Many colleagues saw Peacock’s resignation as the first step in a tilt at the leadership and although he was the likely next leader, that was down the track; there was little belief that Fraser should or would be replaced by Peacock before the next election. As a consequence, his resignation lacked justification, hurt the Government and was resented by many colleagues.
1981 also saw a major development in the internal debate on economic policy within the Coalition. As Minister for Industry and Commerce, Phillip Lynch took to cabinet a proposal which effectively would continue quite high levels of protection for the car industry in Australia. I, along with a number of other colleagues, opposed the Lynch package but Lynch and Fraser had the numbers.
As a prelude to cabinet’s discussion, no fewer than 33 members of the Coalition party room addressed a letter to the Prime Minister and Phillip Lynch calling for lower tariffs and a less protectionist policy. It was a remarkable rebellion on fundamental economic policy. It received wide publicity, but in the final analysis fell on deaf cabinet ears. John Hyde, the Liberal member for Moore in Western Australia, and acknowledged leader of the economic dries within the Coalition, had spearheaded the letter-writing effort, and he had gathered much more support than many had expected.
Lynch lost the support of the dries following the policy decision taken by cabinet on the motor vehicle industry. It also had implications for me. Having been disappointed by Lynch, Hyde and others close to him began to talk more regularly to me, not only about economic policy but also my future within the Liberal Party. This group had become frustrated with Fraser.
The dries were a group of MPs largely elected in 1975, enthusiastically committed to smaller government and more market-oriented economic policies. They had become increasingly disillusioned with the Government’s direction because they felt that decisions often failed to reflect the economic principles in which they believed — the motor vehicle one being the most egregious example. John Hyde had come in with me in 1974, but 1975 had brought in Ross McLean from Western Australia, James Porter from South Australia, and Murray Sainsbury from New South Wales as examples of this line of thinking. In 1977 Jim Carlton joined their ranks. To their credit they maintained intellectual consistency, irrespective of political circumstances, in the arguments they put to me both in private and in the party room. They were quite an impressive bunch who wanted the Government to practise as well as preach the values of the free market. All of the dries paid homage to Bert Kelly, Liberal member for Wakefield in South Australia, as the parliamentary trailblazer of their economic values. In an era of high tariff protection, Kelly’s had been a lonely voice.
Signs developed through 1981 that the economy was beginning to cool. The impact of the 1979 second oil shock had been masked in Australia by the revenue surge it gave the Government flowing from the parity pricing of crude oil. There could be little doubt, however, that the rest of the world was suffering from the impact of another rise in crude oil prices, with recession spreading in many countries. This was bound to have an impact on Australia.
In the lead-up to the 1981 budget I had a meeting with Hugh Morgan, managing director of Western Mining, and other mining industry leaders where they gave me a very sober assessment of where they saw the Australian economy heading. They were gloomy about the prospects for the mining industry. This was particularly daunting, as the wave of investment in mining over the previous year or two had been the source of a lot of hope concerning the future of the Australian economy.
Having earlier in the year rejected my plea for a broadening of the indirect tax base, accompanied by reductions in personal income tax, perversely, senior ministers agreed to include in the 1981 budget some broadening of the indirect tax base (although not as much as I had earlier proposed), but with no personal tax cuts to smooth the acceptance of the indirect tax changes. The extra revenue from the broadening of the indirect tax base was used to further cut the deficit, so as to take pressure off interest rates.
The Government had lost control of the Senate on 1 July 1981, and, as a consequence, never really had a hope of getting the indirect tax changes in the budget passed. The folly of not acting at the beginning of the year, when there were still the numbers in the Senate to achieve reform and change, was there for all to see. It was immensely frustrating.
For decades the Metal Trades Award had been the benchmark for wage fixation in the Australian industrial relations system. In 1981 pressure mounted for a big increase under this award. While some firms could afford to pay increases, many could not. This was always the inherent contradiction, indeed flaw, in a centralised wage-fixation system. It formed the basis of the intellectual argument that I and many others mounted against the system through the 1980s.
After strike action which caused significant industrial dislocation, there was a settlement which conceded much of what the unions had wanted. On 18 December 1981 the Arbitration Commission ratified an agreement between the Amalgamated Metal Workers and Shipwrights’ Union (AMWSU) and the Metal Trades Industry Association (MTIA), the relevant peak employer group, for a wage rise of $41 a week and a 38-hour week.
Before long the implications were clear. The December 1981 agreement flowed through to all of the other awards, and before long firms unable to pay the higher wages began retrenching staff.
That was how a centralised wage-fixing system worked. For me it was a political, as well as economic, nightmare. The Government was left marooned without a policy response, other than the highly unattractive one of increasing interest rates to restrict the capacity of firms to pay higher wages. That was no response at all, because it would result in still higher unemployment. What our side of politics needed, and did not have at that point, was a totally different approach to wages policy.
Federal Labor was the political beneficiary of the wages explosion, but it also recognised the implications of what had happened. Some years later, Paul Keating would famously say to George Campbell, the Federal Secretary of the Amalgamated Metal Workers’ Union (AMWU) at the time of the explosion and later a Labor senator, that he and his associates ‘carry the jobs of the dead men’ around their neck, a reference to the widespread unemployment caused by the wages breakout. Labor’s political argument was that the Liberal Party had no way of controlling wages, except by the blunt instrument of tightening monetary policy through much higher interest rates, thus squeezing firms, which in turn laid off more staff.
This argument would remain valid if a centralised wage-fixing system continued, whereby across-the-board wage increases were delivered irrespective of individual capacity to pay. It would be an entirely different matter if that approach were abandoned, and a system of workplace or enterprise bargaining were introduced. That was the system for which I was to campaign for years. If there were to be a change to such a system, then union power, most particularly the monopoly the unions held over the bargaining system, would need to be rolled back. This was to become the real battleground in a debate which is yet to be fully resolved and remains intensely relevant to Australia’s economic future.
The year 1982 opened amidst a deepening world recession, which Australia did not escape. Stagflation, the economic disease of the 1970s and ‘80s, afflicted most developed economies. In the United States, interest rates remained very high; for this and other reasons, they were also high in Australia. In 1979 Paul Volcker, a dedicated inflation fighter, had become Chairman of the Federal Reserve in America and signalled that he would push interest rates up to the level necessary to squeeze inflation out of the system. This approach worked. In 1980 annual inflation in the United States was 13.5 per cent. By 1983 it had fallen to a little over 3 per cent.
This