CASE PROGRAM 2005-26.1 The Loans Affair In November and December 1974, senior officials of the Australian Commonwealth Treasury were engaged in a struggle with senior Ministers of the Whitlam Labor government over a proposal to raise $4 billion in loan funds. The then Minister for Minerals and Energy, Rex Connor, had entered into negotiations with an unknown Pakistani commodities broker, Tirath Khemlani, on 11 November. Determined to fund an ambitious public works programme, Connor was eager to borrow the $US4 billion Khemlani claimed he could access from oil-rich Middle Eastern nations. Treasury considered the loan highly suspect and launched its own investigation, while Connor explored ways of circumventing the Loans Council, which would likely block his plan. On discovering that the deal was a likely sham, Treasury officials strongly advised Connor, Prime Minister Gough Whitlam and Treasurer Jim Cairns to abandon the scheme. But an ever-souring relationship between Treasury and Government saw Connor forge ahead regardless and gain Executive Council authority to take out a 20-year loan for “temporary purposes”. Despite this setback, Treasury Head Sir Frederick Wheeler and his colleagues persisted with their inquiries and eventually discredited Khemlani. Although no money ever changed hands, information leaked to the Opposition about Australia’s near miss with a fraudster sparked a chain of events which toppled the Whitlam government in November 1975. The Whitlam Government After 23 years in Opposition, the Labor Party led by Gough Whitlam was brought to power on 2 December 1972. Campaigning on the slogan “It’s Time”, Whitlam took his win as a mandate for change and wasted little time in transforming his policies into legislation. Nine This case was written by Marinella Padula, Australia and New Zealand School of Government, for Professor John Alford as a basis for class discussion rather than to illustrate either effective or ineffective handling of a managerial situation. Cases are not necessarily intended as a complete account of the events described. While every reasonable effort has been made to ensure accuracy at the time of publication, subsequent developments may mean that certain details have since changed. This work is licensed under Creative Commons Attribution-NonCommercial- NoDerivatives 4.0 International Licence, except for logos, trademarks, photographs and other content marked as supplied by third parties. No licence is given in relation to third party material. Version 15-11-05. Distributed by the Case Program, The Australia and New Zealand School of Government, www.anzsog.edu.au. days after he became Prime Minister, troops were withdrawn from Vietnam, and conscription was ended shortly afterwards. He also launched an ambitious program of social reform, targeting areas such as health, education and welfare. In 1973, new Commonwealth departments were created, including Aboriginal Affairs, Environment, and Urban and Regional Development. That year also saw the establishment of the Aboriginal Land Rights Commission, Institute of Criminology and Law Reform Commission. Although Labor had won a comfortable majority in the House of Representatives, they lacked control of the Senate. Consequently, Bills were routinely rejected – approximately 100 over the life of the government and more than in the first 73 years of Federation.1 Barry Cohen, then a Labor backbencher, remembered a constant sense of crisis, “Many suggested that we were a government in panic. They were right. Any government threatened continually with having their budget or supply bills stopped would be panic-stricken.”2 By April 1974, the Senate was indeed threatening to block the upcoming Budget. On 18 May, Whitlam won a double-dissolution election over the matter, albeit with a reduced majority and still no control of the Senate. Yet this was but one of the Prime Minister’s many obstacles. He also faced problems from within. The rapid rate of change was worrisome for Labor members both at State and Federal levels. “To say that the Whitlam government hit the ground running is to raise understatement to an art form,” said Cohen. “Many, however, particularly those sitting on marginal seats found it difficult to keep up. We were sneeringly described…as ‘nervous Nellies’.”3 At that stage the Labor Party caucus still had the power to overturn Cabinet decisions, and factional in-fighting over policy proved destabilising and distracting. So much so, that Whitlam was said to have relished travel opportunities, spending a total of 56 day overseas in 1974.4 When John Menadue asked Whitlam to rescind his travel plans after Cyclone Tracy decimated Darwin later that same year, the Prime Minister famously responded: “‘Comrade, if I’m going to put up with the f***wits in the Labor Party, I’ve got to have my trips.”5 Menadue, who was appointed Secretary of the Department of Prime Minister and Cabinet in August 1974, noticed problems from the beginning of his tenure: Even after two elections, there was still a view in the community that 23 years of conservative government had established ways of doing things, contacts and networks, and that somehow this government was not legitimate and it was appropriate for the Senate at every opportunity to harass the government and if necessary in the end bring it down…There was hostility from the business sector. Some were cooperative but most of them had networks for 23 years with different ministers…Most business believed this was an aberration anyway and they would just have to wait the government out and normal relations would be returned in future.6 Menadue also found that many bureaucrats, especially those in Treasury, had a certain nostalgia for the past, “From the time I joined Mr Whitlam in Canberra, the clear 1 Blenkin, M. ‘Fed: Whitlam faced treachery, hostility and legitimacy issues.’ AAP Newsfeed 1/01/05. 2 ‘1974 and all that.’ The Age 1/1/05. 3 ibid. 4 Rehn, A. ‘I’ll be Gough then – A tourist PM and getaway comrades.’ The Daily Telegraph 1/01/05. 5 Blenkin, M. ‘Fed: Whitlam faced treachery, hostility and legitimacy issues.’ AAP Newsfeed 1/01/05. 6 ibid. impression I got was that the Treasury had gone on strike with this government. And I think they were the words that Whitlam used to me, that the Treasury presented dogmatic advice. If it was not accepted it would take its bat and ball and leave and we, the government, floundered to provide alternatives.”7 Difficulties stemmed from profound differences in the way Treasury and the Government believed the economy should be managed. These differences were then brought into sharp relief by changing national circumstances and global events. When Whitlam assumed power in 1972, Australia’s inflation rate was 4.5 percent. By June 1974, it had more than trebled, reaching 14.4 percent.8 Unemployment was at 2 percent at the beginning of 1974 but was steadily rising. Earnings were up on average 15.3 percent during 1973 and climbing. Government spending increased by 20 percent in 1973 and was on track to grow further.9 By mid-1974, the combination of rising inflation and unemployment left Australia’s economy in a state of “stagflation”. Governments around the world were dealing with the same problem, largely brought on by OPEC’s decision to double the price of oil on January 1, 1974. Treasury’s position was to tackle inflation first, urging “the utmost fiscal restraint” in the preparation of the upcoming budget.10 Indeed, its advice, known famously as the “short, sharp, shock”11 strategy, was to reduce inflation by raising unemployment. Treasurer Frank Crean did propose some modest spending cuts but they were rejected, while “big-spending departments” took over budget planning.12 The 1974 budget saw Government/Treasury relations sink to a new low: The week of the Budget Cabinet saw a situation emerge where virtually open war was declared between the public servants of Treasury and the Government’s ministers who had to take responsibility for national economic policy. It led to the appointment of a special committee of mainly outside advisers, headed by Dr H. C. Coombs, to provide the government with some alternative proposals to the single course of action upon which the Treasury Department insisted. The warfare was so open that the civil servants and the politicians were seeking public allies. The Treasury fed information on the content of confidential Cabinet Submissions to uncritical journalists, senior Cabinet Ministers talked openly about the disagreements with the Treasury and made no secret at all of their disenchantment with its role.13 Historian Ian Hancock was not surprised that the Government ignored Treasury’s advice, “Believing that a state of full unemployment was both desirable and achievable, no Labor Government or Labor caucus in 1974 could easily accept Treasury’s proposal to fight inflation first.”14 Indeed, Social Services Minister Bill Hayden declared at the time that, “Unemployment of 3.5 to 4 percent is simply not acceptable to the caucus or the 7 ‘1974 and all that.’ The Age 1/1/05. 8 Rehn, A. ‘I’ll be Gough then – A tourist PM and getaway comrades.’ The Daily Telegraph 1/01/05. 9 Colebatch, T. ‘The year the economy went “bung”’ The Age 1/1/05. 10 ibid. 11 Weller, P. & Cutt, J. Treasury Control in Australia Ian Novak Publishing Co., Sydney 1976, p. 25 12 ibid. 13 op cit. 14 Fraser, A. ‘Revealed, 30 years on: How Whitlam toughed out siege.’ Canberra Times 1/1/05. 3 community.”15 Treasury’s recommendations regarding the 1975-76 budget were largely ignored; government spending was to climb an extra 32 percent.16 John Stone (the then Treasury Deputy) had the task of providing the Government with general advice on economic policy.