Lazarus Rising

11 ‘MAY I SPEAK TO THE TREASURER?’

Immediately after Malcolm Fraser called the 1977 election, there were unexpected and dramatic developments involving the Treasurer, Phillip Lynch, which derailed the campaign for three weeks. This was to have amazing consequences for me. The day before Fraser called the election, Peter Leake, a land developer, told a judicial inquiry in Victoria that he had been involved in local land speculation with his friend Phillip Lynch. Whitlam pursued the matter in parliament the day that Fraser called the election. The location of the investment was called Stumpy Gully, a colourful description which added to some of the drama. There were also questions raised about property Lynch had acquired. The press went ballistic.

Lynch had not done anything improper or illegal, but he had been politically indiscreet. It is never a good thing for a senior minister, particularly a Treasurer, to involve himself in anything that can be regarded as financial speculation. The country was still in the economic doldrums, and it was so easy for the Government’s opponents to allege double standards.

When the matter was raised in parliament, he had no immediate answer and, from the start, was on the defensive. Only a short time afterwards, the Treasurer became ill and, on 10 November, he entered Peninsula Private Hospital suffering severe kidney pains. It was at this point that I was caught up with the problems that had engulfed Phillip Lynch.

I was having dinner at home with my family on 10 November when Fraser rang and calmly told me that Lynch had gone into hospital and, therefore, had to stand aside as Treasurer, and that he wanted me to ‘become the Government’s spokesman on Treasury matters'. He didn’t say exactly that I was being appointed as acting Treasurer, although that was the case. Totally surprised, I relished the challenge; it would put me back in the mainstream of the political debate. But, at that stage, I did not imagine that this would be anything other than a temporary responsibility.

However, developments were to change that. Lynch went under the knife the next day, and five days later, convinced that it had an issue damaging to the Fraser Government, the ALP went for the jugular. Using parliamentary privilege, two Victorian upper-house MPs made sweeping allegations against Lynch. The issue ran strongly. The media and the Labor Party would not let it rest. They wanted the scalp of the Treasurer.

Fraser was unhappy with the explanations given by Lynch regarding his financial affairs and angry that every day was dominated by an issue which involved, at root, a bad judgement call by his deputy.

At a news conference called by Fraser and me, ostensibly to talk about Whitlam’s policy-speech highlight to abolish payroll tax, virtually every question focused on Lynch, and the news conference was a total wipe-out for the Government. Fraser walked from the conference with a stony face, and I knew that Phillip Lynch would not remain as Treasurer through to the election. Unless the Lynch issue was contained, it would overwhelm the entire election campaign.

Fraser correctly concluded that Lynch had to stand aside as Treasurer, leaving his future to be resolved after the election in the event of the Government being returned. But the way in which he achieved this disclosed real flaws in Fraser’s handling of people.

Sensibly Fraser should have gone to see Lynch in hospital and talked to him directly in the presence of the party president and federal director. Instead he sent Peter Nixon, a senior National Party man, to do the job. Nixon was close to Fraser, tough, honest and skilful, but here Fraser was dealing with his own deputy. He should have been personally engaged.

On Friday 18 November 1977, after a rather tortured six- or seven-hour period of negotiations between Malcolm Fraser, who was in the Commonwealth Parliamentary Offices in Martin Place in Sydney, and Phillip Lynch, who was in hospital on the Mornington Peninsula, Lynch agreed, reluctantly, to stand aside as Treasurer, though he would stay as Deputy Leader.

Almost all of Fraser’s messages to Phillip Lynch were delivered by other people. Resentment against Fraser by Lynch’s many followers, such as Fred Chaney and John Hyde, grew out of his mishandling of this situation. He would display similar clumsiness in handling a problem with Reg Withers a few months later, resulting in Withers leaving the Government and a lasting estrangement between the two men.

As acting Treasurer I thought that I might end up as Treasurer, albeit on a temporary basis, in the event of Lynch standing aside. That was the press speculation, although Fraser never canvassed the matter with me. It wasn’t until Alan Carmody, Secretary of the Department of Prime Minister and Cabinet, said to me, after Lynch had agreed to go as Treasurer, ‘The swearing in will be at Admiralty House on Saturday at 4 pm’ that I realised that I would replace Lynch as Treasurer.

It had been an amazing day, indeed a series of amazing days. During the weekend, Janette told me that late on Friday afternoon, Sir Frederick Wheeler, the Secretary of the Treasury, had rung our home saying, ‘May I speak to the Treasurer?’ Janette deflected his enquiry by telling him that he wasn’t at home. This incident validates a long-held view in Australian politics that public servants and Commonwealth car drivers always know important things well in advance of the politicians.

I was excited about what had happened, but I didn’t believe that I was Treasurer for other than an interim period. I assumed that after the election, the Phillip Lynch issue would be resolved and I would return to some other, lesser, portfolio.

Meanwhile, my main concern was not to drop the ball on economic issues during the campaign. At that stage, despite our enormous majority, the Government was travelling badly, having been diverted by the Lynch Affair for several weeks and facing a public quite apathetic towards what we regarded as important campaign issues.

There was a further complication for me personally. Our second child, our elder son, Tim, was actually due on the very day that I was sworn in as Treasurer. He took his time, not arriving until 25 November. The events of these hectic weeks, coming on top of my prolonged absence overseas during the latter stages of Janette’s pregnancy, had put a lot of pressure on her, which she handled quite remarkably. I was sworn in as Treasurer at Admiralty House in Sydney by the Governor-General, Sir John Kerr. Afterwards, Malcolm Fraser and I went on what was reported as a pub crawl, although from recollection we visited only one hotel, namely the Kirribilli local. Fraser was relaxed, and engaged in easy chit-chat with the locals. These were pre-mobile phone days, and the best that I could do to keep in touch with Janette was for my Commonwealth car driver, Bob Jenkins, who was at the hotel, to ring Janette periodically to check on her condition and report to me.

With the Lynch issue out of the way the campaign returned to what it always should have been about, namely whether or not Australians would re-elect a Whitlam Government. Once this became the principal issue, it was only a matter of time before the polls turned, and ultimately the Government won.

I had two major one-on-one debates during the campaign. The first was an ABC Monday Conference interview chaired by the late Bob Moore, immediately following Malcolm Fraser’s policy speech in Melbourne. My opponent was Tom Uren, the Deputy Leader of the Opposition. The second debate was against Bill Hayden, who had been Whitlam’s Treasurer. This was an appearance on the ABC’s This Day Tonight program, and it was chaired by George Negus. These two debates were regarded as key events in the campaign, and the fact that I was judged to have won them convincingly did my reputation no harm at all.

The Fraser Government was returned on 10 December 1977 with a majority of 48 seats, only a fraction less than the record margin of 55 achieved two years before. It was an impressive result given the size of the 1975 majority. In retrospect, of course, there was never a chance that Whitlam would get re-elected. He gave a dignified speech on the night of the election, which ended his remarkable career at the top of the Labor Party.

To this day, Whitlam remains a legendary figure to devoted followers of the Labor Party and others in the community. Nobody can doubt his flair and style, his considerable sense of humour and his erudition. He did something for the Labor Party which seemed for so many years unattainable. He won government. Having won government, he proved to be a very poor Prime Minister. Sentimentality towards him should not smother that reality.

After the election Fraser did what I suspected might happen. Having made some positive comments about my efforts during the campaign, he kept me as Treasurer but gave the finance portfolio to a separate minister. Like Phillip Lynch, I had administered both portfolios from the time of my appointment as Treasurer.

Before any of this occurred, he had to resolve Phillip Lynch’s position. Phillip’s health had been restored, and he had easily retained his seat of Flinders. Stephen Charles, a well-regarded Melbourne silk, had prepared a report on Lynch’s financial affairs, clearing him of any wrongdoing. Fraser called an ad hoc meeting, including Charles, Reg Withers, government leader in the Senate, Senator Fred Chaney and me. Although Charles had given Lynch a clean bill of health, Fraser was querulous at the meeting. He questioned one particular transaction, which, to me, seemed quite normal. When asked my opinion I said so. Reg Withers had the same view. That seemed to end the matter.

Lynch remained as deputy leader, but opted to become Minister for Industry and Commerce, specifically ringing and telling me that this is what he wanted. Thus, at the age of 38 years and 4 months, I became, unconditionally, Treasurer of the Commonwealth.

Again, I had every reason to be grateful to Malcolm Fraser for giving me what was a huge promotion.

Being Treasurer gave me access to the best concentration of brains in the federal bureaucracy. There are plenty of other departments with extremely talented people, but for concentration of brain power, the Treasury is hard to beat. The dominant figures in the Treasury at that time were Sir Frederick Wheeler as secretary and John Stone, the deputy secretary (economic). Wheeler was, with Sir Arthur Tange, Secretary of the Department of Defence, the last of the traditional mandarins of the federal public service. I liked Wheeler a lot.

I admired the way in which he had stood up for due process at the time of the Khemlani Affair, in the Whitlam years. He was tough and cunning and a firm believer in the independent sanctity, if I can put it that way, of the federal bureaucracy and most particularly the Treasury. His minutes were succinctly and strongly written. For all that he no doubt had the view that Treasurers came and went but the Treasury went on forever, I always thought he would give me advice that he believed was in the national interest. He was also a heavy smoker, and that suited me at the time because I was still addicted to the habit.

John Stone, who took over from Wheeler in 1979, was the brightest public servant with whom I ever dealt. That did not automatically make him the best, because, on occasions, his judgements did not match the purity of his intellectual arguments. He nevertheless held resolutely to all of the conclusions that he reached, and was quite uncompromising in the advice which he offered to his minister. Some ministers were nervous when I proposed appointing Stone head of Treasury, because they thought he was too doctrinaire in his economic thinking. My attitude was that people should be appointed to senior public service positions on merit. Passing over Stone would have been to deny that fundamental principle.

Early in April 1979, not long after Stone had been appointed secretary, Fraser asked Stone if he would prepare a memorandum of advice for an incoming Conservative Government in Britain, as to what should be done to fix their ailing economy. Fraser wanted to give it to Lord Peter Carrington, who was to see Fraser in Canberra. He was an old friend of Australia, and became Thatcher’s first Foreign Secretary, staying in the post until the Falklands War.

Thirty years on, the Stone memo makes fascinating reading. For example, he wrote, ‘Meanwhile union power has become a threat not merely to economic stability, but to civil liberties and the very concept of the rule of law upon which the British society has been founded and of which it has been for so long such a notable exemplar.’1 The full memo appears as an appendix to this book.

Thatcher visited Canberra, very briefly, not long after her election in May 1979. She had been at a G7 meeting in Tokyo and came to Australia, ostensibly to discuss the situation in Rhodesia in advance of the Commonwealth Heads of Government (CHOGM) meeting in Lusaka. During her brief visit Mrs Thatcher attended a cabinet meeting, giving an uncompromising outline of what she intended to do in her own country. After she had left, quite a number of my colleagues were rather sceptical about some of her intentions, asserting that she was unrealistic. They had underestimated her.

I had badly needed expert advice on economic issues during the election campaign, as the Treasury had to maintain a certain distance during the caretaker period embracing the campaign.

This is when I met John Hewson. Already a professor of economics although only in his early 30s, John Hewson had had an impressive career at the Reserve Bank and the International Monetary Fund (IMF). He had joined Phillip Lynch’s staff on a part-time basis, and worked closely with another economics professor, John Rose, who worked, also on a part-time basis, in Fraser’s office. They were a real tandem. They provided joint advice to the Prime Minister and the Treasurer, especially on monetary policy issues. I liked John a lot. He gave good advice on most economic issues and was taken by the political atmosphere. In the changeover from Lynch to me, he had glided almost effortlessly from one office to the other.

Tension would develop between the senior people in the department and John early on. The top officials in the Treasury resented the degree to which both Fraser and I listened to private office advisors.

At this time the relationship between the minister, his private office advisors and his department was undergoing significant change. Ten years earlier, somebody like John Hewson would not have existed in the Australian political system. All of the principal policy advisors in a minister’s office came from the relevant department. If non-departmental advice were taken, it was overtly taken from someone who was not on the minister’s staff.

My five years as federal Treasurer were to change profoundly my opinions on many aspects of managing the Australian economy. When I became Treasurer I was unaware of the extent to which the Australian financial system was in need of deregulation, and although generally aware of the negative impact of across-the-board wage rises granted by the Conciliation and Arbitration Commission, I did not see the issue as one requiring freeing of the labour market. Rather I adhered to the conventional view at the time that the commission should be encouraged to deliver different wage judgements. I did not then realise that fundamental change to the system was required.

I believed that the Whitlam Government had spent far too much and that a big part of my responsibility as Treasurer was to reduce the rate of growth in government spending. I also thought the Australian taxation system needed to be reformed. However, I underestimated the enormity of the task involved in bringing about change in that area.

I was to have successes and failures. In 1978 the idea I floated of introducing a retail turnover tax collapsed, as a policy initiative, fairly quickly after an onslaught from Australian retailers and some very unhelpful comments from one of my colleagues, Bob Ellicott. He used the platform of a Sunday evening address at the Wayside Chapel in Sydney to say that the Government should abandon the whole idea because it was causing disquiet in sections of the business community. Although I had been right, in a pure policy sense, to raise the issue, I had been extremely naïve in the way in which I had gone about it. As I learned from that, you need time to build the case for change by explaining, in detail, the shortcomings of the existing system.

* * *

Decisions and promises from the first term of the Fraser Government preoccupied my early months as Treasurer. Treasury told me, shortly after the election, that the 1977 budget revenue estimates would not be realised. This was due to the average weekly earnings issue, already mentioned, as well as early predictions of expenditure over-runs. So from the beginning of 1978, it became increasingly apparent that my first budget would be extremely difficult. Australia still had a large budget deficit, although Lynch had made an impact on this in his first two budgets, and inflation, despite having fallen, was still quite high. Very unpopular decisions would be required if a significant reduction in the budget deficit were to be achieved.

Then there were the interest-rate predictions made by both Malcolm Fraser and Doug Anthony during the election campaign. Interest rates in Australia at that time were high, and financial institutions within the traditional banking sector were still tightly regulated. Fraser and Anthony predicted during the campaign that interest rates would fall by 2 per cent during the next term of office. Fraser said in the campaign, ‘Falls in important interest rates could add up to a total of 2 per cent within 12 months.’ Doug Anthony said that if interest rates did not fall by 2 per cent he would eat his hat. The statements were not only wildly optimistic, but also politically unnecessary.

At that time, bank lending and borrowing rates were subject to controls administered by the Reserve Bank. All savings bank housing loans and overdraft or business loans under $100,000 were caught by the controls. But the Government effectively decided those rates because, in administering the controls, the Reserve Bank normally reflected the views of the Monetary Policy Committee of cabinet. That committee met regularly, was chaired by Fraser, and as well as me as Treasurer, included Doug Anthony, Ian Sinclair and Peter Nixon plus Phillip Lynch and Reg Withers. The secretary of the Treasury and the Reserve Bank governor normally attended its meetings.

Thirty years on, this may sound an interventionist system, but it was not until the election of my Government in 1996 that the bank was given full independence to set interest rates. Although there was some early success on the interest-rate front in 1978, with a small reduction, there was never any hope that that 2 per cent prediction could be realised. Increasingly, monetary conditions ran in the opposite direction.

From the beginning, the interest-rate issue caused a lot of tension between the PM, the RBA and me. Fraser felt that the bank was dragging its feet on cutting rates. This was nonsense. He should never have made such a specific prediction in the campaign. I was caught in the middle. The Monetary Policy Committee once talked about invoking section 11 of the Banking Act, which enables the Government to direct a monetary policy move by the bank, provided the reasons for the direction and the RBA’s contrary view are tabled in parliament. I thought that such a move would be extremely damaging for the Government, because on the economic merits there was no justification for a further cut in interest rates. As part of the debate with the bank, I was asked by the Monetary Policy Committee to meet the RBA board and argue the case for a rate reduction. I felt uncomfortable carrying this brief, and simply went through the motions. Quite justifiably, the RBA did not shift. My discomfort was increased by the presence, as an RBA board member, of Bob Hawke. Fortunately, my senior colleagues thought better of invoking section 11.

Within a few months of becoming Treasurer, it was clear to me that far from interest-rate controls keeping interest rates low, they were having the opposite effect. Banks could not attract enough money to lend for housing because the controls to which they were subject prevented them from offering sufficiently attractive interest rates to attract funds in the first place. Increasingly, as time went by, the solution seemed to me to be the removal of those controls.

The winter of 1978 was consumed with preparing the budget, and I knew it would be extremely unpopular. The expenditure-cutting process was made even more difficult because Eric Robinson, the Finance Minister, was sidelined because of a Royal Commission. I carried both portfolios. It was a lonely exercise. Any euphoria about being the youngest Treasurer had gone. I was determined to cut the deficit, but at every turn I met solid resistance from colleagues defending their patches. There would be no last-minute revenue surge to relieve the pain. The early forecasts were that, for the first time in 20 years, the Government faced a reduction of revenue receipts in real terms.