The 1980 election result was a real shock for Malcolm Fraser. It should not have been. The 1977 result simply reflected the unwillingness of the electorate to seriously contemplate Whitlam again. Once Whitlam had gone, things were bound to return to a more normal political situation.
When Malcolm Fraser and I discussed the election outcome, he said that part of the reason why the Government had lost so many seats was that he had not been able to give people lower taxes. He said that his Government had been elected on a smaller-government, lower-tax platform and more had to be done on this front, and that he intended to do something about it. This was encouraging, because I had to agree with him that that was part of the problem. Now that Whitlam himself was gone, it was no longer tenable to hark back to the Whitlam days too much.
He established what became known as the ‘razor gang', under the chairmanship of Phillip Lynch. This group of ministers was charged with trawling through all areas of government, to find expenditure savings to form the basis of a major statement about the size and direction of the Government. This was quite separate from my earlier understanding with Fraser to reform the taxation system.
As well as Phillip Lynch as chairman, the committee included me, Margaret Guilfoyle, the newly appointed Finance Minister, Peter Nixon, and Ian Viner. Fraser wanted the committee to start work immediately and have only minimal time off over the Christmas period, with a view to the major statement being made early in 1981.
Margaret Guilfoyle had replaced Eric Robinson as Finance Minister. Fraser demoted Robinson from cabinet to the outer ministry — for no good reason — and Robinson refused to serve in the lesser post. He died suddenly only weeks later (from a congenital heart condition). Robinson had been Queensland Liberal president, and the Nationals in that state unreasonably resented his continued, aggressive advocacy of the Liberal cause in Queensland. The friction this produced would have heavily influenced Fraser’s decision to treat Robinson as he did.
In keeping with our understanding, I announced that the Government would immediately start an examination of the taxation system, including the possibility of introducing a broad-based indirect tax, accompanied by reductions in personal income tax. Once again I felt quite excited, as this was a reform I was convinced was needed. There had been a false start two years earlier. There was only a six-month window of opportunity, as the Government would lose control of the Senate by 1 July 1981. There was not a moment to be lost, and I was keen to get to work on the tax proposal immediately.
On 3 December, the Monetary Policy Committee of cabinet, on my recommendation, decided that interest rates paid on deposits taken by banks from customers be deregulated. I had also argued for deregulation of lending rates, but this change was rejected. This was a significant decision and set the ball rolling on interest-rate deregulation, which would emerge a year later as one of Campbell’s major recommendations. Once rates offered by banks were deregulated, it was only a matter of time before the rates charged by banks had to be deregulated. Nonetheless, the ball rolled very slowly, as it was not until early 1986 that the Hawke Government moved to phased deregulation of lending rates by removing the ceiling for new loans, thus adopting a policy I had advocated as Opposition leader.
When announcing the 3 December decision to parliament, I challenged decades of orthodoxy on interest-rate controls, from both sides of the house, by pointing out that, in particular, they had resulted in small borrowers being denied access to funds. Today such comments would be accepted as a statement of the obvious; in 1981 they were anything but.
After a gruelling year, I was relieved when I arrived at Hawks Nest, on the Central Coast of New South Wales, for a family holiday late in January. This would be the first of many holidays at Hawks Nest for our youngest child, Richard, who had been born the previous September. It went extremely well until I received a message from the motel owner asking me to ring Michelle Grattan, chief political correspondent of the Age. There was nothing strange in this of itself. Michelle was never one to be deterred by the fact that somebody was on holidays. When I rang back, she said, ‘Your indirect tax is dead, cobber.’ I asked her what she meant, and she told me that Malcolm Fraser had been on Melbourne radio a short while before, pointing out some of the difficulties in broadening the indirect tax base, including the time taken to put the proposal together, and its inflationary impact. The Age quoted him on 10 February as having said on radio the previous day that it would cost $3.5 million to cut the standard rate of tax from 32 to 25 cents in the dollar. He was reported as saying, ‘If you were going to raise the same amount of revenue by indirect tax you would add about 5 to 7 per cent to Australia’s inflation rate.’1 Fraser gave me no warning of his intervention.
This was very bad news for me. I knew instinctively that he would not have gone public with these reservations unless he had made up his mind to oppose taxation reform. To make matters worse he had not given me any advance warning about his comments. I spoke to him subsequently, and his response was, ‘Well, John, there are difficulties, and they need to be considered, but you should continue your work.’ I resolved that I would but I knew then that we were not going to achieve taxation reform because the PM was against it.
I, nonetheless, went ahead and put forward a submission proposing a modest broadening of the indirect tax base, including, for the first time, a tax on services, with compensating personal tax cuts. It was a proposal which could be implemented in the remaining six months of government control of the Senate, and could be further expanded once the principle of a broadened indirect tax base had been accepted. It would have begun easing the heavy burden of personal tax in the Australian taxation system, and shifting some of it to the indirect tax base. Cabinet rejected my proposal, as I knew it would once the Prime Minister had disclosed his hand, although I was not without a number of supporters, including Ian Viner, Fred Chaney and Peter Durack.
I made a major statement to parliament, explaining why we had decided not to broaden the indirect tax base, on 12 March 1981. Although the statement contained that explanation, it really put on record my arguments for long-term restructuring of the taxation system.
This episode affected my attitude towards the Prime Minister. We still remained close colleagues, and I was a staunch supporter of his within the parliamentary party, but I felt badly let down on an important policy issue and sensed that when it came to big reforms, he would not chance his arm. This had implications for the durability of the Government. We had lost quite a lot of seats at the just-concluded election, and the immediate summation had been that the Government had not been adventurous enough.
The razor gang proved to be anything but adventurous and was one of the great damp squibs of the Fraser Government. For example, there was a strong view amongst its members that we should privatise government-owned businesses such as Qantas, Australian Airlines and the Commonwealth Bank. There was no point in pursuing this unless we had the support of the Prime Minister. We deputed Phillip Lynch to obtain Fraser’s views. Unsurprisingly to me, he was very negative. He held the economically conservative view that government enterprises kept the private ones honest.
Meanwhile, the dynamic within the Liberal Party itself was changing, and a challenge, of sorts, from Andrew Peacock to Malcolm Fraser had begun to brew. Perhaps it was one of the reasons why he got cold feet over taxation reform. Immediately after the election there was the customary party meeting. Naturally there would be no contest for the leadership, and it was assumed by most the same would apply to Phillip Lynch’s position as deputy. Peacock nominated for the position, and mustered a very respectable 35 votes against 47 for Lynch. This outcome was interpreted by many as a virtual nomination of Peacock as Fraser’s logical successor.
Peacock’s strong showing in this ballot had unsettled Fraser a lot, and had injected a new element into the internal mood of the Liberal Party. After the election, Peacock voluntarily gave up the Foreign Affairs portfolio and moved to Industrial Relations. He had been Foreign Minister for five years and before that shadowed in the area. It was thought that his good interpersonal skills would work well with many trade union leaders.
Andrew