Federal election 2016: reformers knew how to sell policy

Illustration: Eric Lobbecke

Thirty years ago this month, Paul Keating shocked voters out of their complacency and opened a new front of economic reform when he warned that Australia was at risk of becoming “a banana republic”.

Keating’s radio interview with John Laws on May 14, 1986 from a kitchen at a Labor fundraiser in regional Victoria set off a political firestorm, led to a plunge in the currency and sparked a rift with Bob Hawke.

Rarely have so few words caused so much controversy.

Today, as the major parties have given up on budget repair and structural economic reform, lessons from the mid-1980s crisis could not be timelier. The Hawke government, like the Howard government, seized the mantle of fiscal responsibility and turned it into a political virtue. They convinced voters to accept tough decisions in the national interest.

There is another parallel with the present because there was a correlation between the Hawke government’s response to a sharp deterioration in the terms of trade that threatened living standards and winning an election a year later, in July 1987. That was the last time we had a double-dissolution election.

Like Malcolm Turnbull’s government today, only months out from the July 1987 election the Hawke government was behind in the polls. Labor’s internal polling, mirroring the published polling at the time, showed John Howard was a good bet to make it to The Lodge. The Hawke-Keating government was written off.

In July 1986 — just a year out from the election — Labor slipped behind the Coalition in the polls. By August-September 1986, the Coalition was ahead of Labor by 48 per cent to 41.5 per cent on the primary vote.

Meanwhile, Labor’s own research showed it was in dire trouble and had “lost economic credibility”. But by April-May 1987, Labor was back in front.

What destroyed Howard was disunity in the Coalition — the ­bizarre “Joh for PM” putsch — and Hawke and Keating convincing voters they could continue to be trusted to manage the economy and balance the budget. The election quickly became a referendum on party unity and economic credibility.

But the contest for integrity on economic policy was not won until the election campaign. Keating, as driven and determined as ever, set out to destroy Howard.

The fatal blow came when Keating found a $1.6 billion hole in Howard’s tax package. It was the final nail in Howard’s political coffin — and it took him a decade to bust out of it.

The treasurer’s statement in May 1986 that Australia was at risk of becoming a “third rate economy” followed the release of the monthly trade figures for April. The current account deficit had increased to $1.48bn — the worst deficit since the depression. The value of our exports relative to imports was rapidly declining.

Cabinet papers show Keating had been warning his colleagues for months about the worsening balance of payments problem that exposed an Australia living beyond its means. The policy remedies were to continue to consolidate the budget, restrain wages and to push ahead with micro-economic reform.

The August 1986 budget and May 1987 mini-budget saw spending dramatically cut across the board: welfare payments and unemployment benefits, health ­programs, concessional pharmaceuticals, defence and foreign aid. Government assets were sold. Funding to the states was slashed. The ban on uranium exports to France was lifted.

The scale and speed of fiscal consolidation was unprecedented: $5.5bn in savings were made over two years (about $30bn today as a share of GDP) and outlays were reduced in real terms.

The budget papers show Keating delivered four budget surpluses in a row between 1987-88 and 1990-91. No government had achieved a budget surplus since the early 1950s.

Spending, according to revised accounting estimates, fell from 27 per cent of GDP in 1986-87 to 22.9 per cent in 1988-89. What is remarkable is that the size of government was reduced while taxation declined from 26.2 per cent 24.7 per cent of GDP over the same period. In other words, most of the heavy lifting on budget repair was due to reducing spending, not increasing taxation.

The contrast with the three budgets delivered by Joe Hockey and Scott Morrison — who both argued we faced a “budget emergency” just a few years ago — is stark. The 2016-17 budget shows spending will remain above 25 per cent of GDP into the 2020s and taxation is set to increase year on year to 25.1 per cent of GDP.

Budget deficits are now projected into the 2020s and our triple-A credit rating is at risk. Without higher growth, a bigger productivity dividend and improved competitiveness, we run the risk of the next generation being worse off than the present generation — something that has not happened in the post-war era.

The kind of fiscal consolidation necessary for sustainable budget repair achieved under the Hawke-Keating and Howard-Costello governments are now artefacts from a bygone era. The political class is simply not capable of responding to this kind of challenge. Instead, the Coalition and Labor are promising to tax and spend more. This is the tragedy of this election campaign.

Keating’s “banana republic” warning galvanised the government into action and the voters understood the scale of the crisis. Hawke and Keating knew how to articulate a complex problem and explain the solution. The polls started to turn back in the government’s favour and it won a third election a year later.

The contemporary relevance of the mid-1980s crisis and the policy response to it is that politicians who are prepared to make tough decisions and convince voters they are necessary will be rewarded. “Good policy is good politics,” as Keating said. But it is a political lesson that has been lost to history.