Policy levers set to irrational

THE 1979 federal cabinet records, released under embargo by the National Archives Office on December 8, bring to mind that old joke about deja vu all over again.

In January 1979 I became secretary to the commonwealth Treasury, so that year's events and the papers recording them have a special familiarity. Turning through them recalls economic policy battles lost as well as happier outcomes; and occasionally there are papers not previously sighted.

Go to our 1979 Cabinet papers special section.

By 1979 the Fraser government, re-elected in December 1977 with almost as huge a majority in the House of Representatives as in 1975, was nevertheless labouring under the dreadful legacy of the Whitlam government and the consequences of its own past errors.

As NAO historical consultant Jim Stokes said at the document release, "John Howard in Treasury and Eric Robinson in Finance were equally tenacious advocates of budgetary restraint and fiscal reform".

But Howard's concerns went beyond the budget. As Stokes said, his "main concerns were rising inflation and an excessive growth in money supply". In his mid-July cabinet submission on the prospective 1979-80 budget, Howard stressed that on all three counts the government was in trouble.

The 1978-79 budget deficit, originally put at $2.8 billion, had become $3.5bn. This overrun, after an even bigger one in 1977-78, had created "a problem of credibility for the present budget which alone argues for erring on the side of caution".

Growth in M3 (the money supply measure then targeted) had increased from 8 per cent during 1977-78 to about 11.8 per cent during 1978-79. And since, as Milton Friedman said, "inflation is always and everywhere a monetary phenomenon", the consumer price index, having climbed by 7.9 per cent during 1977-78, unsurprisingly rose even faster during 1978-79.

The 1979-80 budget was the most successful of the Fraser government's seven. Having postulated a significantly reduced deficit ($2.2bn, down from $3.5bn), it actually came in slightly lower. Yet it was being framed within a policy straitjacket.

The economically illiterate regime whereby the commonwealth Conciliation and Arbitration Commission set wage awards that priced Australians out of jobs, continued. Industrial disputation was rife: a six-month-long dispute at the Kurnell oil refinery in Sydney ; a nine-day blockade of the Hume Highway; a 20 per cent wage claim by Australia Post and Telecom unions, with bans and limitations to enforce it; a 40 per cent wage claim from Hammersley Iron employees, leading to an ACTU threat of a three-day national blockade of Western Australia; and the list went on.

The government's only tools to combat inflation were fiscal policy, monetary policy (raising interest rates) and exchange rate policy (maintaining a somewhat overvalued Australian dollar to put external competitive pressures on domestic prices). Howard was beginning to make some ground on the first; but neither higher interest rates nor a strong exchange rate found favour with either powerful Country Party ministers or the prime minister, whose views (and interests) differed little from theirs. Indeed, so tight was the ministerial rein on management of the exchange rate that during 1979 the monetary policy committee of cabinet considered reports from the responsible body of officials (including the Reserve Bank of Australia governor and myself) on 12 occasions.

As to interest rates, among the NAO handout last month was a cabinet memorandum I had not seen before.

The nature of such documents requires a brief explanation.

It has long been the practice that ministers may, with the prime minister's prior consent, raise a matter in cabinet "without submission". In discussing that under the line item, they may table documents in support or for general information. Since February 1979 these cabinet memorandums have been registered and collated by the cabinet office.

The example referred to above, dated February 23, 1979, was addressed to Fraser by John Rose (one of his better private office advisers). Under the heading Reserve Bank Board and Bank Overdraft Rate, Rose sought to warn his boss against "the course you are on" namely, persistent attempts to bully the Reserve Bank (of whose board I had just become an ex officiomember) into reducing the maximum trading bank overdraft interest rate.

This two-page note encapsulates the problems faced by Howard and his policy advisers (including the Reserve Bank). A handwritten annotation on it says: "PM: This is the only copy of this note. It has not been circulated." It is not clear whether Howard himself was subsequently favoured with a copy. Certainly his department was not.

The memorandum sheds a fascinating and depressing light upon the attitudes, amounting almost to paranoia, within the Fraser inner circle. Consider the following quotes:

"The Treasury view is fairly widely known in the market: namely, that interest rates will need to rise in order that the government can get back control of the growth of the money supply."

"The Treasury view about the undesirability of reducing the maximum overdraft rate is known by the Reserve Bank board."

"In these circumstances it seems probable that the Reserve Bank board will maintain its position, leading to confrontation."

". . . It would be disturbing to the market to find the government fighting its monetary advisers to hold down the overdraft rate".

Critics "have been saying the government has reduced interest rates against official advice [and] an open confrontation would give strong ammunition to them".

"By allowing public confrontation.you run the risk of losing the public relations fight with the Reserve Bank board [and effectively the Treasury]".

In a paper to a University of NSW symposium on April 27, 1979, I had noted that "three decades of so-called full employment policies has the apparently paradoxical result that full employment has now become, at any rate for a time, inherently beyond the grasp of any government . . . in this and many other countries".

What I did not say, for obvious reasons, was that, with almost every policy lever locked in irrational positions, that objective was even more unattainable than those words implied.

John Stone served as secretary to the Treasury under John Howard (1979-1983) and Paul Keating (1983-1984).