Dog Days: Australia After the Boom (Redback) (4 page)

Cutting back protection allowed the Australian government to participate actively in multilateral trade negotiations for the first time. In turn, this supported the inclusion of agriculture among measures to reduce global protection. Australia’s sponsorship of Asia-Pacific Economic Cooperation from 1989 and its promotion of the idea of ‘open regionalism’ (regional trade liberalisation without discrimination against outsiders) was an important influence on many Western Pacific countries up to the Asian Financial Crisis of 1997–98.

When it came to winding back protection, there never was anything like majority support. Protection remained popular even when its removal was playing a major role in increasing Australian living standards during the 1990s and 2000s. Vested interests were well organised to spend heavily to block reform through lobbying, donations to political parties and public presentation of arguments against reform.

Nevertheless, through the Reform Era, the influence of both popular opinion and vested interests on the policy process was constrained by the presence of a substantial, well-informed independent centre of the polity. This independent centre ensured that leaders seeking political advantage by pandering to populist or vested interests would suffer harm to their reputations. It also ensured that a leader wishing to make major change in the public interest would have support.

REFORM AND THE RECESSION WE DIDN’T HAVE TO HAVE

The willingness of Australians to accept change increased during the economic instability of 1974 to 1983. Hawke took office just as unemployment rose to its highest level since the Great Depression, reaching 10.3 per cent in March 1983 and remaining there until September. Jobs were the first priority of the new government; structural change to raise long-term growth would proceed slowly until people were confident that employment was growing. But structural change to promote long-term growth was part of the government’s story about itself from April 1983: some steps were taken along that track from the May Statement of 1983, and few steps were taken that were inconsistent with the long-term direction.

Economic performance through the reform period breaks into three contrasting parts. The first seven years saw strong growth driven by the expansion of employment: from June 1983 until June 1990, economic output increased by 37 per cent and employment (total hours worked) by 29 per cent. By contrast, in the preceding nine years, output had increased by 21 per cent, and in the five years to June 1983 (collection of these data began only in 1978), employment had increased by a mere 2 per cent.

Prosperity was threatened in the mid-1980s by a large fall in the terms of trade, which took the exchange rate down with it. This was the first episode of a weak dollar after the floating of the exchange rate. It created alarm at the time, and was used by the government to galvanise action on reform. The low exchange rate of these years helped the winding back of protection.

Late in the 1980s, domestic spending began to grow at historically high rates, fuelled by a lift in the terms of trade and rapid credit expansion. Fiscal policy was firm from 1984 and tight in the late ’80s, with budget surpluses around 1.5 per cent of GDP – but not tight enough to offset the boom in private spending. Interest rates were raised again and again. The real exchange rate rose by one-third from a trough in September 1986 to a peak in September 1990. The vigorous expansion of manufactures and services exports from the beginning of the Reform Era now stopped.

Interest rate increases continued after political crises in the Soviet Union and China and then recession in the northern developed countries caused export prices to fall. In a familiar Australian pattern, the retreat of temporarily high terms of trade and the puncturing of a boom in debt-funded spending combined to cause recession. Monetary policy was tightened too late to stop the emergence of boom conditions, and then excessively and for too long so that it precipitated a deep recession.

This was the second part of the economic story of the reform era: the deep recession of 1990–91. Output fell by 1.6 per cent from peak to trough. Employment (monthly hours worked per adult) started falling earlier than output, fell more and kept falling for longer. Unemployment, which had fallen below 6 per cent in 1989, rose quickly to a new post-Great Depression peak of 11.2 per cent in December 1992.

There were two silver linings. The recession ended the high inflation that had persisted for two decades. But the costs were substantial: the loss of value in the recession itself; persistent long-term unemployment through much of the 1990s; the corrosion of skills; and the loss of confidence in market-oriented reform. We did not have to have the deep recession. Low inflation could have been purchased at a much lower cost.

The second silver lining was that leaders relinquished political control of monetary policy. Both the large increases in interest rates of the 1980s and the timing and extent of their easing were closely associated with Treasurer Paul Keating and the Hawke government. It is unlikely that the policy would have been different at this time if administered by an independent Reserve Bank: perceptions did not vary much across the senior echelons of the official family. However, after the recession no one in government wanted to argue for continued control of monetary policy. The Reserve Bank quietly assumed, then asserted, its independence. This was formalised by the incoming Howard Coalition government in 1996.

In the third part of the economic story of the Reform Era, Australia enjoyed the first half of its long boom. It entered the longest period of expansion unbroken by recession in its history – or in the modern history of any developed economy. The last decade of the Reform Era was characterised by low inflation. From the recession of 1990–91 through to 2000, Australian total productivity growth was the highest in the developed world, after being close to the lowest through most of the twentieth century.

REFORM FOR OPENNESS AND EQUITY

The removal of old barriers to trade began early and made Australians aware that they were living in an economy in which the relevant benchmarks were the best international practice.

Reductions in protection were gradual, with important decisions being taken each year from 1983 to 1991. First came the removal of quantitative restrictions on steel and a number of other major products. Large across-the-board cuts in tariffs were announced in 1988 and 1991. The March 1991 Statement, delivered in deep recession, covered the single largest step in the dismantling of protection: phased reductions extending to 1996 for most goods and to 2000 for the most highly protected.

Other major distortions were removed in 1983 and 1984: the system for allocating crude oil that had separated the domestic and international energy markets; and the requirement for government approval of the terms of all export sales of major resource commodities. Comprehensive regulation of prices and quantities for rural producers – notably the dairy industry – was removed in successive steps through the 1980s. From sharing with New Zealand the distinction of having the highest protection against imported goods (agricultural and industrial products together) of all developed countries in the early 1980s, by the mid-1990s Australia with New Zealand had the lowest.

The reforms led to even greater change in our international trade in services. Changes in education policy supported by adjustments to immigration in the mid-1980s saw the emergence of education as a major export industry. The removal of exchange controls led to direct overseas investment by Australian-based firms, which facilitated the rapid growth of a range of service exports. Civil aviation reforms were important to the rapid growth of tourism, with the ratio of inbound to outbound visits doubling over the period.

Financial reforms were commenced in 1983 and mostly completed by 1985: the removal of all foreign exchange controls and the floating of the dollar in December 1983; the removal of controls on interest rates; and the issue of licences for new foreign-owned banks for the first time since early in the twentieth century and on a scale without precedent.

Despite the high real exchange rate of the late 1980s, export volumes grew at a compound rate of over 7 per cent per annum throughout the Reform Era. Services and manufactures exports grew most rapidly. By the end of this time, Australia had a diverse range of exports, with similar contributions from services, resources, manufactures and rural products.

From 1983 until the end of the century, there was far-reaching public finance reform: the targeting of social security on people with lower incomes and without large assets; restraint in spending and removal of tax concessions as part of a strategy to balance the commonwealth budget over the economic cycle; the first commitment by an Australian government to limits on revenue, expenditure and the deficit as a share of the economy in Hawke’s ‘Trilogy’ of 1984; cuts in income tax alongside the broadening of the tax base to cover previously exempt (capital gains, ‘fringe benefits’) and largely exempt (superannuation) income; resource rent taxes for projects within commonwealth jurisdictions; and the replacement of the wholesale sales tax, and some state-based taxes and a small part of the income tax, by a broadly based value-added tax introduced by the Howard government in 2000.

Budget data was presented in new ways that allowed informed discussion of government finances. Forward estimates of revenue and expenditure were published from the mid-1980s. Early in the life of the Howard government a ‘Charter of Budget Honesty’ was introduced that required half-yearly release of budget estimates, with another such update to be made available by the secretaries for Finance and Treasury within ten days of an election being called.

The reform agenda covered the corporatisation of many public enterprises (which were required to operate independently in a competitive environment) and eventually the sale of almost all commonwealth businesses. Some states followed suit with the privatisation of utilities. Privatisation was preceded by careful work on regulatory policy in transport and communications. This was open to scrutiny as a basis for public discussion, and provided the foundations for a subsequent extension of competition policy.

The reform agenda included a large increase in investment in education, training, research and development. The proportions of Australians completing high school and tertiary education increased from below to above the average for developed countries.

There were also changes in taxation and provision of public services to support more equitable access. Most important were Medicare and support for low-income families with children. (The latter was of immense social significance, although derided for falling short of Prime Minister Hawke’s election statement that after its introduction no Australian child would live in poverty.) The cost of these was partly covered by income and asset testing of social security payments.

Labour-market reform in the early 1990s increased flexibility in setting wages and employment conditions. This was taken forward moderately by the Howard government in 1996, long before its step too far after the 2004 election.

There was one major move away from economically rational policies in 1999, which in some ways was an augury of the end of the Reform Era: a cut in the capital-gains tax rate, which reopened old opportunities for tax avoidance.

Most of the productivity-raising reforms were fiercely opposed by interests that stood to lose from them, by influential parts of the press and by majority popular opinion. Every one of the changes in isolation was politically difficult and offered an opportunity for rival parties to win short-term gains through opposition.

THE HELPFUL MYTH OF BIPARTISAN SUPPORT

A mostly helpful myth has developed that the Reform Era was characterised by bipartisan support for change. The reality is more varied and complex. The financial liberalisation can be fairly characterised as having had bipartisan support, most importantly from the shadow treasurer and later leader of the Opposition, John Howard. Cutting back protection had the active support of a minority of Liberal federal parliamentarians through the 1980s, but not comprehensive support until the elevation of John Hewson to the leadership after the 1990 election. Hewson accepted the recommendation in
Australia and the Northeast Asian Ascendancy
that Australia should remove all remaining protection by 2000. This provided political support for Prime Minister Hawke’s March 1991 Statement.

By contrast, the Opposition made rejection of the government’s measures to expand the tax base, and to target pensions more tightly, central planks of its 1984 election platform.

The reality was less complex when the Howard government took office in 1996. The Labor Opposition opposed moderate further steps towards a more flexible labour market in 1996. It gave support to cutting the capital-gains tax rate in half. It then opposed fiercely the government’s broader package of taxation reform incorporating a GST. Australia entered a period of policy populism in which bipartisan support was common for measures that favoured private and sectional interests, but rare for productivity-raising reform.

REFORM REQUIRES A NEW POLITICAL CULTURE

The quality of political leadership on both sides of the Parliament was crucial to the success of the Reform Era. From the beginning, the Hawke government sought to reorient Australian political culture. Hawke saw the disorganisation of the Whitlam Cabinet and its tendency to surprise the public with new policy announcements, and the social tension and conflict under Fraser, as causes of policy failure. He was determined to govern with order and without surprises, and with the support of as wide a spectrum of the community as possible. ‘Cooperation’ and ‘consensus’, ‘shared information’ and ‘shared understanding’ were guiding concepts.

The Hawke government came to office with an ‘Accord’ with the trade union movement. The parties to the Accord were committed to close cooperation to achieve high employment and strong growth. It was understood that success would require incomes restraint in the early years, which was to be secured within a framework of fair distribution.