Lazarus Rising

by John Howard

  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.

  I therefore recommended in a submission to the Monetary Policy Committee in February 1982 that we commence the process of deregulating interest rates on housing loans of less than $100,000 — average loans in high-priced Sydney were less than $50,000. My submission spelled out how controls were failing their intended objective, and I advocated lifting the controls through a process of negotiating with the banks for phased deregulation. I could not obtain authority to do this; rather, there began weeks of negotiations with banks to secure extra housing finance through a combination of a 1 per cent increase in the interest-rate ceiling and the removal of some restrictions on the banks, as recommended by Campbell. These changes were helpful and produced promises of increased lending, but fell well short of the change needed to break free of counterproductive regulation — and that was removing interest-rate controls altogether on future housing loans. In one stroke, that would have lifted permanently
the flow of money into housing.

  There was also a time-consuming examination of other quite nonsensical proposals to boost the flow of money to housing, including the unsound idea of the RBA releasing some of the Statutory Reserve Deposits (SRDs) it held from the trading banks to augment the pool of money for housing. One of the reasons it was unsound was because the SRDs were subject to short-term variations, whereas housing finance was for long periods. Another equally flawed idea was to extend the old 30/20 rule whereby life offices and superannuation funds paid higher taxes if they did not invest a portion of their funds in government bonds to housing finance. The life offices and superannuation funds would pay higher taxes if they did not commit a specified level of funds to housing. Campbell had recommended abolition of the 30/20 rule, let alone its extension.

  Both proposals ultimately bit the dust, but it was only the combined opposition of me and the RBA governor which stopped the SRD proposal appearing in the 1982 budget speech. These proposals ignored the central reality that interest-rate controls aggravated, rather than ameliorated, the shortage of housing finance at a time of generally high interest rates. That was the view of Campbell. If that was the view of Malcolm Fraser in 1982 he did not act upon it.

  With Fraser’s support, early in 1983 I announced that the Government would allow in approximately ten foreign banks. They would provide much-needed competition for the existing domestic banks. This decision was applauded by the business community, but criticised by the shadow Treasurer, Paul Keating. In a statement on 26 January 1983, Keating said, ‘By allowing foreign bank entry in Australia the nation is being subjected again to ad hoc decision-making which in this case will effectively change by stealth the whole structure of the Australian financial sector.’1

  Also the Fraser Government had taken the obscure-sounding decision to bring in a tender system for the sale of Treasury bonds. This change meant that demand would determine interest rates on government bonds; as a consequence, there would be less printing of money to finance deficits. In his 2006 Boyer Lecture, Ian Macfarlane, the former governor of the Reserve Bank, said that this had been a major reform not accorded the recognition it deserved — second only in importance to the floating of the dollar. It was a change that Fraser himself strongly advocated.

  I knew that putting together the 1982 budget would be a daunting task, even more difficult than my first in 1978. With the economy slowing rapidly and revenues falling away, there was a gruelling tussle between me and the Prime Minister about the direction of policy. He favoured an expansionary budget. By contrast, I argued that the inflationary pressures in the community were still so strong that any large increase in the budget deficit would add to those pressures and be damaging to the economy. Unemployment had begun to increase, and large parts of the country were still racked by drought. All of the options were bleak. I wanted our economic policy to remain consistent. For years we had preached the virtues of fighting inflation, reducing the budget deficit and avoiding the easy resort of spending our way out of difficulties. The way things started, it looked as if this budget would turn all of that on its head.

  The budget cabinet deliberations became acrimonious. The differences between me and the Prime Minister were out in the open. Our colleagues must have been dismayed as the Prime Minister and his Treasurer argued and sniped at each other about the shape of the budget as the country headed towards recession.

  I became alarmed that early spending decisions were so extravagant that there would be a huge increase in the budget deficit. To me, this was untenable, and I talked about resigning with my wife, John Hewson and Michael Baume, my parliamentary secretary and close friend, later a NSW senator. I put it aside as an option. It would be seen as disloyalty to the Government, only worsen its political difficulties and not necessarily result in a better economic outcome.

  Fortunately, Fraser responded to my concern, acknowledging that too many expenditure decisions had been taken which added to the budget deficit. We met in his office and he immediately suggested changes to decisions already taken, and some other measures which would help bring the prospective deficit back to more manageable limits. We would still end up with a very expansionary budget, but it would not be as bad as had seemed likely a short while before.

  I brought down the budget on 17 August 1982. It was attacked as too expansionary, and breaking with the economic doctrine the Government had been enunciating for many years. This was the central political dilemma we faced. For years we had preached the virtue of expenditure restraint and reduced deficits, yet all of a sudden we were saying that the solution to the nation’s economic problems lay in more government spending. It confused the public.

  So much for economic and political theory; the public was more interested in the human consequences of the worsening recession. On several occasions, over coming months, it became necessary to revise upwards, the unemployment predictions. This not only reflected the reality of a collapsing labour market, but unavoidably conveyed the impression that the Government was powerless to do anything about it.

  Due partly to his having come to the prime ministership through an early election, Malcolm Fraser was always attended by early election speculation. I felt sure that he wanted, if possible, to have an early election at the end of 1982. I was against this. My principal reason was that the public had grown sick and tired of elections being called to accommodate what they saw as the political interests of the incumbent government. The Liberal Party organisation was in no mood to fight an early election. Fraser was both stunned and angry at opposition to an early election.

  Suddenly, in October 1982, Phillip Lynch announced that, because of ill-health, he would retire from parliament, leaving a vacancy in his seat of Flinders to be filled at a by-election before the end of the year. Within a few days there was a real bombshell. Malcolm Fraser developed severe back problems and had to enter hospital for surgery which would sideline him for up to two months. This put paid to any possibility of an election at the end of the year.

  It also meant that I would lead the Liberal campaign effort in the by-election, as acting party leader in Fraser’s absence. What is more, I was left with most of the responsibility for a wages pause, which Fraser had initiated only a few weeks earlier. It had struck a chord with Australians. By now, employment was falling like a stone, and even some of the more difficult elements of the trade union movement embraced the idea of holding down wages as a trade-off for some others keeping their jobs. As part of the healing process, Andrew Peacock was able to return to cabinet in November, taking the place of the retiring Phillip Lynch.

  Bob Hawke had entered parliament in 1980. From that moment onwards there was constant speculation about his replacing Hayden. On 16 July 1982, with the open support of the NSW right, led by Keating, Hawke challenged Hayden. The result was the best possible for the Government. Hayden defeated Hawke by a margin of only five votes: 42 to 37. It left Hayden debilitated and Hawke, despite his wordy protestations, as an untamed predator. Hayden needed a good result in Flinders to consolidate his leadership.

  Lynch had held Flinders at the 1980 election with a margin of 5 per cent, and with a by-election in the depths of a recession, it seemed ripe for the taking by Labor. The ALP got off to an atrocious start by choosing a very poor candidate, a local real-estate agent by the name of Rogan Ward. He was uninspiring on the campaign trail. In by-elections, particularly high-profile ones, and Flinders was certainly one of these, there is constant publicity surrounding the candidate. A bad candidate can get lost in a general election. He or she can’t hide in a by-election.

  The Liberal Party’s candidate was a local solicitor, Peter Reith. I opened his campaign with a rally at Mornington High School on 12 November. My travel to the event attracted more than the usual publicity. I had burst an eardrum and had medical advice not to fly. I therefore took the Riverina Express from Central Station in Sydney to Spencer Street Station in Melbourne. It had been a long time since a senior political figure
had travelled between Sydney and Melbourne by rail, and there was quite a bit of interest in this.

  The Liberal Party’s one campaign theme was the wage pause. We said to the people of Flinders that the country was in a recession, unemployment was rising and one way which meshed with the Australian notion of mateship, of helping those whose jobs were at risk, was for those who had jobs to forgo wage increases to help their fellow Australians who were at risk. It seemed to catch on. But I didn’t imagine for a moment that it would be sufficient to prevent the seat falling to the Labor Party. Reith was a very good candidate, and he and his wife, with their then young family, presented a good image of a local family, strongly identified with the aspirations and the future of the electorate.

  The Labor Party was knocked sideways, three days out from the election, by an article appearing in the Melbourne Age suggesting that the Labor candidate, Ward, had been involved in some shady real-estate deals. Rogan Ward denied the allegations. It was manna from heaven for the Liberal campaign. I stayed in Sydney the day of the by-election, 4 December, and rather nervously awaited the result. Finally, I rang Grahame Morris, who had been ‘minding’ Peter Reith throughout the campaign, and to my great delight he said, ‘I am about to go in and tell Peter that he has been elected as the member for Flinders. It has been a great result. The swing against us was only 3 per cent.’ This was an amazing outcome, the deficiencies of Rogan Ward notwithstanding. It had huge implications for both the Government and the opposition.