The Money Men Chris Bowen (the red fox clan .txt) 📖

cent. These and other promises Howard made amounted to a substantial unwinding of the tax and welfare reforms Keating had achieved: abolishing the assets test on the age pension, abolishing the capital gains tax and the fringe benefits tax, and restoring the business expense deductions that had been part of the 1985 package. In order to pay for these massive tax cuts, Howard and shadow treasurer Jim Carlton promised unspecified ‘spending reductions’ that amounted to a full 5 percentage points of GDP.

It was an enticing package. Commentator Richard Carleton had said he would not predict the result of the 1987 election until the Liberal tax policy had been released, and that an average tax cut of $15 a week would make Howard very electable. Howard’s package promised an average cut of $26 a week. However, it struggled to gain credibility, especially since the public understood the need for the fiscal caution that Hawke and Keating had successfully engineered. The package also had a fatal flaw.

On 17 June, seven days after Howard and Carlton had released the package, Keating held a press conference alleging a $1.6 billion error. He asserted that some savings had been ‘double counted’ by the Liberals. Four days later, Howard was forced to admit to errors amounting to half a billion dollars. The media coverage was devastating. ‘Keating Puts Howard Down for the Count’, said The Canberra Times. ‘Keating Figures Undermine Libs’, said The Age. In Adelaide, The Advertiser argued that ‘Opposition Leader John Howard’s election campaign has been a disaster for his personal image.’ Hawke’s calling of the election, at the urging of Keating, had taken the Liberals unawares and as a result their tax policy was woefully unprepared.

While Sir Joh’s bid for power made a Howard victory in 1987 unlikely, Carlton’s error, for which Howard was forced to accept responsibility as leader, made it impossible. Howard told me in 2014, ‘That tax mistake was damaging to my campaign, extremely damaging, no doubt about that.’25 Howard was of course right about this. And Keating was not one to let such a mistake go. He hammered Howard and the Coalition on economic credibility until election day.

The Hawke–Keating government was re-elected on 11 July 1987 with an increased majority. This was a historic election win in more ways than one. ‘Hawke’s Hat-trick’ screamed the headlines the day after the election, highlighting that this was the first occasion on which Labor had won three consecutive elections. It was also the first time that Labor had sought and succeeded in winning an election primarily on the basis of a more rigorous approach to budgeting.

The Hawke–Keating government had to continue to grapple with boom and bust: Australia was about to experience some of the highest interest rates in its history, a period of unprecedented fiscal contraction and budgetary rigour, and one of the deepest recessions on record. The economy would emerge from this painful roller-coaster ride to a period of sustained low inflation, which accompanied the longest period of economic growth any developed economy has ever experienced. Plenty of mistakes would be made in managing the macro-economic settings of the nation in the period between 1987 and 1991. These mistakes were not exclusively or even primarily Keating’s. The entire official economic family, consisting of the RBA and the Treasury, together with almost every private-sector forecaster, would err in underestimating the size of the boom in 1987 and 1988, and misjudging the depth of the downturn in 1990 and 1991. A sober and objective analysis of the disagreements between Keating and his official advisers over this period leads to the conclusion that he was usually right and they were usually wrong.

Keating knew that continued fiscal rigour after the 1987 election would be necessary. The 1987 Budget, delivered eight weeks after the election win, represented a further contraction, with the deficit effectively eliminated (a tiny deficit of $27 million counted as fiscal balance). This result was achieved by a remarkable 2.4 per cent reduction in real spending. This was the first Budget in thirty years that reduced real spending, the deficit and the tax-to-GDP ratio all at the same time.

This fiscal contraction was necessary, but for different reasons from those in 1985. Rather than a terms-of-trade crisis leading to a blowout in the CAD, the opposite problem applied. A spike in commodity prices led to historically high terms of trade, stimulating the economy. This turnaround in Australia’s trading fortunes was accompanied by a very substantial relaxation of lending standards by the country’s banks. The local banks were worried about losing market share to the new foreign banks and other competitors, so they started lending to businesses that would not have met the earlier stricter lending criteria. These economic phenomena were accompanied from late 1988 by a massive and unforeseen investment boom around Australia’s businesses. This boom, argues Edwards, ‘transformed a fairly routine exercise in demand management into an almost personal contest between Keating and the Australian economy’.26

Much of the trouble in managing the Australian economy in the years following 1987 can be traced to one day late in that year. On 19 October—what became known as ‘Black Monday’—the US stock exchange crashed spectacularly after similar plunges in Hong Kong and Europe. The fall in the price of shares was greater as a percentage of the stock market than the Wall Street Crash of 1929. Given that the earlier crash had heralded the onset of the Depression, there was understandable concern from governments and forecasters throughout the world that action had to be taken to avoid a similar event. This was a common view in Australia as well. The respected commentator and editor of The Financial Review, Paddy McGuiness, wrote that the crash was ‘almost inevitably the harbinger of a world depression’.27

As it turned out, the resilience of the world economy, and the sophistication of the responses of the world’s governments, meant that no recession emerged. What the crash meant in Australia, however, was that the justified tightening of monetary policy that otherwise would