• Paul Tilley

Treasury and the Reformists II

Updated: Dec 4, 2019

The election of the Howard government in March 1996, with Peter Costello as Treasurer, revitalised the economic reform program in Australia – and Treasury was again a reform partner.

Budget repair and some governance architecture

Treasury’s Incoming Government Brief revealed a large budget deficit and an early focus of the government was remedial fiscal action. The 1996 budget contained tough measures to bring the budget back to balance and put in place a medium-term fiscal strategy to maintain an underlying balance on average over the course of the economic cycle.

In addition, the government enacted a Charter of Budget Honesty laying out requirements for the timing and content of budgets and their updates, including that Treasury and Finance would publish a pre-election update 10 days into an election campaign. No more budget black holes!

As Treasurer, Costello also released a Statement on the Conduct of Monetary Policy with the Reserve Bank that recognised the Bank’s independent role in setting interest rates and endorsed its 2-3 per cent inflation target. This was an important formalisation of the Bank’s role.

Financial sector reform and a crisis

The new government set in train some major economic reform processes, principally in the financial sector, workplace relations and the tax system.

The 1997 Financial System Inquiry, the first of substance since the 1981 Campbell Committee, was chaired by Stan Wallis and had a secretariat, led by Greg Smith, based in Treasury but with a mix of public and private sector people. It resulted in a new ‘twin peaks’ regulatory architecture for the financial sector with ASIC regulating market conduct and APRA having prudential responsibility.

The government also had to navigate the Asian Financial Crisis with Australia a central player supporting its regional neighbours – Thailand, Indonesia and Korea. Costello as Treasurer worked with Treasury, with Ted Evans as Treasury secretary, and the IMF shaping the international response. These events were a catalyst for the 1999 establishment of the G20, with Australia as a member.

Tax reform

The biggest, and hardest, economic reform of the Howard government was tax reform – in particular the replacement of a raft of Australia’s ramshackle commonwealth and state indirect taxes with the GST. The reform package also combined an element of commonwealth-state reform with all of the GST revenue going to the states.

The tax package was developed by a Treasury taskforce led by Ken Henry. The modelling of the GST impacts was extensive and crucial to the design of the rest of the package, including household compensation. This was a time when Treasury began using powerpoint presentations to brief ministers and ultimately for cabinet presentations.

While the base of the GST was narrowed in the political negotiations, the package was nonetheless a major reform. Together with the 1985 reforms, Australia’s tax system had been transformed from something like world-worst practice to something like world-best practice.

Resources boom

With the resources boom kicking in early in the new century, it became harder to make the case for economic reform – the burning bridge was less obvious. The budget had already been put on a strong footing in 1996 and with strong revenue growth driving budget surpluses the debates became more about how to design tax cuts and spending increases.

Permanent spending increases, particularly family benefits, were enacted on the back of temporary revenue increases. The budget surpluses, together with asset sales, also drive down government debt. Rather than eliminate debt, and the associated debt-raising infrastructure, the government established a sovereign wealth fund, the Future Fund, to manage an asset portfolio.

Treasury reform

During this period Treasury underwent some major internal reforms, both to its management structures and its policy perspectives.

In 1998, with Ted Evans as secretary, Treasury remodelled itself removing one layer of management, seeking to push day-to-day policy responsibilities down to middle management and leaving senior management to be more strategic. The performance management system was also reformed giving much greater emphasis to internal management issues – a traditional Treasury weakness.

In 2001, with Ken Henry as secretary, Treasury adopted a new wellbeing framework which established five dimensions for the consideration of Treasury’s policy advice: consumption possibilities; distribution; risk; complexity; and opportunity and freedom. This was an attempt to broaden Treasury’s perspectives beyond a narrow focus on GDP.

Treasury’s relationship with the government

Through much of the Howard/Costello government’s time there was a strong reform partnership with Treasury. That was particularly evident in the development of the financial sector and tax reform packages and the handling of the Asian Financial Crisis.

Towards the end of the government’s time, though, that relationship started to deteriorate. With the resources boom obscuring the need for reform and as the government’s political fortunes faded the government was less inclined to take advice from policy agencies such as Treasury.

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