222 Paul Kelly The Politics of Economic Change in Australia in the 1980s and 1990s After-dinner address by Paul Kelly1 In December 1993 the Federal treasurer, John Dawkins, announced he was leaving politics after his budget received a tough public reception and a mauling in the Senate. At his farewell drinks, as described by journalist, Laura Tingle, Dawkins called himself a politician of the 1980s ‘when you acted first and explained yourself later’. It was a melodramatic view. Yet Dawkins had a point. The power of the 1980s story gains fresh lustre from the progress of the 1990s and its contribution to this success. The conference proceedings today were arduous so let me begin this address with the sort of grand simplifications appropriate for a journalist. The 1980s saw the globalisation of the Australian economy; the 1990s saw this globalisation being contested in a new political struggle between globalists and anti-globalists; and the coming decade will determine which side wins the ascendancy in this struggle. An assumption running through my comments is that political and economic cycles are just as likely to be in conflict as they are in harmony. I want to put three main propositions in these remarks. First, that a series of unique events no longer in place, made possible the 1980s reforms and triggered a transformation in Australia’s economy. Second, that the domestic keys to our 1990s success are because economic decision-makers managed to retain the best from the 1980s policy but also discard the worst. Third, that a new political framework to underwrite a more neo-liberal and open economy has not been constructed in the 1990s, leaving the prospect of an uncertain future for Australia’s economy in a globalised world. 1. The Foundations of the 1980s Reforms With the benefit of a decade’s hindsight, what was that remarkable combination of factors that made possible the 1980s reforms? Let me try to identify what could be called the foundations of the 1980s reformism. First, there was a fairly pervasive sense of national stagnation and decline symbolised by the early 1980s recession. Australia’s annual average GDP growth during the Fraser era was 2 per cent – disappointing in terms of both our historical performance and international comparisons. Our high unemployment level, which hovered around 9 per cent in the recession, was seen as evidence of failure within the 1. I would like to thank those people with whom I spoke in preparing these remarks, none of whom are responsible for the content of the speech. There are two people I want to thank in particular, whose assistance and ideas I have drawn upon, HSBC Chief Economist, Dr John Edwards and Director of Access Economics, Dr Ed Shann. The Politics of Economic Change in Australia in the 1980s and 1990s 223 economic system and a defect that had to be fixed. The notion that Australia had to engage in a global catch-up was a useful driver for new policy. Second, there was a new Labor Government determined to bring a new approach. The Hawke-Keating Government was free from both party dogma which had ruined the Whitlam Government and the old-fashioned economic orthodoxy which had destroyed the Fraser Government. Hawke and Keating were not just interested in finding a new approach; they believed that a new approach was essential. Third, there was a set of economic ideas waiting for Labor to seize upon. These ideas, which had currency in agencies such as the Treasury, the Reserve Bank and the Industries Assistance Commission, had won some support in Federal parliament and more in the quality media – freer trade, smaller government, deregulation of markets, lower tax rates within a fairer system, a more flexible labour market, low inflation, an attack on economic rent seekers and a more market-orientated economy. The components of this new direction evolved at different times for different reasons but it was increasingly seen, overall, as essential for Australia’s adaptation to a more integrated global economy. These policies needed a fresh government prepared to defy vested economic interests. Such a government would win much support for its boldness. These ideas came from the top down. The public wanted change – but it was not protesting in the streets for a floating dollar, free trade and low inflation. The intellectual momentum for the 1980s reforms was elite-driven. Fourth, the Hawke and Keating Governments had a formal social contract with the trade union movement. The Accord represented a choice by the union movement to switch from an industrial to a political strategy; to give priority to an economic growth strategy with the ALP rather than to achieve a lift in the wages share by industrial might. The Accord conceded one of Treasury’s own convictions – that wage restraint was central to job creation. For the Accord partners, wage restraint would make a credit squeeze unnecessary. It was an anti-inflation instrument to deliver a growth cycle and it achieved this purpose for most of the 1980s. It meant that the unions and the industrial left, potential critics of the market reforms of the Hawke and Keating Governments, had been converted instead into stakeholders in their policies. But it had other effects as well. Fifth, the Accord meant Labor’s reformism would be based upon gradualism and a search for consensus. The 1983 National Economic Summit was a remarkable and successful effort to engender a new chemistry. The unilateral nature of the float tended to disguise Labor’s support for outcomes that were more negotiated than imposed. This was clearly reflected in its macroeconomic policy of fighting inflation and unemployment simultaneously. There are many cynics about Hawke’s consensus but my own judgement is that this wasn’t an empty slogan, but reflected much of the policy formulation approach, though it was often a point of tension between Hawke and Keating given their temperamental differences. The float, by definition, was a ‘big bang’ reform yet Hawke-Keating reformism overall shunned the ‘big bang’ technique. The tax debate of 1985 and the incremental approach to labour market changes are classic proofs of 224 Paul Kelly search for consent in preference to ‘big bang’ reformism. This meant that reform was multi-faceted, that it didn’t depend on one ‘all or nothing’ policy and that the government had the political insurance of fighting with policies on a wide front. Sixth, for the Hawke Government, social and economic equity was vital in the transition to economic liberalism. Equity was integral to the Accord, to Labor’s own constituency and as a tactic in selling a market-based economic agenda. But equity was vital in another sense – it was part of the reform agenda itself, an aim in its own right. That real wages were being cut in the cause of job creation only reinforced this element. Labor introduced a more targeted welfare system, an assets test on the pension, arbitrated superannuation, a family allowance supplement for poor families, a restoration of Medicare, a loan scheme for tertiary education and tax changes where lower marginal rates were traded-off against an extension of the direct tax base to include capital gains and fringe benefits. Research by Professor Ann Harding suggests that government policy in terms of the tax-transfer system during this period was highly effective in nullifying most of the income inequity arising from a more market-orientated economic system. The Hawke Government had to prove to its cabinet, caucus, factions and trade union partners that equity was a real concern. It was a function of the social contract. Seven, John Howard is right to argue that in the 1980s the Opposition supported many of the Government’s reform directions. In fact, the Opposition often attacked the Government for not advancing further and faster. This was a remarkable and unusual advantage for a reforming government. For example, the Coalition supported financial deregulation, low tariffs, a broadly based indirect tax (most of the time) and microeconomic reform. It attacked the Government at various points for its failure to be bolder and for buckling before the vested interests on its own side, notably the trade unions who, via the Accord, had a unique access to decision-making. The Coalition criticised the Government for its failure to free-up the labour market, its reluctance to privatise more quickly and for too lax a fiscal policy. Far from complaining that Labor was engaged in rip and tear reformism – the classic 1990s oppositionist perspective – the Coalition’s typical claim was that Labor was too timid. This gave Hawke and Keating great political flexibility and the chance to occupy the middle ground. It also helped to entrench the reform policies. Eight, the Government had only minor troubles in winning Senate support for its reform agenda despite the 1987 double dissolution over the Australia card. The Senate balance of power was held by the ALP and the Democrats. But Labor was able to prevail either because of Coalition support or by winning Democrat backing. The Senate never became a major threat to the reform agenda. Nine, a more subjective and contentious judgement is that the Hawke Government was effective in putting and winning the intellectual case for new economic ideas and in selling the new economic direction as part of a national vision. These judgements are subjective but I would nominate the quality of political salesmanship as an element in the carriage of 1980s reformism. For a considerable time Treasurer Keating was highly successful in winning intellectual backing for his approach from the media, the markets and opinion-makers.