by John Howard
The leak completely overshadowed the fact that for the first time in years Australia was projected to record a domestic budget surplus. After five years of grind, it was a significant achievement but its symbolism was completely lost in the bigger story of the budget’s premature disclosure.
The 1980 election and its immediate aftermath would markedly change my relationship with Malcolm Fraser on policy issues. I had retained my enthusiasm for taxation reform involving the introduction of a broad-based indirect tax accompanied by reductions in personal income tax. After the election had been called I reached an understanding with the Prime Minister, which he honoured in full, that neither of us, nor indeed the Deputy Prime Minister, Doug Anthony, would, during the course of the campaign, rule out future taxation reform. I wanted to keep open the option of moving on this issue if the Government were returned.
Hayden exceeded expectations in the campaign but Labor still fell short, with the Government winning with a reduced majority of 23 seats. Bob Hawke entered parliament via the safe Labor seat of Wills, in Victoria. There was a big swing against the Liberal Party in Victoria, although we held up better in New South Wales. Most people attributed this to the effective fear campaign waged by the Government on the capital gains tax issue during the dying days of the campaign. Peter Walsh, who became Finance Minister in the Hawke Government, had raised the possibility of a capital gains tax. Fraser grabbed hold of this with an impressive ferocity, reminding all of us what a formidable campaigner he could be. Walsh should have known that Fraser would hurt Labor with a claim it would tax the family home.
When the remarks were made by Walsh, the Government was struggling in the polls, and although Labor had a huge leeway to make up there was considerable nervousness in the Liberal camp. Property values in Sydney were higher than in any other part of the country, and the capital gains tax issue resonated in the nation’s biggest city more than anywhere else. Ten days out from the election, Fraser rang me at home and said that ‘our polling says that Labor is in a clear winning position’. I had spent most of my time in New South Wales, and told him that the mood in that state was still strong for the Government.
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 taxat
ion 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.