The Money Men by Chris Bowen (superbooks4u .txt) 📕

and rhetorical backflip, overturning months of denial that a recession had been inevitable or even desirable by telling journalists, ‘This is the recession that Australia had to have.’ Together with his ‘banana republic’ riff, it would be the most-remembered utterance of his seven-plus years as treasurer. However, it did not reflect the reality that the recession represented a failure of policy. It also made him seem harsh and uncaring towards those who would lose their jobs or had otherwise been hit hard by the recession. Keating would later say that this was the one thing he said as treasurer that he regretted.

The recession would be debilitating, with unemployment peaking at 10.8 per cent. Unlike the 1981–82 recession, however, which saw high unemployment accompanied by high inflation, the 1990–91 recession saw the spine of inflation broken. This was due to the wages restraint that had been exhibited during the boom, and the fact that the RBA had kept interest rates so high for so long with the explicit purpose of moving Australia out of recession with a low inflation environment. Importantly, inflationary expectations (the rate at which Australians expect inflation to be, which therefore dramatically influences both consumer and business investment decisions) fell dramatically. There is no denying that the recession caused much economic pain, but economic policymakers, Keating included, knew that if Australia could successfully engineer a low-inflation environment, then a prolonged period of economic growth could follow.

Another point worth making here is that the recession might not necessarily have been avoided if interest rates had been raised earlier in 1988, or cut earlier and deeper in 1989. But it would have been less severe if Keating had prevailed over the RBA.

From Little Things, Big Things Grow

The concept of micro-economic reform was first introduced into the Australian political lexicon by Hawke and Keating during the 1987 election campaign, and it has stayed there ever since. The notion of improving Australia’s economy through a series of micro measures, as opposed to big, sweeping macro-economic reforms, was a novel but exceedingly effective concept, encompassing financial deregulation, reductions in protection, the privatisation and commercialisation of government enterprises, increased competition, tax reform and increased flexibility in the labour market. However, progress on these reforms was stop-start, with Hawke and Keating encountering plenty of obstacles, some of which delayed the implementation of important measures by years.

Micro-economic reform began with the financial deregulation of 1983 and 1984, although it would take until 1987 before Hawke and Keating brought the reforms under a coherent policy umbrella and started referring to their agenda as micro-economic reform. The next big agenda that Keating chose to pursue was tax reform, but this was nowhere near as smooth a process as that of financial deregulation. It led to the greatest rupture between Hawke and Keating until the latter’s 1991 leadership challenge. Keating nevertheless salvaged a substantial tax-reform package in 1985, and learnt from the defeat of his more ambitious plans that he needed to develop a stronger coalition in favour of reforms within the Cabinet and the ACTU. This was the secret to his success in later engineering massive micro-economic reform.

Tax reform in the early part of the Hawke government began largely by accident. In the lead-up to the 1984 election, opposition leader Peacock was making political headway with a scare campaign suggesting that Labor wanted to introduce a capital gains tax and death duties. Hawke made a snap decision to shut the issue down by drawing on the perceived success of the 1983 economic summit. Without consulting Keating, he announced that a re-elected Labor government would hold a tax summit, and that only reforms that won the consensus of the summit would be introduced. Keating decided to use the tax summit for the opposite of consensus. He argued for radical reform and engaged in a high-stakes game of brinkmanship designed to limit the options available to his prime minister and to his government. Keating risked his own viability as treasurer in order to maximise the chances of success for radical reform.

On Keating’s instructions, the Treasury prepared for the tax summit by developing three options for tax reform. Option A involved the introduction of a capital gains tax (with the family home exempt) and a fringe benefits tax, the abolition of the tax deductibility of entertainment expenses for businesses, the winding back of negative gearing, and the introduction of a gold tax. Option B included all of the above measures plus the introduction of a 5 per cent consumption tax. Option C was Option A plus the implementation of a 12.5 per cent consumption tax.

A consumption tax had been on the national agenda for several years. Treasurer Howard had himself mooted the introduction of such a tax, only to be overruled by prime minister Fraser in a radio interview. History was about to repeat itself.

Keating argued passionately for Option C within the Cabinet, with stakeholders and in public. He pointed out that income tax now represented 52 per cent of taxation revenue, compared with just 35 per cent in the 1950s. New sources of revenue needed to be found to lessen this reliance. Option A would allow the average personal income tax rate to be cut from 46 per cent to 40 per cent. But the imposition of Option C would see the average personal income tax rate reduced to a low 35 per cent.

Keating was not interested in half-measures. He included the 5 per cent consumption tax option only to highlight the virtues of the bigger reform encompassed by Option C. It was not a genuine process of a treasurer dispassionately placing options before the Cabinet for consideration. As Kelly puts it:

Keating’s tactic was to destroy Labor’s options. He depicted the existing system as unsustainable … it had to be changed radically. Keating’s aim was to generate such momentum for reform that the politics would be transformed—that retreat would be seen as political cowardice and that biting the bullet would become the lesser political risk.29

Keating won Cabinet approval to