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

to pay less for the goods Australia exported was the single biggest factor in the ballooning CAD.

Keating employed every available orthodox weapon against the CAD between 1985 and 1987, but it remained stubbornly high. He was desperate to bring the CAD down without reducing economic activity to such a degree that a recession would result, but the degree of difficulty in achieving this result was enormous. There were essentially two weapons in the government’s armoury against the CAD: the dollar and the deficit.

The float of the dollar had meant that the market would work as intended: a high CAD would result in a depreciation of the dollar, which would, in turn, make Australia’s exports more competitive (and imports less competitive), resulting in a decline in the CAD. This would, however, take time, and the CAD could be expected to worsen in the meantime. If this theory worked and the CAD was graphed, it would vaguely resemble the letter ‘J’ as it worsened (the bottom of the ‘J’) before strengthening (the stick of the ‘J’). Keating would use his remarkable skills of explanation and political debate to introduce the Australian people to the concept of the J curve.

Keating also introduced the idea of the ‘twin deficits theory’, which posited that a reduction in the budget deficit would reduce economic activity and thus reduce the current account deficit. Keating devoted enormous effort to achieving this. He wanted fiscal policy to carry the majority of the load in reducing the CAD because he thought (correctly) that giving too much of the load over to monetary policy would run a heightened risk of forcing the economy into recession. Thus, Keating embarked on a fiscal policy in the 1985/86 Budget that Paul Kelly would later describe as ‘trail blazing’.17 Whereas the 1984/85 Budget had a deficit of 3.1 per cent of GDP, the 1985/86 deficit was substantially lower, at 2.1 per cent. Even more strikingly, Keating kept real spending growth to just 1.3 per cent in 1985/86, compared with a full 6.1 per cent the year before.

This contraction in fiscal policy was just the beginning, however. Three months after the 1985 Budget, there were dramatic falls in the value of the Australian dollar. The international market was voting as Keating had intended when he had floated the dollar, at this time dictating further spending cuts. In addition, the terms of trade continued to decline, reinforcing the need for further fiscal contraction.

The CAD reached its peak in April 1986: a terrible $1.5 billion. Keating was spurred not only to employ the policy levers at his disposal, but also to convince the Australian people of the need for aggressive economic reform.

On 14 May, Keating was attending a fundraising breakfast for Neil O’Keefe, the member for the Victorian seat of Burke. He had not yet publicly commented on the appalling May CAD figures, but that was about to change. He used a phone in the kitchen of the restaurant to conduct an interview with Sydney radio host John Laws. What followed was arguably the most controversial media interview ever undertaken by an Australian treasurer. Keating articulated one of the signature phrases of his political career to outline what he saw as the size of the economic challenge facing Australia. It is worth reproducing highlights of the relevant section of the interview:

Keating: We are importing about $12 billion more than we are exporting on an annual basis. What it means is that we are living beyond our capacity to meet our obligations by $12 billion … we must let Australians know truthfully, honestly, earnestly just what sort of an international hole Australia is in … If in the final analysis Australia is so undisciplined, so disinterested in its salvation and its economic wellbeing, that it doesn’t deal with these fundamental problems, then the fallback solution is inevitable because you can’t just fund $12 billion a year in perpetuity … the only thing to do is slow the growth down to a canter. Once you slow the growth under 3%, unemployment starts to rise again.

Laws: Then you have really induced a depression.

Keating: Then you are gone. You are a banana republic.

Keating had not planned to make such a dramatic statement. This is just the way of interviews—sometimes they have a life of their own. But having made the comment, Keating wanted it to have an impact. He was not disappointed. The interview steeled the media, the public and his own government colleagues, preparing them for the tough policy changes that would have to come. Kelly describes the Laws interview as a ‘psychological pivot’, arguing that ‘it lifted the public consciousness about Australia’s predicament to an unprecedented level and it changed the limits of political tolerance’.18

Keating was understandably nervous about how such a bold statement would be received. But the attention it drew appeared set to allow him to kickstart his agenda. The Sydney Morning Herald, for example, wrote the day after the interview that Keating had provided ‘exactly the right response … and has begun the task of preparing the party and public opinion for the decision ahead’.19 The Financial Review referred to his frankness as ‘rare and refreshing’.20

The reaction within the Labor Party, however, was mixed. The most violent and negative response came from Hawke, resulting in the second major fissure in his relationship with Keating after the 1985 tax summit (discussed in the upcoming section ‘From Little Things Big Things Grow’). Hawke was in Tokyo at the time of the Laws interview and was taken unawares by Keating’s strategy. He ‘was stunned, then furious’.21 By the time he had completed the next leg of his trip, to Beijing, he had decided to reassert his authority over Keating by repudiating him. When asked by a journalist whether he thought Australia was heading towards banana republic status, he replied, ‘No, I don’t.’ He briefed the Australian media that he was taking control of the situation through the acting prime minister, Lionel Bowen. This had the political effect Hawke desired: ‘Hawke