Lazarus Rising
As a measure of Fraser’s nervousness, he rang me on the Tuesday before polling, when I was campaigning for Michael Baume at the Moss Vale Golf Club in his electorate of Macarthur. Fraser told me that he had a number of ministers, mainly Victorians, gathered in his office discussing the state of the campaign. They were canvassing the possibility of the Prime Minister announcing that the Government would boost family allowances if it were returned. I said I thought that would be regarded as a panic move by the electorate, and might backfire. He asked me to seek Michael Baume’s view, given that Michael held a marginal seat. Michael replied, ‘Tell the big bastard to calm down and focus on the Government’s record.’
The 1980 election result was a real shock for Malcolm Fraser. It should not have been. The 1977 result simply reflected the unwillingness of the electorate to seriously contemplate Whitlam again. Once Whitlam had gone, things were bound to return to a more normal political situation.
When Malcolm Fraser and I discussed the election outcome, he said that part of the reason why the Government had lost so many seats was that he had not been able to give people lower taxes. He said that his Government had been elected on a smaller-government, lower-tax platform and more had to be done on this front, and that he intended to do something about it. This was encouraging, because I had to agree with him that that was part of the problem. Now that Whitlam himself was gone, it was no longer tenable to hark back to the Whitlam days too much.
He established what became known as the ‘razor gang', under the chairmanship of Phillip Lynch. This group of ministers was charged with trawling through all areas of government, to find expenditure savings to form the basis of a major statement about the size and direction of the Government. This was quite separate from my earlier understanding with Fraser to reform the taxation system.
As well as Phillip Lynch as chairman, the committee included me, Margaret Guilfoyle, the newly appointed Finance Minister, Peter Nixon, and Ian Viner. Fraser wanted the committee to start work immediately and have only minimal time off over the Christmas period, with a view to the major statement being made early in 1981.
Margaret Guilfoyle had replaced Eric Robinson as Finance Minister. Fraser demoted Robinson from cabinet to the outer ministry — for no good reason — and Robinson refused to serve in the lesser post. He died suddenly only weeks later (from a congenital heart condition). Robinson had been Queensland Liberal president, and the Nationals in that state unreasonably resented his continued, aggressive advocacy of the Liberal cause in Queensland. The friction this produced would have heavily influenced Fraser’s decision to treat Robinson as he did.
In keeping with our understanding, I announced that the Government would immediately start an examination of the taxation system, including the possibility of introducing a broad-based indirect tax, accompanied by reductions in personal income tax. Once again I felt quite excited, as this was a reform I was convinced was needed. There had been a false start two years earlier. There was only a six-month window of opportunity, as the Government would lose control of the Senate by 1 July 1981. There was not a moment to be lost, and I was keen to get to work on the tax proposal immediately.
On 3 December, the Monetary Policy Committee of cabinet, on my recommendation, decided that interest rates paid on deposits taken by banks from customers be deregulated. I had also argued for deregulation of lending rates, but this change was rejected. This was a significant decision and set the ball rolling on interest-rate deregulation, which would emerge a year later as one of Campbell’s major recommendations. Once rates offered by banks were deregulated, it was only a matter of time before the rates charged by banks had to be deregulated. Nonetheless, the ball rolled very slowly, as it was not until early 1986 that the Hawke Government moved to phased deregulation of lending rates by removing the ceiling for new loans, thus adopting a policy I had advocated as Opposition leader.
When announcing the 3 December decision to parliament, I challenged decades of orthodoxy on interest-rate controls, from both sides of the house, by pointing out that, in particular, they had resulted in small borrowers being denied access to funds. Today such comments would be accepted as a statement of the obvious; in 1981 they were anything but.
After a gruelling year, I was relieved when I arrived at Hawks Nest, on the Central Coast of New South Wales, for a family holiday late in January. This would be the first of many holidays at Hawks Nest for our youngest child, Richard, who had been born the previous September. It went extremely well until I received a message from the motel owner asking me to ring Michelle Grattan, chief political correspondent of the Age. There was nothing strange in this of itself. Michelle was never one to be deterred by the fact that somebody was on holidays. When I rang back, she said, ‘Your indirect tax is dead, cobber.’ I asked her what she meant, and she told me that Malcolm Fraser had been on Melbourne radio a short while before, pointing out some of the difficulties in broadening the indirect tax base, including the time taken to put the proposal together, and its inflationary impact. The Age quoted him on 10 February as having said on radio the previous day that it would cost $3.5 million to cut the standard rate of tax from 32 to 25 cents in the dollar. He was reported as saying, ‘If you were going to raise the same amount of revenue by indirect tax you would add about 5 to 7 per cent to Australia’s inflation rate.’1 Fraser gave me no warning of his intervention.
This was very bad news for me. I knew instinctively that he would not have gone public with these reservations unless he had made up his mind to oppose taxation reform. To make matters worse he had not given me any advance warning about his comments. I spoke to him subsequently, and his response was, ‘Well, John, there are difficulties, and they need to be considered, but you should continue your work.’ I resolved that I would but I knew then that we were not going to achieve taxation reform because the PM was against it.
I, nonetheless, went ahead and put forward a submission proposing a modest broadening of the indirect tax base, including, for the first time, a tax on services, with compensating personal tax cuts. It was a proposal which could be implemented in the remaining six months of government control of the Senate, and could be further expanded once the principle of a broadened indirect tax base had been accepted. It would have begun easing the heavy burden of personal tax in the Australian taxation system, and shifting some of it to the indirect tax base. Cabinet rejected my proposal, as I knew it would once the Prime Minister had disclosed his hand, although I was not without a number of supporters, including Ian Viner, Fred Chaney and Peter Durack.
I made a major statement to parliament, explaining why we had decided not to broaden the indirect tax base, on 12 March 1981. Although the statement contained that explanation, it really put on record my arguments for long-term restructuring of the taxation system.
This episode affected my attitude towards the Prime Minister. We still remained close colleagues, and I was a staunch supporter of his within the parliamentary party, but I felt badly let down on an important policy issue and sensed that when it came to big reforms, he would not chance his arm. This had implications for the durability of the Government. We had lost quite a lot of seats at the just-concluded election, and the immediate summation had been that the Government had not been adventurous enough.
The razor gang proved to be anything but adventurous and was one of the great damp squibs of the Fraser Government. For example, there was a strong view amongst its members that we should privatise government-owned businesses such as Qantas, Australian Airlines and the Commonwealth Bank. There was no point in pursuing this unless we had the support of the Prime Minister. We deputed Phillip Lynch to obtain Fraser’s views. Unsurprisingly to me, he was very negative. He held the economically conservative view that government enterprises kept the private ones honest.
Meanwhile, the dynamic within the Liberal Party itself was changing, and a challenge, of sorts, from Andrew Peacock to Malcolm Fraser had begun to brew. Perhaps it was one of the reasons why he got cold feet over taxation reform. Immediately after the election there was the customary party meeting. Naturally there would be no contest for the leadership, and it was assumed by most the same would apply to Phillip Lynch’s position as deputy. Peacock nominated for the position, and mustered a very respectable 35 votes against 47 for Lynch. This outcome was interpreted by many as a virtual nomination of Peacock as Fraser’s logical successor.
Peacock’s strong showing in this ballot had unsettled Fraser a lot, and had injected a new element into the internal mood of the Liberal Party. After the election, Peacock voluntarily gave up the Foreign Affairs portfolio and moved to Industrial Relations. He had been Foreign Minister for five years and before that shadowed in the area. It was thought that his good interpersonal skills would work well with many trade union leaders.
Andrew Peacock lasted just six months as Minister for Industrial Relations before he resigned. There was obvious tension between him and the Prime Minister from the beginning. He complained that the PM interfered too much in the running of his portfolio, but I don’t think that he received any rougher treatment than other senior ministers. He was on stronger ground in his dispute with Fraser over the continuing recognition of the Pol Pot regime in Cambodia (then Kampuchea), when he argued that Fraser had broken a promise to deny a false report about his threatened resignation on the Pol Pot issue.
Many colleagues saw Peacock’s resignation as the first step in a tilt at the leadership and although he was the likely next leader, that was down the track; there was little belief that Fraser should or would be replaced by Peacock before the next election. As a consequence, his resignation lacked justification, hurt the Government and was resented by many colleagues.
1981 also saw a major development in the internal debate on economic policy within the Coalition. As Minister for Industry and Commerce, Phillip Lynch took to cabinet a proposal which effectively would continue quite high levels of protection for the car industry in Australia. I, along with a number of other colleagues, opposed the Lynch package but Lynch and Fraser had the numbers.
As a prelude to cabinet’s discussion, no fewer than 33 members of the Coalition party room addressed a letter to the Prime Minister and Phillip Lynch calling for lower tariffs and a less protectionist policy. It was a remarkable rebellion on fundamental economic policy. It received wide publicity, but in the final analysis fell on deaf cabinet ears. John Hyde, the Liberal member for Moore in Western Australia, and acknowledged leader of the economic dries within the Coalition, had spearheaded the letter-writing effort, and he had gathered much more support than many had expected.
Lynch lost the support of the dries following the policy decision taken by cabinet on the motor vehicle industry. It also had implications for me. Having been disappointed by Lynch, Hyde and others close to him began to talk more regularly to me, not only about economic policy but also my future within the Liberal Party. This group had become frustrated with Fraser.
The dries were a group of MPs largely elected in 1975, enthusiastically committed to smaller government and more market-oriented economic policies. They had become increasingly disillusioned with the Government’s direction because they felt that decisions often failed to reflect the economic principles in which they believed — the motor vehicle one being the most egregious example. John Hyde had come in with me in 1974, but 1975 had brought in Ross McLean from Western Australia, James Porter from South Australia, and Murray Sainsbury from New South Wales as examples of this line of thinking. In 1977 Jim Carlton joined their ranks. To their credit they maintained intellectual consistency, irrespective of political circumstances, in the arguments they put to me both in private and in the party room. They were quite an impressive bunch who wanted the Government to practise as well as preach the values of the free market. All of the dries paid homage to Bert Kelly, Liberal member for Wakefield in South Australia, as the parliamentary trailblazer of their economic values. In an era of high tariff protection, Kelly’s had been a lonely voice.
Signs developed through 1981 that the economy was beginning to cool. The impact of the 1979 second oil shock had been masked in Australia by the revenue surge it gave the Government flowing from the parity pricing of crude oil. There could be little doubt, however, that the rest of the world was suffering from the impact of another rise in crude oil prices, with recession spreading in many countries. This was bound to have an impact on Australia.
In the lead-up to the 1981 budget I had a meeting with Hugh Morgan, managing director of Western Mining, and other mining industry leaders where they gave me a very sober assessment of where they saw the Australian economy heading. They were gloomy about the prospects for the mining industry. This was particularly daunting, as the wave of investment in mining over the previous year or two had been the source of a lot of hope concerning the future of the Australian economy.
Having earlier in the year rejected my plea for a broadening of the indirect tax base, accompanied by reductions in personal income tax, perversely, senior ministers agreed to include in the 1981 budget some broadening of the indirect tax base (although not as much as I had earlier proposed), but with no personal tax cuts to smooth the acceptance of the indirect tax changes. The extra revenue from the broadening of the indirect tax base was used to further cut the deficit, so as to take pressure off interest rates.
The Government had lost control of the Senate on 1 July 1981, and, as a consequence, never really had a hope of getting the indirect tax changes in the budget passed. The folly of not acting at the beginning of the year, when there were still the numbers in the Senate to achieve reform and change, was there for all to see. It was immensely frustrating.
For decades the Metal Trades Award had been the benchmark for wage fixation in the Australian industrial relations system. In 1981 pressure mounted for a big increase under this award. While some firms could afford to pay increases, many could not. This was always the inherent contradiction, indeed flaw, in a centralised wage-fixation system. It formed the basis of the intellectual argument that I and many others mounted against the system through the 1980s.
After strike action which caused significant industrial dislocation, there was a settlement which conceded much of what the unions had wanted. On 18 December 1981 the Arbitration Commission ratified an agreement between the Amalgamated Metal Workers and Shipwrights’ Union (AMWSU) and the Metal Trades Industry Association (MTIA), the relevant peak employer group, for a wage rise of $41 a week and a 38-hour week.
Before long the implications were clear. The December 1981 agreement flowed through to all of the other awards, and before long firms unable to pay the higher wages began retrenching staff.
That was how a centralised wage-fixing system worked. For me it was a political, as well as economic, nightmare. The Government was left marooned without a policy response, other than the highly unattractive one of increasing interest rates to restrict the capacity of firms to pay higher wages. That was no response at all, because it would result in still higher unemployment. What our side of politics needed, and did not have at that point, was a totally different approach to wages policy.
Federal Labor was the political beneficiary of the wages explosion, but it also recognised the implications of what had happened. Some years later, Paul Keating would famously say to George Campbell, the Federal Secretary of the Amalgamated Metal Workers’ Union (AMWU) at the time of the explosion and later a Labor senator, that he and his associates ‘carry the jobs of the dead men’ around their neck, a reference to the widespread unemployment caused by the wages breakout. Labor’s political argument was that the Liberal Party had no way of controlling wages, except by the blunt instrument of tightening monetary policy through much higher interest rates, thus squeezing firms, which in turn laid off more staff.
This argument would remain valid if a centralised wage-fixing system continued, whereby across-the-board wage increases were delivered irrespective of individual capacity to pay. It would be an entirely different matter if that approach were abandoned, and a system of workplace or enterprise bargaining were introduced. That was the system for which I was to campaign for years. If there were to be a change to such a system, then union power, most particularly the monopoly the unions held over the bargaining system, would need to be rolled back. This was to become the real battleground in a debate which is yet to be fully resolved and remains intensely relevant to Australia’s economic future.
13 FOOLED BY FLINDERS
The year 1982 opened amidst a deepening world recession, which Australia did not escape. Stagflation, the economic disease of the 1970s and ‘80s, afflicted most developed economies. In the United States, interest rates remained very high; for this and other reasons, they were also high in Australia. In 1979 Paul Volcker, a dedicated inflation fighter, had become Chairman of the Federal Reserve in America and signalled that he would push interest rates up to the level necessary to squeeze inflation out of the system. This approach worked. In 1980 annual inflation in the United States was 13.5 per cent. By 1983 it had fallen to a little over 3 per cent.
This year was made worse by one of the most severe droughts of the 20th century, which afflicted large parts of eastern Australia. It threatened the survival of breeding stock as well as producing the usual debilitating effects on farmers and communities of all bad droughts. The response of the Fraser Government was comprehensive and effective, with interest-rate subsidies helping preserve breeding stock, so vital to Australian pastoralists.
On 4 January, the former prime minister Bill McMahon retired from the Sydney seat of Lowe, which he had held since 1949. This would prove to be a bad by-election for the Government. There was a swing of more than 7 per cent and, on 13 March, Labor won the seat from the Liberal Party for the first time since its creation, at the 1948 redistribution.
1982 was also to become a watershed year for Victoria politically. After 27 years of Liberal government, inaugurated by Henry Bolte in 1955, the Labor Party won office under John Cain on 3 April. The psychological impact of this on Liberals from Victoria was immense. Intellectually they had prepared for defeat, but the jewel-in-the-crown sentiment ran deep in this Liberal division.
With the Victorian election out of the way, Fraser acted to bring the long-simmering stand-off between himself and Andrew Peacock to a head. It had become a constant distraction for the Government and a regular signal to the community that the Liberal house was divided. Fraser called a party meeting for 8 April and indicated that he would resign the leadership, thus providing Peacock with the opportunity of challenging for the top job. I never thought that Peacock had a chance of toppling Fraser. The only issue was the size of Fraser’s victory.
In the weeks preceding Fraser’s initiative, a group of Liberal MPs, led by John Hyde and Ross McLean, had come to me with the proposition that, if there were to be a spill of leadership positions, then I should contest the party leadership. They said they had lost faith in Fraser’s economic direction, but that Peacock was not committed to the type of economic policies they thought Australia needed in the years ahead.
I was flattered by their offer of support but, nonetheless, made it very clear that I did not think it was in the best interests of the Liberal Party for me to stand, that I would support Fraser and campaign for him, and I urged them to do likewise. They were not entirely surprised by my response. But their approach had told me that in the year or more which had passed since the 1980 election, the dries had not only transferred their support from Lynch to me, but had well and truly given up on Fraser.
Phillip Lynch decided that he would give up the deputy leadership at the same time as the ballot for the leadership. After a quick assessment of support, I decided to nominate for that position. I had Fraser’s support. He promoted the advantages of a deputy coming from Sydney, as against his Melbourne attachment. This was my first experience of a contested party room ballot, and I did the only thing that seemed logical. I directly approached people for their votes, naturally excluding some who I felt intuitively would never vote for me. Michael MacKellar, a fellow New South Welshman and the Health Minister, also stood. It seemed pretty clear that the great bulk of those who were going to side with Peacock against Fraser would also support MacKellar against me.
Fraser defeated Peacock by a neat margin of 2 to 1: 54 votes to 27. In the contest for deputy, I won 45 to 27 on the second ballot against MacKellar. After eight years in parliament I was both Treasurer and Deputy Leader of the parliamentary Liberal Party.
My sense of achievement was heavily qualified. Although it was not a poisoned chalice, I had come to the deputy leadership at a very difficult time. The Government had been in office for over six years, was performing poorly in the polls, had been through a bruising leadership contest, and the economy was slowing rapidly.
I did not see elevation to the deputy leadership as necessarily indicating that I would become the leader after Fraser. The Prime Minister was then only about to turn 52, so issues of longer-term succession were not on the agenda. My total political focus was the re-election of the Fraser Government.
Late in 1981, the Campbell Inquiry reported. It had met all of the expectations. Campbell recommended widespread deregulation of the financial system, including: floating the Australian dollar and the abolition of exchange controls; admitting foreign banks; and the removal of controls on interest rates. It went too far for the comfort of the Prime Minister and some of his senior colleagues.
I had a difficult negotiating session with Fraser over the contents of my statement welcoming the publication of the report. I wanted to be as positive as possible. He did not want the Government locked in too much to supporting the main recommendations.
Doug Anthony wasted no time in saying, publicly, that he was against removing interest-rate controls. Fraser and other senior members of the Government made clear their complete opposition to floating the dollar. As I mention later, Doug Anthony maintained this attitude in opposition, and Fraser, by then out of parliament, attacked the Hawke float.
When the Campbell Report landed with a thud on the cabinet table, interest rates were still high, and there was acute concern in the Government about the cost and availability of finance for housing and small business. The controlled ceiling for housing interest rates was then 12.5 per cent, and there was little finance available at that rate because the banks were losing deposits to other financial institutions offering higher rates. A typical arrangement then was for a borrower to receive a relatively small portion of the required loan at 12.5 per cent and the rest from a finance company, often a trading bank affiliate, at a much higher rate. These ‘cocktail’ loans usually produced an average rate of 17 to 18 per cent for the whole loan. It was, therefore, easy to see that interest-rate controls were not delivering cheaper loans for homebuyers. That was Campbell’s conclusion, which I endorsed.