The Money Men by Chris Bowen (i wanna iguana read aloud .TXT) 📗

told the conference that if he had a choice between foreign banks and Australian banks, he’d back the Australian banks every time. The ABA and the Australian Bank Employees Union joined forces to oppose the introduction of competition. The managing director of the Commercial Bank of Australia wrote to every employee warning of job losses if foreign banks were let into Australia.

Keating was not swayed by this convenient protectionist argument by the vested interests of the entrenched banking oligopoly. Nor was he interested in half-measures. He stuck to his guns at the conference, and his view won the day. Following Keating’s victory, the RBA and the Treasury called for expressions of interest from foreign banks wishing to operate in Australia. Economist John Edwards neatly captures the dynamics of what happened next:

The Government was expected to proceed slowly, introducing competition by degrees. Perhaps four banks would be permitted, perhaps six … In February 1985 Keating astonished the banking community by announcing that sixteen foreign banks would be licenced to operate in Australia, more than doubling the number of banks. ‘And they said it couldn’t be done’ Keating told the press conference.15

Other deregulatory moves would follow, including the lifting of restrictions on interest rates for new home loans. The net effect of this deregulation was inarguably positive and substantial, opening up the financial sector and therefore the economy to the rigours of international competition. There would, however, be teething problems. Desperate to keep market share in the face of new competition, the domestic banks loosened their lending standards and fuelled unsustainable corporate expansion throughout the 1980s. This would be one of the factors contributing to the booms and busts of that decade.

Budgeting for Booms and Busts

Every new prime minister and treasurer receives a briefing from the Treasury secretary on the day after the federal election. The briefing given by Stone to Hawke and Keating on Sunday, 6 March 1983 must surely be regarded as one of the most remarkable, and alarming, ever given to a new government. The outgoing administration had acknowledged the possibility of a $6 billion deficit for 1983/84, a substantial blowout compared with the $1.6 billion flagged when Howard had delivered the 1982 Budget. The reality was substantially worse than this. Stone told Hawke and Keating that the real budget deficit for 1983/84 was $9.6 billion. At 6.5 per cent of GDP, this represented the largest budget deficit in postwar history, and real spending was increasing by 7.5 per cent, the highest rate of increase since 1974/75. Taking into account cumulative state budget deficits, the public-sector borrowing requirement was the highest ever recorded.

Hawke and Keating were faced with several alternatives. They could implement their election spending commitments and see the deficit blow out even more. They could take no action and see the deficit come in at the projected level. Or they could make cuts in an attempt to bring the deficit under control. Hawke, Keating and finance minister John Dawkins settled on the third option. This was seen as a controversial call by the Caucus and the Cabinet. Spending cuts were bound to disappoint supporters with high hopes after seven years in the wilderness. For this reason, former shadow treasurer and now minister for industrial relations Willis opposed Keating in Cabinet, arguing that the Treasury had underestimated the extent of the downturn and that more stimulus was required. But Keating and Dawkins argued in the Cabinet that spending cuts were required to bring the deficit down to (a still very large) $8.5 billion. The reduction would need to be brought about by spending cuts because the Prices and Incomes Accord entered into with the ACTU was predicated on no increases in income tax.

By taking the fiscally responsible path, Hawke and Keating were deliberately differentiating themselves from the Whitlam years. They would be setting the tone for their entire government in seeking to successfully establish Labor as the preferred managers of the economy.

The 1983 and 1984 budgets contained cuts to make the deficit manageable, but also with a view to the early election that Hawke wanted to hold. Nevertheless, the 1984 Budget contained the courageous but wholly necessary decision to introduce an assets test for the age pension. This was a savings measure for the short term, but more importantly, it was a measure that ensured the long-term sustainability of the age pension. The Liberal Party, of course, opposed the means-testing, and opposition leader Andrew Peacock was able to mobilise an effective campaign on this issue in the lead-up to the 1984 election. Hawke, distracted by the news of his daughter’s heroin addiction, was not able to mount an effective counter-campaign. Despite being widely tipped to win an easy re-election in an enlarged House of Representatives, it was the Liberal and National parties that won an extra sixteen seats while the government won seven.

The re-elected Labor government would not face calmer economic seas in its second term. Instead, it was presented with a new set of crises requiring more robust fiscal contractions. The nub of the problem was Australia’s current account deficit (CAD), the gap between the value of the country’s exports and its imports. It was not unusual for Australia to run a CAD. Between World War II and 1980, Australia’s CADs had averaged 2.5 per cent of GDP. But in the early 1980s it began to creep up, and it rose dramatically in 1985/86, by which time it had reached an unsustainable level: 6 per cent of GDP. There were several reasons for the rise. Mining companies in the 1980s had imported large amounts of capital equipment in preparation for a mining boom that did not eventuate to the degree that had been expected. The recovery from the early 1980s recession had been strong, fuelled by an end to the drought and the expansionary impact of ongoing budget deficits. Finally, Australia suffered one of the worst declines in its terms of trade, dropping 14 per cent between 1986 and 1987.16 That the world market was prepared