On 4 January, the former prime minister Bill McMahon retired from the Sydney seat of Lowe, which he had held since 1949. This would prove to be a bad by-election for the Government. There was a swing of more than 7 per cent and, on 13 March, Labor won the seat from the Liberal Party for the first time since its creation, at the 1948 redistribution.
1982 was also to become a watershed year for Victoria politically. After 27 years of Liberal government, inaugurated by Henry Bolte in 1955, the Labor Party won office under John Cain on 3 April. The psychological impact of this on Liberals from Victoria was immense. Intellectually they had prepared for defeat, but the jewel-in-the-crown sentiment ran deep in this Liberal division.
With the Victorian election out of the way, Fraser acted to bring the long-simmering stand-off between himself and Andrew Peacock to a head. It had become a constant distraction for the Government and a regular signal to the community that the Liberal house was divided. Fraser called a party meeting for 8 April and indicated that he would resign the leadership, thus providing Peacock with the opportunity of challenging for the top job. I never thought that Peacock had a chance of toppling Fraser. The only issue was the size of Fraser’s victory.
In the weeks preceding Fraser’s initiative, a group of Liberal MPs, led by John Hyde and Ross McLean, had come to me with the proposition that, if there were to be a spill of leadership positions, then I should contest the party leadership. They said they had lost faith in Fraser’s economic direction, but that Peacock was not committed to the type of economic policies they thought Australia needed in the years ahead.
I was flattered by their offer of support but, nonetheless, made it very clear that I did not think it was in the best interests of the Liberal Party for me to stand, that I would support Fraser and campaign for him, and I urged them to do likewise. They were not entirely surprised by my response. But their approach had told me that in the year or more which had passed since the 1980 election, the dries had not only transferred their support from Lynch to me, but had well and truly given up on Fraser.
Phillip Lynch decided that he would give up the deputy leadership at the same time as the ballot for the leadership. After a quick assessment of support, I decided to nominate for that position. I had Fraser’s support. He promoted the advantages of a deputy coming from Sydney, as against his Melbourne attachment. This was my first experience of a contested party room ballot, and I did the only thing that seemed logical. I directly approached people for their votes, naturally excluding some who I felt intuitively would never vote for me. Michael MacKellar, a fellow New South Welshman and the Health Minister, also stood. It seemed pretty clear that the great bulk of those who were going to side with Peacock against Fraser would also support MacKellar against me.
Fraser defeated Peacock by a neat margin of 2 to 1: 54 votes to 27. In the contest for deputy, I won 45 to 27 on the second ballot against MacKellar. After eight years in parliament I was both Treasurer and Deputy Leader of the parliamentary Liberal Party.
My sense of achievement was heavily qualified. Although it was not a poisoned chalice, I had come to the deputy leadership at a very difficult time. The Government had been in office for over six years, was performing poorly in the polls, had been through a bruising leadership contest, and the economy was slowing rapidly.
I did not see elevation to the deputy leadership as necessarily indicating that I would become the leader after Fraser. The Prime Minister was then only about to turn 52, so issues of longer-term succession were not on the agenda. My total political focus was the re-election of the Fraser Government.
Late in 1981, the Campbell Inquiry reported. It had met all of the expectations. Campbell recommended widespread deregulation of the financial system, including: floating the Australian dollar and the abolition of exchange controls; admitting foreign banks; and the removal of controls on interest rates. It went too far for the comfort of the Prime Minister and some of his senior colleagues.
I had a difficult negotiating session with Fraser over the contents of my statement welcoming the publication of the report. I wanted to be as positive as possible. He did not want the Government locked in too much to supporting the main recommendations.
Doug Anthony wasted no time in saying, publicly, that he was against removing interest-rate controls. Fraser and other senior members of the Government made clear their complete opposition to floating the dollar. As I mention later, Doug Anthony maintained this attitude in opposition, and Fraser, by then out of parliament, attacked the Hawke float.
When the Campbell Report landed with a thud on the cabinet table, interest rates were still high, and there was acute concern in the Government about the cost and availability of finance for housing and small business. The controlled ceiling for housing interest rates was then 12.5 per cent, and there was little finance available at that rate because the banks were losing deposits to other financial institutions offering higher rates. A typical arrangement then was for a borrower to receive a relatively small portion of the required loan at 12.5 per cent and the rest from a finance company, often a trading bank affiliate, at a much higher rate. These ‘cocktail’ loans usually produced an average rate of 17 to 18 per cent for the whole loan. It was, therefore, easy to see that interest-rate controls were not delivering cheaper loans for homebuyers. That was Campbell’s conclusion, which I endorsed.
I therefore recommended in a submission to the Monetary Policy Committee in February 1982 that we commence the process of deregulating interest rates on housing loans of less than $100,000 — average loans in high-priced Sydney were less than $50,000. My submission spelled out how controls were failing their intended objective, and I advocated lifting the controls through a process of negotiating with the banks for phased deregulation. I could not obtain authority to do this; rather, there began weeks of negotiations with banks to secure extra housing finance through a combination of a 1 per cent increase in the interest-rate ceiling and the removal of some restrictions on the banks, as recommended by Campbell. These changes were helpful and produced promises of increased lending, but fell well short of the change needed to break free of counterproductive regulation — and that was removing interest-rate controls altogether on future housing loans. In one stroke, that would have lifted permanently the flow of money into housing.
There was also a time-consuming examination of other quite nonsensical proposals to boost the flow of money to housing, including the unsound idea of the RBA releasing some of the Statutory Reserve Deposits (SRDs) it held from the trading banks to augment the pool of money for housing. One of the reasons it was unsound was because the SRDs were subject to short-term variations, whereas housing finance was for long periods. Another equally flawed idea was to extend the old 30/20 rule whereby life offices and superannuation funds paid higher taxes if they did not invest a portion of their funds in government bonds to housing finance. The life offices and superannuation funds would pay higher taxes if they did not commit a specified level of funds to housing. Campbell had recommended abolition of the 30/20 rule, let alone its extension.
Both proposals ultimately bit the dust, but it was only the combined opposition of me and the RBA governor which stopped the SRD proposal appearing in the 1982 budget speech. These proposals ignored the central reality that interest-rate controls aggravated, rather than ameliorated, the shortage of housing finance at a time of generally high interest rates. That was the view of Campbell. If that was the view of Malcolm Fraser in 1982 he did not act upon it.
With Fraser’s support, early in 1983 I announced that the Government would allow in approximately ten foreign banks. They would provide much-needed competition for the existing domestic banks. This decision was applauded by the business community, but criticised by the shadow Treasurer, Paul Keating. In a statement on 26 January 1983, Keating said, ‘By allowing foreign bank entry in Australia the nation is being subjected again to ad hoc decision-making which in this case will effectively change by stealth the whole structure of the Australian financial sector.’