Malcolm Fraser's budget blowout was Bob Hawke's saviour

ON November 29, the National Archives Office released, under embargo until yesterday, cabinet papers for 1982 and 1983. Both years were eventful for the Australian economy. As secretary to the Treasury during them, they were also eventful for me personally.

I once described the Hawke government's decision in December 1983 to float the Australian dollar as "the most important single step in economic policy to be taken by any Australian government in the post-War period".

It is therefore ironic that National Archives historian Jim Stokes's "background" address barely mentioned that decision, nor is it mentioned in the introductory note to the "Economy" section of the cabinet papers. Stokes's address was based on having "extensively researched the cabinet papers for 1982 and 1983". The fact is there were no cabinet papers for the float decision. (Two Cabinet memoranda, written after it was taken, only addressed implementation details) Since, however, I have written about the float in Quadrant's current issue, and in The Weekend Australian on Saturday ("The dollar myth that floated"), I shall not further address it here.

The most important economic event in 1982 was the 1982-83 budget. For reasons mentioned below it could be argued that, the float apart, it was also the most important event for 1983. Against the 1981-82 background of a very subdued world economy and a crippling Australian drought, the outlook for 1982-83 (as stated in treasurer John Howard's cabinet submission) was if anything even gloomier, including "no growth in aggregate economic activity or employment", and "a substantial increase in unemployment". Thus, "framing this year's budget presents really acute difficulties. To put it bluntly, the economy has 'gone bad' on the government.".

In these circumstances "the Treasury believes the desirable outcome is as close as possible to overall balance, but in any event not more than an overall deficit of $500 million" (cf. 1981-82 deficit, $611 million). Howard considered "an outcome in the range of $1 billion to $1.5 billion would be the upper limit if we are to maintain the appearance of sound economic management". His warnings were largely ignored, with his prime minister already focused upon seeking an early election later that year. The published deficit became $1.67 billion, and was seen, Stokes says, "as a significant policy split between Fraser and Treasury" (not for the first time!).

As the year wore on, the budgetary situation went from bad to worse; by late February 1983, when Treasury and Finance completed their usual mid-year review of the figuring, and with the federal election campaign already in full swing, it was my unhappy duty to inform Howard that our best estimate of the deficit had blown out to over $4 billion.

On March 6, I received a call from a newly elected prime minister, Bob Hawke. My note for file records a cordial conversation during which "at no time.did Mr Hawke refer to the various apparently heavily backgrounded reports in the press regarding my own future under the incoming government", but merely requested an urgent update on the 1982-83 budget situation. Later that day I delivered to him, and treasurer-designate Paul Keating, two minutes (copies in my possession). The first, entitled "1982-83 Budget Outlook", responded to Hawke's request. It showed an estimated deficit of $4.345 billion, including an estimated increase in outlays of 18 per cent over 1981-82 which, if realised, would be "the highest real growth in outlays since 1974-75". The second, "Current Fiscal Situation and Outlook", went further. "Because the prospective situation in that area [the fiscal position] for 1983-84 is so truly alarming, I feel that I must also take this opportunity of informing you on that topic". "On the basis of the continuing expenditure programs of the previous government", and a weak outlook for receipts, "a 1983-84 deficit of around $9.6 billion" was projected. Importantly, that took no account of Labor's own election promises, estimated to add roughly $2.4 billion to the "no policy change" figure. Thus "the prospect is for a 1983-84 budget deficit of almost $12 billion, equivalent to around 6.5 per cent of projected GDP, the highest in Australian post-war history". To sum up, "the speed and magnitude of that deterioration [in the Budget balance] is almost without precedent among the major OECD countries in the post-war period".

Hawke used these figures (shrewdly) to abandon almost all of Labor's bloated election promises; to bring down a May mini-budget which cut spending growth significantly; and to produce an August budget in which the deficit, though still very high ($8.3 billion), was seen as almost respectable. Ironically, Fraser's budgetary blowout thus became the saviour of the Hawke government!

John Stone was secretary to the Treasury between 1979 and 1984.