Main players: Former RBA governor Bernie Fraser, former prime ministers Bob Hawke and Paul Keating, and former Reserve Bank board member Sir Peter Abeles.Credit: Michael Howard
It was Paul Keating’s infamous “recession we had to have”.
But this masthead can reveal members of the Reserve Bank board – which had driven official interest rates to 18 per cent – made an unprecedented call on the Hawke government in 1991 to slash taxes and spend more as the country endured a recession that left more than 1 million people out of a job and devastated working-class communities.
Previously secret documents show some of the nation’s most important business and union leaders who were serving on the RBA board were worried about the economic “despair” spreading across the country which would eventually leave unemployment above 10 per cent for almost three years.
The recession we had to have – how Paul Keating’s famous words of 1990 were reported.Credit: The Age
On Wednesday, the RBA’s archives released a trove of documents including personal correspondence about staff, official photographs of bank employees and data on currency movements from the 1920s.
Among the documents are the closely guarded papers given to Reserve Bank board members for meetings held between 1985 and 1991. They give, for the first time, an insight into how the bank dealt with a recession it partly engineered while revealing an effective split between senior RBA staff and people on the board.
In a letter to Keating in May 1988, then RBA governor Bob Johnston said the only way to reduce the then sizeable current account deficit was through a “substantial slowing in domestic demand”, signalling higher interest rates in the year ahead.
“We are not advocating, however, a policy-induced recession,” he wrote.
Unfortunately, he was wrong as Australia entered its deepest economic downturn since the 1930s.
At the time, interest rates had climbed from around 10 per cent to 12 per cent. By the end of the following year, interest rates were an eye-watering 18 per cent.
At its December 1989 meeting, with former Treasury boss Bernie Fraser now governor, the bank held the cash rate steady despite signs the economy was starting to falter.
In notes to the board, the bank’s research department noted that while economic growth had “clearly slowed”, there were “few signs at this time of a rapid deterioration in activity”.
That was on December 5.
But within weeks, Fraser was considering the extraordinary move of cutting rates well before the next scheduled bank board meeting, scheduled for early February. In mid-January, he had prepared a letter to go to board members, explaining the need to cut interest rates by between 0.5 per cent and a full percentage point.
There was pushback from members who wanted a formal meeting, which revealed, despite “thorny” questions about the level of inflation, there were signs of a general economic slowdown.
A special meeting on January 22 approved a rate cut. Many more would follow. By the end of 1990, the cash rate was down to 12 per cent – the largest rate reduction in a 12-month period on record.
It wasn’t enough to stop the economy’s collapse.
Famously, Keating would declare “this is the recession we had to have” on November 29, 1990, when that day’s national accounts appeared to confirm a second successive quarter of negative growth. The recession’s impact would drag on for years.
At the bank’s November 1991 meeting, with unemployment at 10 per cent, the bank had cut interest rates another full percentage point, taking the cash rate down to 8.5 per cent.
It was at this point that the Reserve Bank board took an unprecedented step.
The released documents show an effective revolt among board members who argued the bank should write to then treasurer John Kerin to demand a swathe of policy reforms to get the economy growing.
In a sign of the unusual nature of the debate, the names of individual board members and their positions were noted in the meeting’s minutes. Traditionally, and to this day, the particular thoughts of board members are not revealed.
A long-term bank board member, prominent businessman Jack Davenport, is recorded as the person who proposed sending a message to the government.
He said while he supported a full percentage point cut in interest rates, he was “concerned that monetary policy could not solve all the problems confronting the economy”.
Bob Hawke with Sir Peter Abeles who was one of the RBA board members to call on the government to cut taxes.Credit: Anton Cermak
“He particularly mentioned the employment situation (talked of despair), the need for governments to support major projects, the need to encourage exports and the role of state governments,” the documents reveal.
ACTU leader and Keating confidant Bill Kelty, who critics argued was an unofficial member of the Hawke cabinet, backed Davenport’s position on the jobs market and the need to accelerate economic growth.
“He was, of course, critical of direction coming from the government,” it was noted.
Sir Peter Abeles, a transport magnate who was considered an economic adviser to then prime minister Bob Hawke, also supported a cut in interest rates but said it would not “help much”.
“Monetary policy had become a political tool. He wanted to ‘declare the board’s hand quickly to the government’,” the documents confirm.
Abeles and Kelty had been the two people to witness the Kirribilli agreement between Hawke and Keating in 1988, under which Hawke would step down in favour of Keating if he won the 1990 election.
In a sign of the concern among board members, Kelty said a “range of policies needed to be considered (beyond the blunt instrument of interest rates)”.
“We ought to be saying so strongly to the government,” he was recorded as saying.
One proposal canvassed by board members was to make tax-free any new industries or business that opened new plants, with the argument that there would be no loss of revenue as these industries did not exist.
But senior members of the RBA staff pushed back, noting new investment had held up through 1990-91 and that it would disadvantage existing firms.
Bill Kelty was often described as an unofficial member of the Hawke cabinet. He was a key confidant of Paul Keating.Credit: Fairfax Media
“Why should a new aluminium fabricator pay no tax whilst an existing one pays the tax?” it was noted.
The staff conceded that in some cases a tax holiday could “tip the balance” in favour of a business setting up in Australia, but this had to be balanced against the long-term viability of an industry that was only established in the country for a tax concession.
In a handwritten note alongside the submission, governor Bernie Fraser noted that “this kind of thinking got us into a lot of troubles in the 1900s”, referencing the introduction of an Australia-wide tariff when the Commonwealth was established in 1901.
The letter from Fraser to Kerin was dated November 19, five days after Hawke had released a statement on the outlook for the economy and jobs market.
John Kerin as treasurer in 1991. He held the post for just a few months, during which the RBA asked him to help prop up the economy.Credit: Fairfax
Fraser said the board was concerned that even with the most recent cut in interest rates, the economic outlook was not promising. If the situation deteriorated – unemployment would remain above 10 per cent until May 1994 – then monetary policy was only of “limited effectiveness”.
In a sign of his own concern about the board members’ ideas, Fraser undermined the argument for a tax concession for new businesses.
“This is an attractive notion but in practice no tax concession is costless; more fundamentally, the whole tradeable goods sector has to be encouraged and this requires more than selective tax concessions,” he wrote.
Kerin’s response to the unconventional letter is not recorded. But he would barely have had time to consider its contents: on December 8, he was dumped by Hawke before Keating defeated Hawke for the prime ministership on December 19.
On that day, Keating expressed regret about his comments of a year earlier about the “recession we had to have”.
“It did not reflect the government’s policy, and it was a statement which seemed too uncaring at the time. The government was never after a recession. Policy was only about a slowdown,” he said.
“We never wanted a recession. It’s a pity that the recession we now have is deeper than any of us would have wanted it to be, or needed it to be.”
Within two months, Keating would announce the $7.6 billion “One Nation” stimulus package, which included tax cuts, payments to families and large infrastructure projects.
But it was too late.
While inflation would collapse to its lowest level in 30 years, it came at a tremendous human cost.
When the Reserve Bank started cutting interest rates in January 1990, the jobless rate was 5.8 per cent – the lowest level since 1981, just before the 1982 recession. Among men, it was just 5.3 per cent.
Unemployment would not return to 5.8 per cent until April 2003. The male jobless rate would not return to 5.3 per cent until early 2004, as tens of thousands of men who lost work in the 1990-91 recession never found their way back into full-time employment.
It was Australia’s last recession until the COVID pandemic during which the Reserve Bank took official interest rates down to 0.1 per cent and created $500 billion through quantitative easing measures.
Unemployment would peak at 7.5 per cent before falling to 50-year lows of 3.4 per cent.
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