The election of Malcolm Fraser’s government in 1975 promised a more stable and positive relationship between Treasury and the government of the day. The early signs were good but tensions soon arose that would lead to the splitting of Treasury.
Treasury was continuing to champion its fight-inflation-first policies: tight fiscal policy; tight monetary policy; wage restraint; and keeping the exchange rate on the high side. There were some early inroads - with the gradually tightening of the budget and the adoption of money supply targets - but insufficient for Treasury’s liking and there were tensions over the manner in which Treasury pursued its views.
The Case for Devaluation and a Split
The tensions between Treasury and Fraser came to a head over a proposed devaluation of the exchange rate.
Under the Bretton Woods agreement that had been put in place after World War II, the $A had been pegged to the £, then the $US, then a trade-weighted basket of currencies. Through the course of 1976, however, there was pressure for a devaluation. Fraser wanted to act quickly, to protect the ‘competitiveness’ of Australian industries, but Treasury was resistant preferring to keep the exchange rate on the high side as part of its fight-inflation-first policy.
The debate came to the Economic Committee of Cabinet on 5 November 1976. Fraser and the Country Party were arguing for a devaluation but Treasury and the RBA, with the support of Phillip Lynch as Treasurer, mounted their anti-inflation counter arguments. The Treasury arguments were persuasive on the day but Fraser left that meeting unhappy with Treasury and the level of influence he perceived they had.
Fraser’s mood was inflamed when a few days later a story by Kenneth Davidson in The Age disclosed details of the cabinet discussion, including that Fraser was soft on devaluation but had been defeated by Treasury and the RBA. Fraser was furious and blamed Treasury for the leak. The die was cast – the Prime Minister had already been contemplating a break-up of Treasury and he was now determined to break the department’s power.
On 18 November 1976 Fraser announced that Treasury would be split into two agencies: Treasury would be responsible for economic policy and the revenue side of the budget while Finance would be responsible for the expenditure side of the budget. The official reason given for the split was that Treasury had become too large and unwieldy for one minister. A newspaper headline told the real story: ‘Fraser breaks power of Treasury’.
The Modern Treasury
The story of the modern Treasury dates from this 1976 split. Able to focus on economic policy issues, free from much of the minutiae of the expenditure side of the budget, Treasury was better positioned to develop the arguments for the economic reforms the Australian economy badly needed.
Those reforms would still be some time coming though. The remainder of the Fraser government’s years were not a time of significant economic reform. John Howard replaced Lynch as Treasurer and continued to tighten the budget, bringing it back to balance before a break-out pre-election budget in 1982. The government also commissioned the Campbell Committee inquiry into the financial system in 1979 but substantial action wasn’t taken.
The focus remained largely on macroeconomic levers to control inflation, with debates being around Keynesian versus monetarist policy approaches. What was needed was a major microeconomic reform program – but that would have to wait for a new government and a new dynamic between Bob Hawke and Paul Keating.