The election of the Hawke government in March 1983, with Paul Keating as Treasurer, ushered in an Australian era of economic reform – with Treasury a partner in much of that reform program.
Initially, the central instrument of the government’s economic policy strategy was the Prices and Incomes Accord with the ACTU which was endorsed at the April 1983 economic summit. The accord provided a mechanism to tackle inflation and unemployment simultaneously – consensus style – and was subsequently used to also pursue policies such as the spread of superannuation.
It was, however, the government’s broader microeconomic reform agenda that would reshape the Australian economy.
Floating the exchange rate
The government’s most significant economic decision in its first year was the floating of the exchange rate in December 1983. This was the government’s coming of age - but Treasury was not fully on board.
Following the breakdown of the Bretton Woods exchange rate system in the early 1970s the Fraser government had moved to a ‘managed float’ in 1976 . But there was ongoing debate about a move to a full float. The 1981 Campbell Committee report had recommended major deregulatory reform of the financial system, including a full float of the dollar, but this remained unactioned.
The debate played out in 1983 with Treasury, with John Stone as secretary, resisting the move to a full float. Treasury had long sought to keep the exchange rate a little on the high side as part of its fight-inflation-first strategy and favoured a slower, more-sequenced deregulation of the exchange rate. Keating was reluctant to make the move without Treasury’s support.
With speculator pressures on the $A mounting, though, the government took the decision to move straight to a full float on 9 December 1983. Treasury was out in the cold.
These events resulted in some breakdown of the relationship between the government and Treasury and in particular with John Stone. Stone left Treasury in 1984 and was replaced by Bernie Fraser - a very different relationship with the Hawke/Keating government would emerge.
Tax and other microeconomic reforms
The first big microeconomic reform of the Hawke/Keating government was the 1985 tax package. The Australian tax system was in bad shape and in the 1984 election campaign Hawke committed to holding a tax summit in 1985 - giving Treasury barely 6 months to pull together a major tax reform package.
While the GST proposal in the package did not gain support at the tax summit, a major reform package was achieved with a capital gains tax, a fringe benefits tax, a foreign tax credit system, a dividend imputation system and personal income tax cuts. This was a major reform of Australia’s tax system - but the GST would have to wait another 15 years.
The floating of the dollar and the tax package were major reforms but the structure of the Australian economy still bore the legacy of a regulatory philosophy that dated back to WWII and earlier. Industries had developed behind protective barriers and Australia was falling behind emerging economies, especially in Asia. As Keating said in 1986, we were at risk of becoming a banana republic.
A series of major economic reforms were developed. The 1988 economic statement cut the company tax rate and put in train a phasing down of tariffs which was extended in the 1991 competitiveness statement. Workplace relations reforms were largely pursued through the accord arrangements, including greater enterprise bargaining. National saving was enhanced through consolidation of the budget position and introduction of compulsory superannuation.
Some major competition policy reforms and changes to the regulatory structure were set in train by the 1993 Hilmer Competition Policy Review report to COAG. Key to advancing these reforms was the competition payments to the states and territories conditional on the achievement of reforms. There was also a number of GBE privatisations, at commonwealth and state level, that drove greater productivity.
The recession we had to have
While these microeconomic reforms would set the Australian economy up for future growth, it was still struggling with the transitions and international economic forces. In this context the setting of monetary policy became the subject of intense debate. There were the hawks and the doves – including in Treasury where David Morgan was the key hawk but Bernie Fraser was the key dove.
By the late 1980s the economy was overheating with an asset price boom and inflationary pressures mounting – the hawks were pushing hard for interest rate increases – the doves were arguing for more weight to put on other policy instruments such as fiscal and wages policy.
The economic forecasts of Treasury and the RBA were crucial but even as the cash rate reached 18% in November 1989 Treasury was still forecasting a soft landing – but that was not to be. Bernie Fraser had moved to the Reserve Bank in September 1989 and was replaced by Chris Higgins. With the hawks in the ascendancy in Treasury they then resisted the pace of the subsequent decreases in interest rates in 1990 – they saw a real chance to break inflation.
The economy went into recession with the 1990 September quarter National Accounts. Keating infamously said ‘this is a recession that Australia had to have’ – a particularly insensitive remark at the time but one that ultimately had some truth. Australia has since had 28 years of continuous low-inflation growth.
For Treasury as an institution there was significant fall-out from these events. The inadequacy of its economic forecasting – its flagship skill - had been exposed. This would be a catalyst for a major rebuild of that capability with a more integrated process involving: specific sectoral analysis; macroeconomic modelling; and business liaison.
Treasury’s relationship with the government
Through most of the Hawke/Keating governments’ time there was a strong reform partnership with Treasury. Treasury was back in from the cold.
