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

of the key budget measures on budget day. Costello would brief Howard in the final fortnight before bringing down a Budget on the scale of the improvement in revenue over forecasts and how he intended to calibrate the resulting tax cuts. It is clear that Costello kept the revenue forecasts from Howard prior to that period because he was concerned that if the prime minister knew of the scale of the increased revenue, he would find spending initiatives to allocate it to, rather than deliver the tax cuts Costello wanted. Costello even instructed the Treasury to ignore any requests from the Department of Prime Minister and Cabinet to be updated on revenue projections. Indeed, Howard has put it on the record that he struggled to get updated figures from his department because they could not prise them out of the Treasury. When Hartcher put it to Howard that this was a deliberate strategy on Costello’s part, he candidly replied, ‘I have no way of knowing whether that is true or false.’22

There were some disagreements between Howard and Costello about the scope and nature of the tax cuts. Regarding the 2006 Budget, for example, Costello told Howard that he proposed to cut each tax scale by 2 cents in the dollar, resulting in rates of 15, 30, 40 and 45 per cent. Howard had no problem with this, and Costello duly announced it. But when Costello told the prime minister a week before the budget announcement that he intended to lift the thresholds for the top two rates of tax to $100 000 and $200 000 respectively, Howard was adamantly opposed. He said such big increases would be seen as the government pandering to high-income earners. As Costello tells the story:

He would not budge. I got angry. We were at the end of the Budget process. I had conducted nearly all of the ERC. I was locked up in the Treasury. I was working under enormous pressure. The Budget had to be put to bed. I had not expected Howard to oppose my proposals. We had a heated argument.23

Here, Costello is being churlish. Just because he had put in the long hours expected of a treasurer in compiling the Budget, the prime minister did not have to automatically agree to his proposal. Costello complains that Howard was upsetting his Budget at the end of the process, rather missing the point that this was the risk that Costello ran by leaving his briefing of the prime minister so late. If Costello had taken Howard into his confidence earlier, they would have had more time to talk through the options.

As it turned out, Costello and Howard eventually compromised by agreeing that the thresholds would be increased to $75 000 and $150 000 respectively. The following year, Costello again tried to convince Howard to increase the top threshold to $200 000, but the prime minister would only agree to an increase to $180 000.

The Asian Financial Crisis

Costello had been federal treasurer for a little over twelve months when the Thai currency, the baht, came under pressure because of the identification of excessive capital flows based on short-term debt. Thailand was vulnerable because it had a fixed exchange rate and poor financial regulation. But the Thai economy was not alone in this. Countries such as Malaysia, Indonesia, South Korea and the Philippines, as well as the Chinese administrative region of Hong Kong, were soon confronted by equally severe challenges. Meanwhile, China, Singapore and Taiwan, while not directly affected by the crisis, suffered from the knock-on effects of subdued activity and confidence in the region. By the time it had peaked, the Asian financial crisis represented the biggest international conflagration since the Depression.

Although it would be surpassed in terms of seriousness by the GFC just over ten years later, the Asian financial crisis was nonetheless a serious threat to Australia’s ongoing economic prosperity. To establish its significance, it is necessary to consider a couple of key facts. As a result of the crisis, the Indonesian economy contracted by a full 13 per cent, and the number of people living below the poverty line doubled to an estimated 50 million. Indonesia was the most severely affected nation, but bigger economies were also at risk. South Korea, which suffered a 7 per cent contraction and required an IMF bailout, was at that time the world’s eleventh biggest economy, bigger than all of the Association of Southeast Asian Nations (ASEAN) economies combined. The effect of the crisis on international economic confidence was clearly profound. It was inevitable that Australia would be affected.

Events unfolded like this. On 2 July 1997, the Thai Government was forced to embark on a distressed float of its currency as it held inadequate capital reserves to maintain the exchange rate. The Thai economy was simply overheating because of short-term debt and real estate speculation. The collapse in the Thai currency led many investors, speculators and governments to closely examine the financial models of other Asian countries, and many were found wanting. The resulting crisis of confidence saw a credit crunch and further distressed floats of key currencies.

Of most concern to Australia was the situation in Indonesia. In late October 1997, Indonesia formally requested the assistance of the IMF in dealing with the crisis, and the following month Australia agreed to provide $1 billion as part of the bailout. The IMF imposed strict requirements on the Indonesian Government to rein in spending, abolish subsidies and deal with the crony capitalism that was also a feature of many other Asian economies. This was standard practice for the IMF, which was used to dealing with crises caused by rampant government spending. But the Asian financial crisis was different. Reducing government spending would do nothing to deal with the withdrawal of capital, the lack of confidence and the poor financial regulation that had led to the emergency in the first place. In addition, the scale and speed with which the IMF expected the Indonesian Government to make these