear consumption taxation because they do not trust Governments with easy revenue.  However, the welfare sector's opposition to a consumption tax, accompanied by compensation for low-income people so that the package is not regressive, was not as easily understood.  A bigger, better-financed welfare sector is more likely to be achieved with a bigger, better-paying tax base.  Its representatives' objection can have been neither to indirect taxation nor to regressive taxation.  The tariff is both indirect and regressive and the most regressive taxes are those levied on cigarettes, beer and poker machines.  The motives of those who selectively object to indirect taxes must be questioned.

Like the cast of a Greek tragedy, Tax Summit participants remained true to their flawed characters destroying something that most of them wanted then or came to want within a few years.  Keating should have anticipated the selfishness and political incompetence of the business community -- the heavens know that federal politicians often remark upon both.  Yet, while he worked in detail with the ACTU, he did little to ensure that the business sector did not destroy his summit in a manner that was foreseeable.

Although the Tax Summit agreed on little else, it reaffirmed that the Australian tax system was a mess needing radical reform, and the Government spuriously claimed a mandate for "Option A".  This proposed taxing the advantages of negative gearing of rental property, fringe benefits, real capital gains, income earned from gold mining, and inheritances, and imposing tougher substantiation rules for tax deductions.  Howard had supported "Option C" from the Opposition benches and Hawke and Keating ought to have appreciated his integrity.

In September 1985, the Government announced a package that contained the revenue enhancing measures of Option A, principally the fringe benefit, negative gearing, and capital gains taxation provisions, but not death duties or income earned from gold mining.  The package also reduced income taxes in two steps taken at 1 December 1986 and 1 July 1987.  It, however, raised taxpayers' already high compliance costs.  The Government raised the company tax rate from 46 cents to 49 cents and provided that income taxes paid by companies (company tax) would be allowed as credits against dividend income in shareholders' hands.  Dividend imputation, as this last provision was called, effectively ended the double taxation of most dividends.  The negative gearing measures were reversed in 1987.

Graham Richardson wrote:

To salvage this from the wrecked tax cart of a few months previously was Keating's finest hour. ... Unpalatable medicine was credible for the first time in my political life:  if times were tough, we did not have to promise rose gardens.  The rules of the game underwent fundamental change, and Australia actually began to see that promising a big bag of lollies every election wasn't the only way for political leaders to behave. ⁽²⁸²⁾

Although John Hyde believes Richardson exemplified much that was wrong with Australian politics few doubt his appreciation of political advantage.  By argument and example the Government had in remarkably short order changed the way the public viewed public policy.

The tax changes were important, but what were Dries to make of them?  They differed on the loss of the broad-based consumption tax.  To this day, some believe that consumption taxation offers profligate Governments too much money too easily while others believe that its alternative, income tax collected at high rates, has compliance costs that are too high and is too easily avoided to be tolerated.

They were unimpressed by the promise of income tax cuts.  First outlays should be controlled and there was then still a deficit at a point in the business cycle when the budget should have been in surplus.  They further deplored the practice of announcing tax cuts for future budgets -- time enough for those when it is known that they can be afforded.

Dries were agreed that revenue should be raised by a tax system that was as neutral between economic activities as possible.  They were not, therefore, to be heard joining the general clamour opposing the fringe benefits tax, the taxing of real capital gains and the taxing of sub-contractors' incomes at source.  They, however, protested the deal with the unions to tax fringe benefits from the employer rather than the recipient of the benefit.  (In the long run it makes little difference where the liability rests but in the short run it increased costs and unemployment.)

From the dry perspective, the big gain was the item that did not arise from Option A, namely, elimination of the double taxation of dividends.  This was an important step in the direction of economic neutrality and hence efficiency.  It also, moreover, was a measure affecting only future budgets.

The summit both advanced and set back the course of tax reform.  It did much to increase understanding of both tax and politics.  When John Hewson advocated what was essentially Option C, Keating would employ his appreciation of the forces that could be marshalled against tax reform with breathtaking cynicism.  ACOSS eventually came around to the common sense opinion that its clientele would benefit from a consumption tax.  The BCA learned that blatant pursuit of business interests ahead of those of the Australian community can foul its nest.

Finally, in 1990, gold was brought into the standard tax net.  Peter Walsh's comments are too good not to quote:

Despite steadily falling real prices, gold production is higher now than it has ever been.  As usually happens when Governments take on the spivs, rent-seekers and special pleaders these were proven wrong. ⁽²⁸³⁾

Few of those John Hyde most clashed with over gold tax were spivs, but rent-seekers and special pleaders they certainly were.

In 1988, the Treasurer used the by then customary May Statement to announce a cut in the corporate tax rate to 39% and the taxing of income earned from superannuation funds. ⁽²⁸⁴⁾

WELFARE

The ratio of people in receipt of unemployment benefits to those recorded as unemployed in Australian Bureau of Statistics surveys had risen from 94% to 116%.  It was to peak at 124% one year later.  It seemed that a lot of the people collecting unemployment benefits were either employed or collecting more than once.  All that the Government did at this point was to require dole recipients to collect their benefit in person.  This simple measure saved the taxpayers $600 to $700 million dollars per year or $1000 million if the calculation is made using the 124% figure. ⁽²⁸⁵⁾

A year later Labor took further strides towards needs-based welfare by abolishing unemployment benefits for 16 and 17-year-olds, means-testing family allowances and welfare payments and scrapping some costly and ineffectual short-term job creation schemes.  Keating was praised by the media for being tough but fair, as indeed the package was. ⁽²⁸⁶⁾  Labor won the Federal election only eight weeks later.

This package had borrowed heavily from leaked Opposition policy documents and also it gave staff at the AIPP the opportunity to tick off several recommendations it had made in Mandate to Govern. ⁽²⁸⁷⁾

BANANA REPUBLIC

During the second half of the 1980s Australia's terms of trade turned sharply down, the current account deficit was 6% of GDP and the Australian dollar slid below US60 cents and a trade-weighted index of 50.

Within a few weeks of his retirement as Secretary to the Treasury in August 1984, John Stone told of how Professor Shann had warned Australians in 1927 that mounting debt was about to plague them as it had in the 1890s crash.  The parallels drawn first by Shann and extended by Stone were sobering and of a type that were readily appreciated by lay-people.  Dries agreed that, if the capital inflow that was the counterpart of the current account deficit financed investments that would remain profitable in hard times, then it was probably a good thing that Australia could attract it.  Many, however, believed that in the 1980s it was being diverted, via the tax and welfare system, protected industry and the sloppy business practices now known as "the 1980s excesses", into current consumption and poor quality assets.  Australians' unwillingness to save worried everybody.

Fears about the ability of the Australian economy to service its mounting debt put pressure on the Australian currency.  As the A$ fell against the US$, the cost of servicing those debts denominated in US$ increased.

In May 1986, John Laws interviewed Keating on radio.  Keating warned of Australia becoming a banana republic.  It was gross hyperbole for which he was roundly criticised.  The situation was serious but Australia was far from becoming a banana republic.  He no doubt had a more spectacular effect than he intended, which was probably nothing more than to generate a sense or urgency.  A run on the dollar and a spat with the Prime Minister, nevertheless, proved passing phenomena, while the effects of the exaggeration upon business lobbies, the trade unions, the states and the caucus were more lasting.  In the short run, by moderating union demands, it avoided some unnecessary unemployment, and enabled Keating to take a tougher stance with the Premiers and the big spenders in Cabinet and caucus.  When in August Moodys downgraded the Australian Government's AAA credit rating the message was reinforced.

Australia's problem was chronic, not critical.  In the unlikely event of our continuing to ignore it as we accelerated down what becomes a slippery slide, we would have eventually ended up with the sort of economy suffered by some Latin American states.  John Hyde has sufficient confidence in the Australian electorate to think that, as we approached banana-republic economic status, we would have found our own Margaret Thatcher or Roger Douglas.  There was, however, no good reason to await that day, courting the risk of war or global depression precipitating a real economic crisis.

In spite of his own and others' doubts about its wisdom, ⁽²⁸⁸⁾ Keating's banana republic interview enhanced his beneficial influence.  By overstating his case at a critical point he changed Australians' appreciation of their real long-term problem.  If intentional, it was courageous and contrasts with the damage to public understanding that he was to do during the 1993 campaign to defeat Hewson and Fightback and his later loose fiscal management.

Four months after Keating's banana republic comment, the International Monetary Fund sent Helen Junz to report on Australia.  She reported in February of 1987 painting a fairly black picture of uncompetitive industry, fleeing capital and rising foreign debt and was particularly critical of the slow pace of productivity-enhancing reforms, condemning wages policy and the Accord. ⁽²⁸⁹⁾

TRADE AND INDUSTRY POLICY

The Hawke Governments' most principled and courageous reforms were with trade and industry policy.  Nevertheless, despite their denying privileges to industries, they on three occasions gave substantial privileges to individual companies.  When the Prime Minister, without prior reference to Cabinet, promised $60 million of the taxpayers' money to Kodak, a company in his own electorate, his lapse from principle was on a par with the Woodsreef episode by the Fraser Government.  Neither did the 1992 subsidy to a German company for a wool-scouring plant in Geelong or the $30 million paid to assist Du Pont to buy out Fibremakers' textile operations stand to Hawke's credit. ⁽²⁹⁰⁾  Despite these lapses his Governments' record is impressive.

John Button developed adjustment packages for separate industry constituencies.  The most important of these was the so-called Button Plan for the motor industry of 1984 when by persuasion, threat (made credible by the Hawke/Keating tariff reductions) and selective subsidy (bribery) he induced management and unions to accept changes in investment and work practices.  The initial reforms were no doubt rather obvious, but a drier minister might have doubted his capacity to tell industry and union managements how to do their respective jobs or used his powers to give effect to their wishes.

Button possessed a delightful candour illustrated by his statement to the Senate of 5 June 1987:

The Australian TCF [textiles, clothing and footwear] industries are still protected by quantitative restrictions in addition to tariff duties which are extremely high by comparison with those assisting most other Australian industries. ...

The high level of protection around these industries has probably diminished their entrepreneurial and competitive spirit.  A significant portion of the industry has chosen to concentrate in areas in which they are least competitive on the world scene (ie the low cost, standardised products in which low wage sources predominate.) ...

An unfortunate feature of the industries has been their dependence upon Government decision-making.  I recognise that this has in part been fostered by Government's willingness to provide support almost whenever requested by the industry.

This Government is prepared to face up to its responsibilities in respect to past mistakes in policy for the TCF industry.

In contrast to Button's industry plans, there was little corporatist about the Treasurer's May 1988 economic statement.  At that time the IAC estimated that protecting the TCF industries alone imposed a regressive annual tax of $1.5 billion.  Passenger motor vehicle (PMV) protection was probably less regressive, but it taxed at a similar magnitude.  The 1987-88 IAC Annual Report quantified the taxation effect of all protection at a massive 6.2% of household expenditure.  These taxes did not appear in the budget and they did not finance public expenditures.  They were paid through higher prices to privileged shareholders and employees -- in the case of motor vehicles to foreign shareholders.

Taking advantage of the "protection" afforded local manufactures by the declining value of the A$, the Government announced reduced tariffs.  All industries that enjoyed tariffs above 15%, other than PMV and TCF, would have these reduced to 15%.  Tariffs between 10% and 15% would be reduced to 10%.  It was announced that PMV tariffs would phase down to 35% and TCF to 55%.  PMV quotas would be scrapped.  The package was sweetened by reducing the company tax rate from 49% to 39%. ⁽²⁹¹⁾  Tariffs were reduced across the board and by pre-announced modest steps as Dries had always recommended.  It was a bold move opposed by trade unions but consistent with the egalitarian traditions of the Labor Party.

The 1987-88 IAC Report was able to report the first real progress since the 25% tariff cut.  The 6.2% consumer tax imposed by protection was expected to fall to 4.4% by the mid-1990s as a result of the then current programs of assistance reduction.  Gutsy political leadership had changed the protection debate from arguments about whether protection should be reduced to arguments about "how fast".  The next IAC motor vehicle inquiry (1990) would receive a joint submission from the car industry that accepted further tariff reductions but pointed out cost impediments to manufacturing in Australia, many resulting from Government policies.

Had the PMV quotas continued, new uneconomic practices would have grown up.  As it was, the car industry's capacity to pass costs to other industries had been much curtailed.  Because the Yen was the currency that most affected the car industry and the industry had benefited from real effective depreciation of the A$ against the Yen of some 40%, a 22% tariff reduction was not as brave as it looked.  Nevertheless, it was a huge step.  The Opposition, the companies and the Vehicle Builders Union all reacted in a responsible manner.  That the last two did so reflected credit on Button's negotiating skills, Keating's rhetoric and patient explanation by the IAC and the dry economists then advising the industry.  Leadership had taken the debate a long way.

Button's second reading speech to the Textile, Clothing and Footwear Development Authority Bill (part of the corporatist baggage) very properly told the TCF people that their plan was not immutable.  Senator Austin Lewis who led for the Opposition departed from the Opposition's mostly responsible approach, saying that it was "Australia's fault" that wages were high.  He seemed not to understand that the Minister's aim was a low-cost industry that would sustain high living standards, rather than low personal incomes that would sustain an otherwise uncompetitive industry.  From a dry perspective industry plans were not the ideal way to proceed but Button's goal was without doubt the right one.

Although Button's steel plan, discussed in Chapter 6, probably delayed the inevitable closure of the Newcastle steel plant, many count it a success.  When Labor won in 1983 the industry was in a sorry state.  Although its condition would eventually have forced drastic action upon even BHP's management, the press and Peter Walsh, who is fairly hard headed about such matters, credited Button with persuading the company to undertake a major investment program and the unions to accept elimination of the worst of the overmanning.  The Government introduced a potentially expensive steel production bounty that John Hyde regarded with horror.  Subsidies were, however, inversely related to sales and ultimately cost less than expected.  Within three years, production had increased by 50%, but productivity was still 23% to 30% below the best overseas mills.  The economist with the Business Council, Peter McLaughlin, said, "The virtue of the steel plan in BHP was that it helped in the initial stages to transform attitudes but it became, before the end, dead weight". ⁽²⁹²⁾  Hyde suspects he was right on both counts.

Button also persuaded the States to abandon their costly State-preference arrangements. ⁽²⁹³⁾

The Hawke Government commissioned two reports that advanced the case for an open economy.  Helen Hughes reported on exports and barriers to exporting, stressing among other things the want of an export culture.  She painted a picture of our children taking table-waiting jobs in Singapore.

The other, Australia and the North East Asian Ascendancy, the Garnaut Report, was one of those few reports that, like Brigden and Campbell, determined a significant part of the future.  Ross Garnaut, academic, former Ambassador to China and Prime Ministerial adviser, was asked to:

recommend on policy and other responses which would increase the economic, political and wider benefits and reduce the costs to Australians of East Asia's continuing economic growth and structural change.

Garnaut had engineered the opportunity and he did not waste it.  That his report came down in the wake of the collapse of the Berlin Wall added to its impact.  Although nominally about Australia relations with China (and Taiwan), Japan and Korea, its most important policy recommendations would have benefited Australia had North East Asia been irrelevant.  Garnaut asserted:

... the beginning of internationalisation and liberalisation of economic life has established an economic, political and intellectual base from which, for the first time this century, it is possible for Australians to seek first best outcomes. ... The tide has turned through the 1980s, although we carry still most of the dead weight of a protectionist past. ... Through the 1990s, Australians ... will choose whether they step out in new, more hopeful directions. ... There is no inevitability of success.

From 1974 the promise of the late 1960s descended into almost a decade of stagnation, high and rising unemployment, inflation and disillusionment. ⁽²⁹⁴⁾ ... Australia's advantages are this time a wider community perception of the magnitude and complexity of the task. ... The danger is that Australians will think too soon that they have changed enough.

... we have relevance to international discussions affecting our future, but not the capacity to secure objectives through the exercise of national power.  As a middle power we must rely on persuading other countries. ...

A ... theme ... upon which all others depend is that we must accelerate progress in domestic economic reform, to build a flexible, internationally-oriented economy. ... Of greatest direct relevance are the needs to press ahead ... towards the abolition of all official restrictions in trade imposed at Australia's borders. ...

Garnaut emphasised that Governments that acceded to the clamour of vested interests were in fact weak.  Strong Governments concentrated upon their responsibilities as umpires.  Delivering a Shann Memorial Lecture at the time when the "excesses of the eighties" were becoming apparent, he asserted:

Enforcement costs of market-conforming behaviour are extremely high unless the operators of the state, and powerful participants in the markets, operate within an ideology that values market-conforming behaviour as a virtue. ... the declining moral legacy of the West has created problems for the continuation of capitalist development.  The weakening ideological support for self-restraint in maintaining the rules of the marketplace has required more explicit, extensive and expensive enforcement of the rules by a strong state.

The Garnaut Report called for free trade for every industry but textiles, clothing and footwear, to be achieved by gradual reduction to the end of the century. ⁽²⁹⁵⁾  Bert Kelly had warned John Hyde always to talk of "freer trade", never "free trade", lest he ask too much of his limited stock of credibility.  Attitudes had by now been changed radically and Garnaut asserted "We are making bad mistakes if we stretch them out beyond that time". ⁽²⁹⁶⁾

The tripartite Australian Manufacturing Council (AMC) commissioned Pappas Carter Evans and Koop to write an appropriately corporatist winner-picking alternative to Garnaut.  Even it, however, accepted the tariff reductions that had already been announced and reduction to levels comparable with those of most Western nations.

Garnaut influenced the March 1991 Economic Statement and contributed to Government rhetoric and public expectations.  Despite the recession then prevailing, the Government reaffirmed its intention to open up the Australian economy.  Other than strengthening rather than weakening anti-dumping measures, it endorsed the Garnaut approach rejecting that of the AMC.  Except for cars and TCF, tariffs were to be reduced to 5% by 1996.  Cars and TCF were not perceived as being different;  it was simply that with those industries there was too far to go in the time.  TCF tariffs were reduced to 25% by 2000 with the remaining quotas abolished from 1993 and motor car tariffs reduced to 15% by 2000.

Hawke defended his decision with an impeccable statement of economic principle:

the most powerful spur to greater competitiveness is further tariff reduction.  Tariffs have been one of the abiding features of the Australian economy.  Since Federation ... the supposed virtues of this protection became deeply imbedded in the psyche of the nation.  But what in fact was the result? -- Inefficient industries that could not compete overseas;  and higher prices for consumers and higher costs for our efficient primary producers.  Worse still, tariffs are a regressive burden -- that is the poorest Australians are hurt more than the richest. ... We have rejected the views of the so-called "new protectionists" because they are simply proposing, in effect, the same discredited policies that had isolated our national economy from the rest of the world and caused great damage we are all working to repair.

This statement had the complete absence of mercantilist demands for reciprocity -- there was instead acceptance that the absence of Australian protection benefits primarily Australians.

It was the high point of dry influence.

DUMPING

Australia's disposition to allege dumping had been the subject of repeated overseas complaint.  In Australia, the benefits that the allegedly-dumped low-priced goods conferred on consumers rarely entered the debate, let alone the equation.

Dumping is relatively rigorously defined as selling in a foreign country for lower prices than in the domestic market -- as Australia did with milk products.  But in 1983 the Hawke Government defined dumping as selling at any price that did not recover all of the relevant costs plus a reasonable profit margin -- as for instance Australian wheat might today be sold in a drought year and much else.  (The US had long employed this definition.) ⁽²⁹⁷⁾  A reason advanced for the change was to give Australian agriculture easier access to anti¬dumping measures.

Ironically, Australian farmers were soon hoist by their own petard.  In December 1985, a $55 per tonne anti¬dumping duty was imposed on imports of DAP (Di Ammonium Phosphate) fertiliser from the USA even though the selling price in Australia, after adjustments for freight etc., was no lower than in the USA. ⁽²⁹⁸⁾  The incident showed how easily discrimination may have unintended consequences.  It was also ludicrous.  The Phosphate Co-operative Company, a farmer-owned cooperative, had brought the anti-dumping action.  Appreciating the consequences of $55 tax on farmers' fertilisers in his election year, the WA Premier begged the Prime Minister to exempt Western Australian farmers from it.  The Federal Government exempted all farmers "on a temporary basis".

An assurance of rigorous anti-dumping action was, however, a means by which the Hawke Government sought to achieve acceptance of reduced protection.  Democratic politics requires compromise and, although Dries have often criticised what they thought was weakness, they have not contended otherwise.

THE URUGUAY ROUND

It had been hoped that a GATT ministerial meeting held in November 1982 would lead to new round of negotiations that would include the liberalisation of agricultural trade.  The meeting was not successful, but Doug Anthony had given an unprecedented Australian commitment to the multilateral process.  The change of heart apparently had been brought about by fear of rapidly growing protectionism worldwide, the tension between maintaining import barriers while seeking export markets, and the growing domestic constituency for liberalisation. ⁽²⁹⁹⁾

The Hawke Government thus inherited the processes that became the Uruguay Round of trade negotiations.  While mercantilist sympathies stirred within many a Labor Party breast, the new Government appreciated better than the old that a negotiating stance by which nations undertook to cease taxing their own consumers and weakening their own economies only if other nations did likewise was inherently silly.

We have seen what Hawke's second Government did to reduce Australian trade barriers.  Shortly before it took that decisive action it had been instrumental in the formation of the "Cairns Group" of nations exporting agricultural produce, not just to carry the good word to all who would listen, but also to bring concerted pressure for free trade in agricultural products within the Uruguay Round negotiations.  The Fraser Government had had the Bureau of Agricultural Economics (BAE) calculate the cost to Europeans of the European Union's Common Agricultural Policy.  A pamphlet in five languages had been circulated within Europe.  During the negotiations, the OECD took up this initiative, calculating that consumer and taxpayer support for farmers cost Europeans US$104 billion in 1989 alone.  The BAE later also calculated the cost to Americans of US agricultural protection.  While the calculations probably had only small beneficial effect within the target nations, the logic that underlay them encouraged Australians to take seriously the IAC calculations of the cost of our own protection policies.

At the Uruguay Round negotiations in Punta del Este in September 1986, Australia announced that it was "willing to negotiate a broad package of measures to reduce overall levels of assistance to industry" -- a radical departure from its stand in previous rounds.  Our "Closer Economic Relations" with New Zealand were used to explain how trade in services might be made freer. ⁽³⁰⁰⁾

By the time that the protracted negotiations were complete, Hawke was no longer Prime Minister.  The Australian Bureau of Agriculture and Resource Economics could estimate, however, that the half-successful Round would allow Australia to sell annually an additional $350 million worth of beef, $250 million of wheat, $75 million of course grains, $100 million of dairy products and $500 million of coal --important gains for Australian producers and European, American and Japanese consumers that were not fully realised because of the backsliding of nations other than Australia.  For the first time at such negotiations Australia had not lost sight of its real interest.

Meanwhile Australia was a major participant in forming the "Asia Pacific Economic Co-operation" (APEC) forum.  The idea went back to the 1960s and was revived in 1989 as a means by which to encourage a successful completion to the Uruguay Round.  It developed a significant life of its own, exploring co-operation in areas such as trade facilitation and liberalisation, investment and technology transfer.  From 1989 it was specifically established that it would not be a trade bloc raising barriers against non-members or discriminating in favour of members.

The professed aims were excellent but some cynicism concerning the politicians who maintained the policies that needed changing seemed warranted.  Hawke, like every Prime Minister before and since, had wanted to look an international big shot and he needed to be seen to be doing something about the economy.  In 1994, the Bogor Declaration committed APEC's developed-nation members to free trade and investment by 2010 and developing-nation members to the same by 2020.  Subsequent meetings have concentrated on implementing that decision but the attitude of its biggest member, the USA, has been sufficiently ambiguous to justify the initial cynicism. ⁽³⁰¹⁾  APEC lost momentum by the end of the 1990s when Asia-only free-trade arrangements that excluded Australia were pursued.

INFLATION

Labor had been critical of Fraser's alleged "fight inflation before unemployment" policy.  In office, it was initially reluctant to screw up interest rates sufficiently to curb inflation.  Further, early monetary policy ran into the same difficulty that Thatcher had experienced in the United Kingdom.  Money being anything from cowry shells to electronic balances, M1, M3 etc, which pick up only some of these, are imprecise measures of liquidity.  With financial deregulation and the ability of trading banks to pay interest on overnight deposits, the most used measure, M3, which includes those deposits, increased without any increase in underlying liquidity.  No doubt conscious of how the Thatcher Government had come to run a tighter monetary policy than intended, Keating announced that the Reserve Bank would no longer target M3 but instead a check list of several "indicators".  This policy was interpreted, as it turned out unfairly, as a decision to be soft on inflation bringing the A$ into further disfavour.  Monetarism had not been rejected but, since the money supply was elusive, other indicators were employed when deciding when to tighten or loosen it by raising or lowering interest rates.

The budget management and productivity-enhancing reforms that would eventually permit inflation to be brought under control while unemployment was reduced were in their nature slow to produce their benefits and in any case were implemented over seven years.  Until "the recession we had to have" Australian inflation was, therefore, well above the OECD average.

In the 1990-91 recession, inflation fell sharply to 3.4% and to 1.2% in 1991-92.  Apart from a short spike in 1994-95 it has been under control since.  Much reduced inflation has been a worldwide phenomenon associated with improved employment in most countries.  We have at least learned that, except over the shortest term, inflation cannot be traded off against employment.

The Hawke Government's control of inflation surprised it as much as anybody but its deliberate actions to deregulate, reduce protection and produce budget surpluses had greatly contributed to that eminently desirable end.

Hawke's Governments tended to dryness in other areas, privatising, deregulating and pursuing equity until, like all Governments, they lost the will.  In the next chapter we consider these and their principal failure, the lack of any determination to include industrial relations in their reform agenda.

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ENDNOTES

255.  The Age, 7 March 1983

256.  Sheldon Richman, The Fortune Encyclopedia of Economics, Warner Books, 1993, pp 115-117

257.  Woodall, P, The Economist, 3 March 1990 cited by Costa & Duffy, Labor, Prosperity and the Ninties, The Federation Press, 1991, p 104

258.  Graham Richardson, Whatever it Takes, Bantam Books, 1994, p 111 to 118

259.  Michael Davidson, Statement on the Outcome of the National Economic Conference, 15 April, 1983.

260.  Edna Carew, Keating -- A Biography, Allen & Unwin, 1998.

261.  Costa and Duffy Labor, Prosperity and the Nineties, The Federation Press, 1991, pp 83-86

262.  Edna Carew, Keating -- A Biography, Allen & Unwin, 1998, p 89

263.  David Barnett, John Howard, Viking Press,  1997, p 273

264.  ibid, p 302

265.  Peter Walsh, Confessions of a failed Finance Minister, Random House, 1995, p 116

266.  ibid, p 119

267.  Peter Walsh, Confessions of a failed Finance Minister, Random House, 1995, p 152

268.  ibid, p 178-9

269.  David Barnett, John Howard, Viking Press, 1997, p 500

270.  David Barnett, John Howard, Viking Press, 1997, p 555

271.  ibid, p 225

272.  Peter Walsh, Confessions of a failed Finance Minister, Random House, 1995, p 239

273.  Edna Carew, Keating -- A Biography, Allen & Unwin, 1998, p 91

274.  David Barnett, John Howard, Viking Press, 1997, p 289

275.  Edna Carew, Keating -- A Biography, Allen & Unwin, 1998, p 111

276.  ibid, p 135

277.  David Barnett, John Howard, Viking Press, 1997, p 296

278.  John Hyde's diary, 8 April 1986

279.  Edna Carew, Keating -- A Biography, Allen & Unwin, 1998, p 220

280.  Edna Carew, Keating -- A Biography, Allen & Unwin, 1988, p 145

281.  15% for the first $50,000 of persons over 55 years old.

282.  Graham Richardson, Whatever it Takes, Bantam Books, 1994, p 186

283.  Peter Walsh, Confessions of a failed Finance Minister, Random House, 1995, p 147

284.  Edna Carew, Keating -- A Biography, Allen & Unwin, 1988, pp 225/6

285.  Peter Walsh, Confessions of a failed Finance Minister, Random House, 1995, p 156

286.  David Barnett, John Howard, Viking Press, 1997, p 449

287.  John Nurick editor, Mandate to Govern, AIPP and Australian Chamber of Commerce, 1987

288.  Edna Carew, Keating -- A Biography, Allen & Unwin, 1988, p 158

289.  David Barnett, John Howard, Viking Press, 1997, p 480

290.  Peter Walsh, Confessions of a failed Finance Minister, Random House, 1995, p 216

291.  David Barnett, John Howard, Viking Press, 1997, p 500

292.  Peter McLaughlin, Internationalising Australia's Economy, Public Policy Forum on the Garnaut and AMC Reports, Australian Graduate School of Management, 1991, p231

293.  Peter Walsh, Confessions of a failed Finance Minister, Random House, 1995, p. 215

294.  Actually the stagnation lasted a little more than a decade but to admit that would have been to admit that the early Whitlam and early Hawke Governments made more errors than perhaps it was politic for Ross Garnaut to advertise.

295.  Snape, Gropp and Luttrell, Australian Trade Policy 1965-1997, Allen & Unwin, 1998, p. 30

296.  Ross Garnaut, Confessions of a failed Finance Minister, Public Policy Forum on the Garnaut and AMC Reports, Australian Graduate School of Management, 1991, p. 223

297.  If an overseas seller is to profit from predatory pricing, it must drive out local competitors and then have no international competition that will prevent it making sufficient super-profits to recoup the losses already sustained -- an unlikely circumstance.

298.  Snape, Gropp and Luttrell, Australian Trade Policy 1965-1997, Allen & Unwin, 1998, Chapter 13

299.  Snape, Gropp and Luttrell, Australian Trade Policy 1965-1997, Allen & Unwin, 1998, p. 369

300.  ibid, pp. 371-2

301.  Snape, Gropp and Luttrell, Australian Trade Policy 1965-1997, Allen & Unwin, 1998, pp. 468-9