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

he saw as having an unacceptable impact on primary producers. Given most of the increase in national income that was fuelling the inflationary fire was in the form of increased profits for wool growers, Treasury naturally enough recommended that a profits tax be applied to wool growers as a direct contractionary tool. But it was as natural for treasurer Fadden to veto this proposal as it was for Treasury to suggest it. There was no way known a Country Party treasurer could countenance such a direct attack on this mainstay sector of Country Party support.

Having vetoed both an appreciation of the pound and a special wool tax, the onus was now on Fadden to come up with an acceptable solution to the inflation crisis. The scheme he subsequently created came to him one night at the Hotel Kurrajong, his accommodation in Canberra, after days of argument over how to solve the inflation imbroglio. He records in his autobiography that he wanted to write down his ideas about the scheme straight away, before he forgot any important element of it, and that he did so on the only paper he could find in his room: toilet paper. Given the adverse reaction the wool sales deduction scheme received when it was announced, it is fair to say that most wool growers would have thought toilet paper was the appropriate place for the idea to be recorded.

Instead of placing a special tax on wool growers, Fadden decided that they should instead be obliged to deposit 20 per cent of their takings with the government, which would be held as a down payment for future tax liabilities. This reduced the cash flow of the producers, but not their income over a longer time frame. The wool growers, however, didn’t fully appreciate how close they had come to paying extra tax, so the scheme proved wildly unpopular, with Fadden having to front rowdy protest meetings in wool-growing areas around the country. This led the treasurer to remark that his scheme was as popular with wool growers as Ned Kelly had been with the police.12 But although Fadden didn’t know it at the time, the wool sales deduction scheme would play a role in keeping Australia’s economic growth rate steady through the 1960s, as the gradual release of cash back to farmers who had deposited it in 1951 was stimulatory at times when wool prices were lower than normal.

The wool sales deduction scheme was the main contractionary measure in the 1950 Budget, which did not include any other measures to deal with the growing inflation—Menzies did not want to introduce too many unpopular policies before the April 1951 election. However, in Fadden’s judgement, this meant that the September 1951 Budget would need to be particularly contractionary. Indeed, it was by far the most controversial of Fadden’s budgets. It was the first time in Australian history that fiscal policy was explicitly used to reduce the amount of economic activity. Greg Whitwell describes it as ‘an event of major significance in Australian budgetary history’.13

The language in Fadden’s 1951 Budget speech underscores how explicitly he was embracing the Keynesian notion that the adjustment of government spending and tax levels could be used to efficiently manage the economy. He told parliament:

In a modern economy every individual and every organisation is affected to a considerable degree by what governments do in the way of raising and spending money. For this reason the financial operations of governments can, if appropriately directed, do a great deal to address the unstable conditions developing within the economy. On the expenditure side there is the strongest possible case for eliminating every item that can possibly be dispensed with.14

Having delayed the necessary action until five months after the election, in which voters returned the Liberal – Country Party coalition (although Labor did gain five more seats), Fadden did not now engage in half-measures, leading economic historians MJ Artis and RH Wallace to later comment that ‘the first exercise in fiscal manipulation proved to be the most vigorous’.15 Fadden’s Budget would be the first in Australia to be christened a ‘horror Budget’.

The measures Fadden adopted were significant, including a 10 per cent surcharge on all personal income taxes, and an increase in company tax, with a remarkable requirement that companies pay tax for the following fiscal year in advance, a move that any government in modern times would be unlikely to contemplate. Fadden also restored a regime in which the government discriminated against certain products through higher rates of sales tax (this discriminatory regime would survive until the introduction of the GST in 2000, which saw a general rate of tax adopted). It is difficult to conclude that there was much rhyme or reason to the products Fadden decided to punish: the sales tax on cars and ice-cream was increased to 20 per cent, and musical instruments suffered from an increase to 25 per cent, while jewels, furs and ornaments copped an increase in sales tax to a punishing 66⅔ per cent.16

Interest rates were also increased for the first time since the outbreak of World War II, and the banks were required to raise the levels of their deposits in the special accounts held with the Commonwealth Bank, but fiscal policy carried most of the contractionary burden. Fadden, acutely aware of the needs of the nation’s farmers, was loathe to increase interest rates by too much given the highly leveraged state of most farmers’ accounts. Menzies was also highly sceptical of the ability of interest-rate increases to impact much on economic activity. Even the Treasury preferred the direct levers of fiscal policy over what was seen as the more indirect tool of monetary policy.

One notable feature of the Budget was that Fadden highlighted that a surplus of £114 million was openly accounted for. In modern times, when surpluses are a point of pride for treasurers to note in their Budget speeches, it is easy to forget that this has not always been the case. In the pre-1951 era,