Lazarus Rising

by John Howard

  Bilateral free trade agreements (FTAs) were often more important with countries where there was no natural trade relationship such as existed with Japan. Singapore and Thailand were two examples. After three years of negotiations, agreement was reached for an FTA between Australia and Singapore on 17 February 2003. This became the first bilateral FTA signed by Australia since the 1983 Closer Economic Relations Trade Agreement with New Zealand. It was particularly valuable for Australia in the areas of services, intellectual property, investment, and competition policy.

  In July 2004 Australia and Thailand signed their bilateral FTA. There was also an agreement struck in relation to working holidays. Australia gained valuable new access for dairy products, wine and motor vehicles. Fortuitously, my bilateral meeting with Thaksin Shinawatra, the Prime Minister of Thailand, at the Bangkok APEC meeting the previous October was the catalyst for a breakthrough in the negotiations. Officials had reached a deadlock. Both of us were keen for a speedy resolution, particularly Thaksin, the host of the APEC meeting. Quite spontaneously he told his officials to go away and resolve outstanding issues with my advisors. That is exactly what happened. Without that particular meeting, the FTA would have never been achieved. Thaksin and I enjoyed a good relationship. He was democratically elected as PM and his unjustified removal was the root cause of Thailand’s recent disturbances.

  Occasionally, in the many discussions I had with world leaders, one would use a phrase which captured the essence of a relationship. That happened during my second visit to India as PM, in March 2006. My Indian counterpart, Manmohan Singh, said to me, ‘We have a lot in common, but we haven’t had much to do with each other.’ It was so true. My visit in 2006 went a good distance towards changing that.

  I had been to India as PM in 2000, but our relationship then was still very much in the ‘history and cricket’ paradigm. The common British connection had brought us together in both world wars, and we were linked by language and law. Of course cricket, about which Indians were passionate, meant that names such as Bradman, Border and Waugh were by far the best-known of all the Australian ones in India. Immigration flows to Australia were rising, as were student numbers. Yet the relationship lacked commercial energy; there was nothing like the complementarities of our trade with Japan and China. India looked elsewhere for resource needs.

  Australia had never had an extensive political dialogue with India, in part a legacy of India’s decades of non-alignment during the years of the Cold War when, paradoxically, democratic India more often than not sided with the dictatorial Soviet Union against the United States. Singh acknowledged this in our discussions. We interacted as Commonwealth partners, but the relationship had nothing of the intensity of those we had with nations in Southeast Asia.

  A combined government/commercial effort was needed to achieve change, so I invited a top-notch business group to accompany me in 2006. It included John Ellis-Flint, Santos managing director; the trucking magnate Lindsay Fox; and Charles Goode, ANZ Bank chairman. As well I was joined by Glyn Davis, Vice-chancellor of Melbourne University, to emphasise the growing potential of the education market.

  Providentially, there was a commodity which had the potential to give momentum to the commercial and political relationship: that was uranium. In 2006 India had a growing appetite for energy, flowing from an expanding economy and a desire to move to cleaner energy sources. Nuclear power was on the agenda. She was keen to buy Australian uranium.

  Just a few days before I arrived, George Bush had completed a visit to India which had opened a new phase in relations between his country and India. Bush had promised to help India achieve her nuclear ambitions. Part of the Bush foreign policy in Asia was to build links with the deep-seated democracies of the region; it was the perfect counter-poise to China. The US President’s journey had a big impact on Singh. He told me that, seeing the visit as a real turning point in links between the two countries. He was in the mood to savour associations with fellow democracies.

  Singh raised the possibility of uranium sales from Australia to India almost from the moment I arrived. We hit it off personally, and talked freely about the past low-key nature of our links. It was during such a discussion that he made the comment which left a lasting impression on me. I wanted Australian uranium sold to India. I knew that under existing policy this could not happen, because India was not a signatory to the Nuclear Non-Proliferation Treaty, and the policy banned sales to non-signatory states. A way around that policy would need to be found.

  Both Alexander Downer and his department were wary about changing the policy. I understood the concerns, but this was a big prize. India was going for nuclear power and would obtain the uranium she needed. India had an excellent non-proliferation record. Why should Australia pass up such a commercial and political opening? In addition I did not believe that we could sustain, indefinitely, selling uranium to China and Russia but not sell it to India, simply on the grounds that those other two countries had signed the treaty and India had not.

  I set in train a process which would have resulted in a change in policy to the benefit of India, if the Coalition had been returned at the 2007 election. It would have involved arrangements containing the same practical safeguards as were provided under the treaty, which India could never sign because of her possession of nuclear weapons. Regrettably the Rudd Government refused to help India, being determined to maintain the strict letter of the treaty’s stipulations and lacking the desire or imagination to find another way forward. This is a major foreign policy mistake and is profoundly disappointing to India. It is quite a roadblock to better relations between the two nations.

  40

  A WONDER DOWN UNDER

  On 18 March 2004 the Economist published an article about the Australian economy, ‘A Wonder Down Under’. Although complimentary, it questioned whether the booming conditions of our economy could be sustained, given the bubble in house prices. It need not have worried. Thanks in no small measure to the firmer monetary policy of the RBA governor, Ian Macfarlane, in 2002–03, home prices did not collapse. The ‘wonder down under’ went on to sail through the biggest challenge to the world economy for many decades.

  There is agreement, across the political divide, on at least one thing. The Australian economy has survived remarkably well from the world financial plunge. It deserved the description, given by many in 2009, of the strongest-performing economy in the OECD area. Always unwilling to give any credit to the Howard Government, which on one occasion he described as ‘indolent’ with economic management, Kevin Rudd regularly claimed that the sole reason Australia performed so well was the spending stimulus his Government injected into the Australian economy in 2008 and 2009. At the very least, the jury is still out on whether or not that stimulus should have been so large.

  Australia entered the global financial crisis, which began in 2008, in a superb fiscal state. Its budget was in surplus to the tune of at least 1.5 per cent of GDP. There was no net Commonwealth debt. Speaking to alumni of Sydney University on 15 May 2008, the governor of the Reserve Bank, Glenn Stevens, said, ‘But there would be very few countries, if any, which would not envy Australia’s fiscal position. The capacity to respond, if need be, to developments in the future is virtually without peer. This seems light years from the situation in the 1970s.’1

  Mark the date of this speech, 15 May 2008. Four months later the global financial maelstrom hit with all its fury. The prescience of the governor’s speech had been remarkable. The robust fiscal health of the Australian economy made it possible for the Rudd Government to embrace a large fiscal stimulus which still left Australia with impressively low debt and deficits. The big bank balance left by the Howard Government enabled Kevin Rudd and Wayne Swan to look good.

  Australian banks survived infinitely better than those in the United States and Europe. At the Davos meeting in Switzerland early in 2009, the Deputy Prime Minister, Julia Gillard, was positively lyrical about Australian banks. She said:

&
nbsp; And we come to this new challenge with many remarkable strengths; Australia has strong financial institutions. Of the 11 banks around the world that are rated AA and above, four of them are Australian. Australia has a AAA foreign currency rating. We have open and competitive markets backed up by a world-class financial and prudential regulatory system — indeed given the flaws exposed by the global financial crisis in financial and prudential regulation, I would say our system is even better than world-class.2

  This was a remarkable, if unintended, compliment to the economic prudence of the Howard Government. The regulatory system of which Gillard spoke in such glowing terms was that established by the former government. Inherited fiscal rectitude and a stable, well-supervised banking system proved to be the guardian angels of the Australian economy as it passed through the perils of the recent international financial crisis. No objective analysis can conclude otherwise.

  Australia’s stimulus package was big by world standards. According to the OECD, Australia’s stimulus package, as a proportion of GDP, was of a similar size to that of the United States, and much greater than that of Britain or other major European economies. It was dwarfed only by the boost given in China. I thought that the stimulus was far too large. However, those who argue that it was the right size should, at least, acknowledge that it was made possible by Australia being in such a solid fiscal position when the process of stimulating the economy commenced.

  Although Kevin Rudd gave most of the credit for our economic deliverance to the stimulus package, he did acknowledge the impact on the economy of large reductions in interest rates. Once again the starting point was relevant. Interest rates in Australia were higher than in most other countries, largely because our economy was growing more firmly than in other parts of the world. Also, interest rates were higher in Australia because, being fully independent, the Reserve Bank adjusted interest rates according to its judgement about the performance of the Australian economy. The RBA used that independence to run tighter monetary policy than many other central banks. Those interest rate adjustments were not always politically palatable.

  In the final stages of the 2007 election campaign I had developed a mantra, obviously too late, which best encapsulated what my Government had achieved. I said that Australia was a ‘stronger, prouder and more prosperous nation in 2007 than it had been in March of 1996’.

  This mantra covered the totality of the Government’s record in office. Nowhere was it more accurate than in relation to our economic management. Australians felt legitimate pride in the virility of the Australian economy; by any benchmark Australia was a more prosperous nation than it had been in 1996.

  Bringing the budget back into surplus, a foundation objective of my Government, not only had economic virtue in its own right, but also immense confidence dividends. In his book In an Uncertain World, Robert Rubin, Bill Clinton’s highly regarded Treasury secretary, wrote, ‘… the US Budget deficit had become the symbol of the Government’s inability to manage its own affairs — and of society’s inability to cope with economic challenges more generally … The view that fiscal discipline was being restored contributed to lower interest rates and increased confidence, and that led to more spending and investment which in turn led to job creation, lower unemployment rates and increased productivity’.3 That assessment neatly fitted the Australian experience.

  The prosperity was broadly based. Whilst it was true that the Australian rich had got richer, they had not done so at the expense of the poor. Many surveys revealed that the lower-income groups, particularly families, had not fallen behind in the wake of the growing wealth of the more affluent in our community. This had been no accident. It was the result of a policy deliberately and consistently applied.

  As explored in Chapter 37, it was a cardinal value of my prime ministership that good economic management should never be regarded as an end in itself. The ends were always the human dividends. The greatest human dividend of all was on display in February 2008, when the unemployment rate in Australia dipped below 4 per cent for the first time in 33 years. There could be no better demonstration that one of the great human goals of our years in government had been achieved.

  The Rudd Government made two paltry attempts to denigrate the economic record of the Howard years. The first was to allege, shortly after it came to government, that the inflation genie was out of the bottle. That false claim was given an outing for a few months and then promptly abandoned, as it lacked any credibility.

  Assertions that my Government had been ‘warned’ about a serious inflationary problem were without foundation.

  Another attempt was made to smear our record on the night of the 2009 budget when Australia heard it had a structural deficit. A structural deficit arises when, after subtracting temporary surges in revenue or expenditure, the ongoing situation is one of deficit rather than surplus.

  Treasury had never told either the former Treasurer or me that Australia was in structural deficit or likely to be so. Perhaps this was because the Treasury itself, during our time in office at least, held the view that undertaking calculations about the structural state of the budget was an inherently unreliable analytical exercise.

  In the Economic Roundup in autumn 2005, Benjamin Ford, from the Macroeconomic Policy Division of the Treasury, wrote, ‘Significant assumptions about the economy’s potential output level and the cyclical sensitivity of revenues are required to calculate estimates of the structural fiscal position. The arbitrariness of these assumptions limits the usefulness of structural fiscal indicators as a guide for policy in the short term. For these reasons, official estimates of the structural balance are not published by the Australian government. However, measures produced by both the IMF and OECD suggest a structural improvement of Australia’s fiscal position over the past few years.’4

  Not only did Ford’s article explain why Treasury had never done structural calculations, but observed that according to both the IMF and the OECD, Australia’s structural budget position had improved over several years up to 2005.

  Yet in 2009 Treasury argued that its estimate of the structural deficit now used a different approach than that of the IMF and OECD — how convenient for my critics! Given that the Treasury had not previously attempted an analysis of the structural surplus or deficit, had not warned my Government of the alleged deterioration, which it was now claiming started in 2002–03, and the IMF and OECD held contrary views, one is entitled to conclude that the Treasury was being less than fully objective on this occasion.

  In response to a question from a Liberal senator later in 2009, the Treasury said that because of big changes to the structure of the economy, it was inappropriate to stretch its 2009 budget-night structural deficit analysis back to 1971 as requested by the senator. Instead it provided an answer based on the structural deficit analyses of the IMF and OECD, both of which suggested that the budget had remained in structural surplus until the end of the Coalition’s time in government. Even the Treasury itself had begun to get cold feet about its structural deficit argument.

  On top of this, having run the line before the election in 2007 that Australia had to prepare for life after the resources boom, Kevin Rudd later happily endorsed the view that the China surge could last for years into the future.

  The real key to the economic success of the Howard Government was the close working partnership between Peter Costello as Treasurer and me. Since the election there have been some claims, particularly in Peter Hartcher’s book To the Bitter End, suggesting ongoing trench warfare between the two of us regarding economic policy, for a substantial period of my Government.

  Those claims are wrong. For the entire 11 years and eight months of the Howard Government, Peter Costello and I worked together in close professional harmony in managing the economy. The powerful evidence for this was the enduring strength of the economy over that time, and how that has carried Australia through the challenges of 2008–09.

  Costello and I agreed on all of the ma
in economic issues. We both believed in balancing the budget and eliminating debt. We both believed in a better tax deal for Australian families. We were both strong supporters of labour market reform and privatisation of Telstra. Both of us believed in policies which shifted people from welfare and back into work. We both supported central bank independence. Although there were some disagreements about detail along the way, we both promoted taxation reform.

  There were inevitably some differences, but not on the really major issues of government economic policy. That is the crucial point. Having got the budget back into balance, there was no way that either of us wanted to return to deficit. We even agreed that the desirable size for future surpluses should be at least 1 per cent of GDP.

  If the fundamentals of the relationship between a prime minister and a treasurer are sound, then there is no reason why, from time to time, there should not be differences between them on particular policies. No two people will think exactly alike. It is the role of the treasurer always to argue for expenditure restraint. It is the responsibility of the prime minister, at various times, to determine that some additional expenditure in certain areas is necessary. Peter Costello and I argued, on occasions, over particular levels of expenditure. That was a normal and proper part of the process. The important thing to remember is that all of the decisions relating to expenditure were taken within the guiding principle that the budget should remain in surplus.

  Unless a treasurer has the support of his prime minister on the fundamentals, then he is crippled. The dynamic of the cabinet process is that the backing of the prime minister is essential to winning approval of any economic change or reform which involves a measure of short-or longer-term political pain. Having held both positions in my career, I am better placed than most to understand that reality. In a professional sense, my relationship with Peter Costello was closer and more enduring than that of any other prime minister/treasurer combination in recent history.