Cabinet papers 1996-97: ‘Beazley’s black hole’ greeted new treasurer Peter Costello

The Keating government’s estimated surplus had evaporated and the new government pinned the blame on then opposition leader Kim Beazley.

When Peter Costello met with Treasury secretary Ted Evans after the March 1996 election, he was presented with a briefing paper that revealed a sharp ­deterioration in the underlying budget deficit that had blown out from $0.6 billion to $7.6bn.

The Treasury “executive minute” obtained by The Australian — which is not part of today’s official ­release of cabinet papers by the National Archives of Australia — revealed the headline budget surplus of $3.4bn was now a deficit of $4.9bn, and the new government was advised to make fiscal repair a priority.

MORE: Full coverage of the Cabinet Papers 1996-97

“Most of the deterioration flows from forecast economic ­parameters for 1996-97 being weaker than they were assumed to be at budget time and the flow-on effects of the downward revision to 1995-96 economic forecasts,” the minute explained to the new ­treasurer.

“There is little comfort to be ­derived from the fact that the ­deterioration mainly reflects revisions to the parameters rather than, say, policy decisions. Whatever the cause, the revised deficit figures provide the best available estimate of the extent to which outlays are unfunded; and the full amount of the deterioration flows through to public debt and ­reduced public savings.”

While Treasury advised Mr Costello that the economic outlook was “relatively favourable” despite mid-cycle adjustments, it nevertheless recommended “a discretionary tightening” of the budget position to the tune of 1.5 per cent of GDP, equivalent to about $8bn, over a three-year period.

In a March 1996 cabinet submission, Mr Costello acknowledged the outlook for fiscal policy was “generally favourable” but “less optimistic” than expected. He argued for “substantial fiscal adjustment” and it was agreed there would be a “discretionary tightening” of 1.5 per cent of GDP over a two-year period.

The Keating government’s ­estimated budget surplus had evaporated and the new government labelled the shortfall “Beazley’s black hole” after the former finance minister, then opposition leader, Kim Beazley.

Cabinet agreed to achieve fiscal consolidation “to the maximum extent possible through savings on outlays” — assisted by a new audit commission — but there was considerable opposition to cutting budgets by new ministers.

Amanda Vanstone, the minister for employment, education, training and youth affairs, complained that cutting grants, and increasing student charges, could “damage” universities. Michael Wooldridge won a reprieve when the Medicare Benefits Schedule was frozen for one, not two years. And Jocelyn Newman, the minister for social security, ­rebuffed a proposal to end unemployment payments after one year.

Mr Costello told The Australian the task of fiscal repair was achieved because it was deemed to be substantial and credible, there was strong cabinet buy-in, and ministers were able to explain why it was needed and how it would be fair across government.

“It was a shocking day,” he recalled on being told the true budget position. “Rather than coming in with our moderate spending cuts and our tax plan, we had to find 1.5 per cent of GDP before we could start. It was very unpopular with colleagues and it didn’t do me any good trying to convince them we had to go further.”

Fiscal repair was achieved largely through lower spending rather than higher taxation.