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

prevailed. While the Cabinet toyed with the idea of retrospectively banning blatant and contrived tax schemes to the date of a general announcement, they did not list this for further consideration prior to the 1983 election, which would see the defeat of the Fraser government. Howard was more proactive in following the advice of the Treasury in making bottom-of-the-harbour schemes a criminal offence, not just a civil one—advice that, as he records, ‘caused me to swallow hard’.24 Budget day 1982 also saw Howard announce a plan to recoup the revenue lost from bottom-of-the-harbour schemes, a measure that was of considerable help in his efforts to deliver a budget deficit of $1.7 billion at the same time as delivering the election tax cuts his boss had demanded. However, even bottom-of-the-harbour schemes had their defenders on the backbench of the Liberal Party, with fourteen Liberal and Country Party members crossing the floor of the House. Given the support of the Labor opposition for Howard’s legislation, their rebellion was fruitless.

Howard’s actions in cracking down on tax evasion lost him some support in the Liberal Party. Party doyens in Western Australia in particular held a grudge against him. In 1982 the Western Australian branch of the Liberal Party took the extraordinary step of taking out a full-page newspaper ad to protest Howard’s action. That branch would also play a role in Howard’s demise as Liberal leader in 1988.

While Fraser and Howard were not entirely in sync on how to deal with the scourge of tax evasion, their objectives were closely enough aligned for them to be effective advocates and deliverers of serious reform. Alas, this unity of purpose was to escape them when they came to deal with a matter arguably even more important than the integrity of the tax base: the need for financial deregulation in Australia.

The Great Financial Deregulation Blame Game

Howard and Fraser each blamed the other for their government’s lack of progress on financial deregulation. Howard has portrayed himself as being pro-deregulation and consistently frustrated by a truculent Fraser, who resisted reform. Fraser described himself as the proponent of sensible deregulation who was blocked by a timid treasurer and a reactionary Treasury, and who pushed through what reform there was against fierce opposition.

There are clear heroes and villains in the stop-start efforts towards a more sensible system of financial deregulation in the latter part of the 1970s and the early 1980s, but neither Howard nor Fraser are among them. A few individuals were consistent advocates of sensible deregulation: Ed Visbord and Ian Castles of the Department of Prime Minister and Cabinet should be judged well by history in this regard, as should (at least for his role in this imbroglio) John Hewson, who was Howard’s key economics adviser, and Fraser’s adviser John Rose. Likewise, it is clear who stood against deregulation and should be viewed less kindly by history. The institutional resistance of the Treasury and the RBA delayed necessary deregulation and does their performance in this period no credit.

It is worth recapping just how all-encompassing government control of financial institutions was in the 1970s. The government determined the value of the Australian dollar, the interest rates that banks could charge on loans and offer for deposits, and how much banks had to deposit with the RBA at any one time. No foreign bank was allowed to operate in Australia, meaning the country was a market effectively closed to new competitors. The government determined the interest rates that would be offered for government bonds, which meant that it had a strong say in the price of basically all financial transactions in Australia. Australia’s banks had very limited scope to make their own decisions, and accordingly to compete for customers. Like the centralised wage-setting system and high tariff walls, financial regulation was a symptom of the protectionist thinking that regarded a high level of government intervention as being necessary to defend Australia’s national interests.

Fraser was essentially a conservative, not a radical. His rural upbringing meant that he had much sympathy with the interventionist instincts of the Country Party. His closest allies in the government were not Liberals but Country Party men—Doug Anthony and Peter Nixon in particular, and Ian Sinclair to a slightly lesser extent. While suspicious of big government, he was equally suspicious of big business, and big banks in particular. He was therefore largely comfortable with high levels of regulatory intervention. While he had invited both Milton Friedman and Friedrich von Hayek to The Lodge on their Australian visits, his sympathy with their agenda had a lot more to do with low tax than it did with the more widespread retreat of the state.

Howard, on the other hand, had deep-seated pro-business instincts, though it took a long time before these developed into a pro-market ideology. Howard was heavily influenced by a 1978 book by former US Treasury secretary Bill Simon, A Time for Truth, which called for a radical deregulatory agenda in the United States. But he was well into his tenure as a minister when he read the book, and his intellectual and ideological development was far from mature when he first became treasurer.

The momentum for financial deregulation had been building since the early 1970s. The collapse of the Bretton Woods system of international economic management was the beginning of the end of government control of exchange rates. There were successful attempts to circumvent the stifling government controls over banks, with the rise in popularity of non-bank financial institutions such as building societies and credit unions. Banks were rationing credit, particularly to small businesses, when they were not allowed to charge the interest rate that they felt was an adequate return for the risk they were undertaking. The nascent Thatcherite and Reaganite movements started to stir in the early 1970s and achieved their first electoral successes in 1979 and 1980 respectively, further increasing interest in deregulatory approaches. Conversely, high levels of government regulation actually made monetary policy less effective, and the rise in popularity of Milton Friedman’s monetarist