by John Howard
Costello and I had essentially the same economic philosophy. We would agree, in the lead-up to a budget, that the order of priorities was to ensure that there was adequate investment in important areas such as Health, Education, Infrastructure and, importantly for me, Defence. Again, after allowing for an appropriate surplus, any excess should be devoted towards taxation relief, either by way of Family Tax Benefit enhancements or reductions in rates of tax or alterations in tax thresholds. It was an orderly process and its logic was compelling.
Chapter 24 is dedicated to the subject of Peter Costello’s first budget in 1996, which was crucial to the Government’s later success. It set the standard, and it was a gold standard. After that budget of August 1996, the atmosphere was of a government in charge which was serious about reform. Major reforms had already been implemented, and the fiscal turn-around of that first budget further consolidated what had been a very active first six months for the new government.
The pattern had been set for the rest of our time in government. Expenditure restraint in subsequent budgets did not match that of the first budget, but it was always sufficient to ensure that we delivered a budget surplus (or very close to it on one occasion). The commitment of the Treasurer and me to balancing the budget became a key foundation stone of both our economic recovery and enduring economic strength. It became accepted wisdom that we would never go into deficit.
The early return of the budget to surplus and the continuing health of the Australian economy, which in turn produced falling unemployment and rising tax revenues, provided the Government with more fiscal flexibility. It was possible to spend more without being economically irresponsible. The proper measure of whether or not government expenditure is excessive is not its nominal growth, rather its share as a proportion of GDP, or national wealth. A bigger economy can responsibly accommodate greater expenditure. Like so many other things, its relative size is the fundamental benchmark.
Those critics who have claimed that my Government spent too much have overlooked several factors. As a proportion of GDP, Commonwealth Government spending during my Government’s term in office actually fell from 26.2 per cent to 24 per cent. When the Howard Government left office, Australia had the third-lowest level of general government outlays (including the states) in the OECD, at 36 per cent; slightly lower even than in the United States and Japan and significantly lower than the average in Europe.
Some would reply that it should have fallen further, and that my Government had been the beneficiary of a rapidly growing economy. That in turn overlooked other considerations. If the economy had not been growing strongly, then inevitably government expenditures sensitive to the economy would have been larger (unemployment benefits, for example), and the size of the surplus may well have been lower so as to stabilise the economy. This in turn would have affected discretionary expenditure decisions, given the Government’s determination to keep the budget in surplus.
It was also the case that some of the good health of the Australian economy flowed from the confidence impact on the business community and overseas investors in particular, knowing that Australia was in the hands of a government determined to get out of deficit, pay off debt and keep the budget in surplus. At a time when this was far from a universal economic credo, the confidence impact should not be underestimated.
My Government maintained fiscal discipline through a time when large additional spending was required for both Defence and intelligence activities. From 1999, the demand for extra resources in these areas was without precedent in a period of more than 30 years. The terrorist threat which confronted the world from 11 September 2001 onward increased, quite dramatically, the pressure for these extra resources.
Importantly too, the distinction between spending and taxation has become totally artificial in certain areas. For example, Family Tax Benefits appear on the spending side of the budget, despite their origin being tax breaks for children.
I learned, during a meeting of the Expenditure Review Committee (ERC), that all of the money put aside from the budget to fund the 30 per cent rebate for private health insurance was classified as an outlay. This included the cost to revenue of the admittedly small percentage (about 7 per cent) of people who claimed the rebate in their tax return, rather than request that it be paid to the private health insurer. The explanation I was given when I queried this practice was that ‘from an accounting point of view it was simpler’.
In similar vein Treasury and Finance treat any tax credit that is made refundable — that is, it will be paid even if someone did not have a tax liability — as an expenditure item, and it appears on the outlays side of the budget. Refundable imputation credits, the refund of the excess of the company tax paid on a dividend over the taxpayer’s own rate of tax, are shown in the budget as an expenditure item. It would be hard to find a single self-funded retiree in Australia receiving an imputation credit who treated it other than for what it was: a refund of an over-payment of tax. It is not a government hand-out, and assuredly not middle-class welfare.
In many ways, the goal throughout our time in government was to remove, progressively, the speed limits on the growth of the Australian economy, by increasing its flexibility and enhancing the supply-side factors that are fundamental to our productive capacity. The Australian economy had been no stranger to periods of strong economic growth; the problem had always been its durability. In the past such growth could not be sustained because it would inevitably come up against rigidities or bottlenecks in the economy affecting the capacity, or supply side, of the economy, causing inflationary and balance-of-payment pressures which had to be met by lifting interest rates and contracting the economy. The description ‘boom or bust’ accurately captured the character of the Australian economy on earlier occasions. It did boom in the 1950s and ’60s. That boom took place behind a protective wall, and in a world that disappeared, never to return.
The Australian economy came face to face in the 1970s with the need to change fundamentally, not only to recover from the affliction of stagflation but also build the basis of sustainable growth in the years that were to follow.
Australian policy makers were forced to embrace far-reaching change in areas of which I have written; namely financial market deregulation, labour market changes, taxation reform, privatisation and tariff reform. The domestic political story of Australia in the past 30 years has, largely, been the response of leaders to that challenge.
I have not included fiscal consolidation or balanced budgets in that group of reforms. That is because balancing the budget is in part a product of the functioning of the real economy, and it was the impact of policies in the areas which I have mentioned that improved the functioning of the real economy with beneficial consequences for the budget. This is not to diminish the great significance of those early and hard budget cuts which returned the national books to the black. Fiscal consolidation eased, considerably, pressure on interest rates and reduced the risk premium in AU$ denominated assets.
The difficulty faced by the Fraser Government as well as the Labor Party, then in opposition, was the reluctance of a generation of politicians who had learned their craft and formed their ideas in the more protected environment of the Menzies/McEwen period of economic management in Australia to change their approach to economic policy.
Their attitude had been barely surprising. The 1950s and ’60s were, collectively, a comfortably long period of considerable prosperity and extremely low unemployment. Most Australians under the age of 45 with whom I have discussed the subject found it difficult to accept that at the change to the Whitlam Government in the 1972 election, Australia’s unemployment rate was less than 2 per cent.
Both sides of politics have played a positive role, in government, in bringing about the major reforms, of which I have written. Therein lies a crucial distinction. I have deliberately said ‘in government’. Only one side of politics, the Coalition side, has played a positive role in bringing about reforms in opposition. P
olitical parties have obligations in both government and opposition. Policy work in opposition can be influential as well as rewarding.
The notable economic reforms of the past three decades in Australia comprised the unopposed reforms of the Hawke/Keating period and the opposed reforms of the Howard Government. There is no artificiality about such a distinction. In modern combative politics, the readiness of an opposition to support a serious reform not only smooths its passage through the parliament but removes much of its controversial nature.
Financial deregulation, especially floating the dollar, and tariff reductions were the two really praiseworthy reforms of Labor in power. The Coalition indemnified the Labor Party politically in respect of both. Hawke and Keating had no stronger supporter than me in further dismantling regulation of the financial system. A fear campaign aimed at blue-collar Labor voters when the ALP decided to cut tariffs would have been absolutely lethal, if the Coalition had embraced it. Instead the Coalition backed tariff reform.
These bipartisan gestures were never reciprocated after the Howard Government came to power even when, in the case of the GST, we had received the most explicit mandate ever from the Australian people for a major reform. Labor not only opposed taxation reform, but labour market changes and, incredibly, privatisation of Telstra, ignoring the fact that our support in opposition had facilitated Keating’s privatisation of the Commonwealth Bank.
Taxation reform, centred on the introduction of a goods and services tax, had been a long-overdue reform. Before it came about, however, the Australian economy was to come through a challenge which gave an early sign of its gathering strengths. That was the Asian economic downturn of 1997–98.
Both Peter Costello and I were concerned as the contagion ripped through Asia that it would spread to Australia. There were many institutional reasons why this should not have been so. Our banks were stable with a balanced regulatory environment. My Government had sent an unambiguous message to markets, both financial and otherwise, that we would run a disciplined fiscal policy. We had begun in earnest the task of industrial relations reform. In 1997 I signalled that we would tread the long path of taxation reform. We had eschewed an interventionist approach with industry policy. There was no crony capitalism in Australia. All of these things meant that the Australian Government was seen in the rest of the world as being serious about economic reform.
That being said, the flexible exchange rate then enjoyed by Australia played a crucial role in our avoiding the impact of the Asian economic downturn. An economic adjustment, as a consequence of the downturn, was unavoidable. That adjustment was taken on the exchange rate. The value of the Australian dollar fell. Wisely the Reserve Bank kept its nerve by not lifting interest rates, and we rode through the Asian economic decline virtually unscathed. Not only was Australia largely to avoid the effects of the downturn, it was able to play a major role in helping nations in our region recover.
Australia and Japan were the only individual countries to provide supplementary help to that of the IMF to help nations in Asia adjust to the impact of the downturn. Our assistance packages to Thailand, Korea and Indonesia were not only important signs of the capacity of the Australian economy, but they demonstrated our credentials as an economic partner in the region. Their psychological value was great, if not greater, than their economic assistance. Australia felt assertive enough to lobby hard with both the Americans and the IMF to ease the stringency of the adjustment measures imposed on Indonesia. A nation feeling less confident about its gathering economic strength would not have done what Australia did in response to the Asian economic downturn.
In office the Government took only two major tariff decisions. They related to the motor vehicle industry and the textile, clothing and footwear sector. Tariffs were on a downward path and had reached a level where, with a floating exchange rate, a further change in the nominal tariff level was of lesser significance. The downward movement continued under my Government, although not at the rate sought by the Productivity Commission and the Treasurer. Despite Labor having cut tariffs in Government and been supported by the opposition, the Beazley-led opposition took the opportunistic approach of calling for a freeze on further tariff cuts.
As we approached the turn of the century and the dawn of a new millennium, two aberrations appeared on the Australian economic scene. It was impossible to know whether the first of them, the Year 2000 (Y2K) scare, was an aberration or a real threat. My instinct was that it was an aberration, but like others I felt we had to treat it seriously, spend a lot of money preparing as best we could and hope that the computers would not switch off and planes fall out of the sky. Thankfully, that turned out to be the case.
The other aberration was the growing belief on the part of some economists, certain foreign investors with interests at stake and quite a few opportunistic doubters that Australia was an ‘old’ economy. Their argument was that with its heavy reliance on the mining industry and the lack of an indigenous information technology (IT) industry, Australia was increasingly seen as an old economy.
In retrospect it was an astonishing proposition which highlighted a reality. The reality was that by the beginning of 2001 the mining industry was not yet seen as the generous benefactor of the Australian economy. What is now called the China boom was certainly not there in 2001, and did not arrive in earnest until two years later. That, of itself, is an important item in the economic narrative of my years as Prime Minister.
Critics have constantly said that it was all made easy for Peter Costello and me because we had the boom in China. The truth is that much of the heavy economic lifting had been done before the China boom arrived. We had restored the budget to balance; we had introduced a new taxation system; we had fixed up the waterfront and gone a long way down the path of industrial relations reform. The privatisation of Telstra was still a work in progress, due to the unyielding obstructionism of the Labor Party and others in the Senate. That criticism merely disclosed a serious lack of wisdom on the part of those who made it.
The old-economy argument levelled against Australia reflected a mindset which wrongly assumed that an industry that had been around for a long time was all beef and little brain. As a simplistic consequence, the conclusion was drawn that the Australian economy had little future because of its heavy reliance on both agriculture and mining. A companion to this argument was that Australia needed an indigenous IT industry; that unless we generated our own know-how in this area, we did not have a future. Once again, this was an extraordinary proposition and gainsayed the reality that whether technology was home-grown or imported, provided it was available, it could transform the operation of a firm and a whole industry.
Much of this rather fatuous economic nonsense emanated from the World Economic Forum (WEF) which was held in Melbourne in September 2000. These wrongly held views that Australia was an old economy played a part in the decline of the Australian dollar late in 2000, which continued into 2001, when it hit a low of US47.73 cents on 3 April. The early part of 2001, and particularly March, was a hard month for economic management. There was news that the economy had contracted 0.6 per cent in the December quarter; unemployment rose; there was a 15.4 per cent plunge in the Westpac–Melbourne Institute index of consumer sentiment for March, and this was on top of continued public unhappiness about the price of petrol. The further slide in the dollar pushed up the price of petrol and risked cancelling out the benefit of the excise reduction I had announced only a short time earlier. My respect for Ian Macfarlane as governor of the Reserve Bank was further reinforced during this time. As had been the case in the teeth of the Asian downturn, he held his nerve on interest rates.
Despite the problems, I was convinced that the fundamentals of our economic management were correct. I did not have to wait long for confirmation of that belief.
The pricking of the so-called high-tech bubble in the United States in the first half of 2001 had a big impact on perceptions of the Australian economy. Having sunk to be
low US50 cents, the dollar began a strong recovery. Interest rates in the United States were cut as it appeared that its economy was heading for a mini-recession. Thus the interest rate differential between the two currencies widened, which assisted the rally of the Australian dollar. By the middle of the year, perceptions about the economy had fully recovered. The belief that Australia had operated an old economy was seen as quite nonsensical. The ‘tech wreck’ in the United States had brought many people back to earth. We had been on the right course in Australia and the soundness of the fundamentals of our economy re-emerged.
That first half of 2001 would be the last period in which the Australian economy would face particular difficulties in the time that my Government remained in office. The next almost seven years were to be ones of continued economic growth and, most importantly, progressive falls in the level of unemployment. This time marked, in effect, the half-way point in the life of the Howard Government. Unemployment, when the government had been elected in March 1996, stood at 8.2 per cent. By March 2001 it stood at 6.5 per cent. In February 2008, just after the Government’s defeat, it had nudged down to 3.9 per cent.
With some of the unavoidable dislocations associated with the introduction of the GST now behind us, the Australian economy had the right settings for an acceleration of economic growth. We were now in a better position than ever before to remove some of those speed limits on our national growth.
The hard decisions which put us in a position to grow at a faster rate were to have a fairly early reward. It was within a year or two that the beneficial effects of the China boom began to be felt by the Australian economy as our sales to that country accelerated. Between January 2004 and January 2009 the value of Australia’s merchandise exports to China quadrupled. As if to dramatise the arrival of China as a major contributor to our economic growth, early in 2002 the North West Shelf Consortium would sign the $25 billion contract for the export of LNG to the Guangdong Province in China which I have detailed elsewhere.