Also the Fraser Government had taken the obscure-sounding decision to bring in a tender system for the sale of Treasury bonds. This change meant that demand would determine interest rates on government bonds; as a consequence, there would be less printing of money to finance deficits. In his 2006 Boyer Lecture, Ian Macfarlane, the former governor of the Reserve Bank, said that this had been a major reform not accorded the recognition it deserved — second only in importance to the floating of the dollar. It was a change that Fraser himself strongly advocated.
I knew that putting together the 1982 budget would be a daunting task, even more difficult than my first in 1978. With the economy slowing rapidly and revenues falling away, there was a gruelling tussle between me and the Prime Minister about the direction of policy. He favoured an expansionary budget. By contrast, I argued that the inflationary pressures in the community were still so strong that any large increase in the budget deficit would add to those pressures and be damaging to the economy. Unemployment had begun to increase, and large parts of the country were still racked by drought. All of the options were bleak. I wanted our economic policy to remain consistent. For years we had preached the virtues of fighting inflation, reducing the budget deficit and avoiding the easy resort of spending our way out of difficulties. The way things started, it looked as if this budget would turn all of that on its head.
The budget cabinet deliberations became acrimonious. The differences between me and the Prime Minister were out in the open. Our colleagues must have been dismayed as the Prime Minister and his Treasurer argued and sniped at each other about the shape of the budget as the country headed towards recession.
I became alarmed that early spending decisions were so extravagant that there would be a huge increase in the budget deficit. To me, this was untenable, and I talked about resigning with my wife, John Hewson and Michael Baume, my parliamentary secretary and close friend, later a NSW senator. I put it aside as an option. It would be seen as disloyalty to the Government, only worsen its political difficulties and not necessarily result in a better economic outcome.
Fortunately, Fraser responded to my concern, acknowledging that too many expenditure decisions had been taken which added to the budget deficit. We met in his office and he immediately suggested changes to decisions already taken, and some other measures which would help bring the prospective deficit back to more manageable limits. We would still end up with a very expansionary budget, but it would not be as bad as had seemed likely a short while before.
I brought down the budget on 17 August 1982. It was attacked as too expansionary, and breaking with the economic doctrine the Government had been enunciating for many years. This was the central political dilemma we faced. For years we had preached the virtue of expenditure restraint and reduced deficits, yet all of a sudden we were saying that the solution to the nation’s economic problems lay in more government spending. It confused the public.
So much for economic and political theory; the public was more interested in the human consequences of the worsening recession. On several occasions, over coming months, it became necessary to revise upwards, the unemployment predictions. This not only reflected the reality of a collapsing labour market, but unavoidably conveyed the impression that the Government was powerless to do anything about it.
Due partly to his having come to the prime ministership through an early election, Malcolm Fraser was always attended by early election speculation. I felt sure that he wanted, if possible, to have an early election at the end of 1982. I was against this. My principal reason was that the public had grown sick and tired of elections being called to accommodate what they saw as the political interests of the incumbent government. The Liberal Party organisation was in no mood to fight an early election. Fraser was both stunned and angry at opposition to an early election.
Suddenly, in October 1982, Phillip Lynch announced that, because of ill-health, he would retire from parliament, leaving a vacancy in his seat of Flinders to be filled at a by-election before the end of the year. Within a few days there was a real bombshell. Malcolm Fraser developed severe back problems and had to enter hospital for surgery which would sideline him for up to two months. This put paid to any possibility of an election at the end of the year.
It also meant that I would lead the Liberal campaign effort in the by-election, as acting party leader in Fraser’s absence. What is more, I was left with most of the responsibility for a wages pause, which Fraser had initiated only a few weeks earlier. It had struck a chord with Australians. By now, employment was falling like a stone, and even some of the more difficult elements of the trade union movement embraced the idea of holding down wages as a trade-off for some others keeping their jobs. As part of the healing process, Andrew Peacock was able to return to cabinet in November, taking the place of the retiring Phillip Lynch.
Bob Hawke had entered parliament in 1980. From that moment onwards there was constant speculation about his replacing Hayden. On 16 July 1982, with the open support of the NSW right, led by Keating, Hawke challenged Hayden. The result was the best possible for the Government. Hayden defeated Hawke by a margin of only five votes: 42 to 37. It left Hayden debilitated and Hawke, despite his wordy protestations, as an untamed predator. Hayden needed a good result in Flinders to consolidate his leadership.
Lynch had held Flinders at the 1980 election with a margin of 5 per cent, and with a by-election in the depths of a recession, it seemed ripe for the taking by Labor. The ALP got off to an atrocious start by choosing a very poor candidate, a local real-estate agent by the name of Rogan Ward. He was uninspiring on the campaign trail. In by-elections, particularly highprofile ones, and Flinders was certainly one of these, there is constant publicity surrounding the candidate. A bad candidate can get lost in a general election. He or she can’t hide in a by-election.
The Liberal Party’s candidate was a local solicitor, Peter Reith. I opened his campaign with a rally at Mornington High School on 12 November. My travel to the event attracted more than the usual publicity. I had burst an eardrum and had medical advice not to fly. I therefore took the Riverina Express from Central Station in Sydney to Spencer Street Station in Melbourne. It had been a long time since a senior political figure had travelled between Sydney and Melbourne by rail, and there was quite a bit of interest in this.
The Liberal Party’s one campaign theme was the wage pause. We said to the people of Flinders that the country was in a recession, unemployment was rising and one way which meshed with the Australian notion of mateship, of helping those whose jobs were at risk, was for those who had jobs to forgo wage increases to help their fellow Australians who were at risk. It seemed to catch on. But I didn’t imagine for a moment that it would be sufficient to prevent the seat falling to the Labor Party. Reith was a very good candidate, and he and his wife, with their then young family, presented a good image of a local family, strongly identified with the aspirations and the future of the electorate.
The Labor Party was knocked sideways, three days out from the election, by an article appearing in the Melbourne Age suggesting that the Labor candidate, Ward, had been involved in some shady real-estate deals. Rogan Ward denied the allegations. It was manna from heaven for the Liberal campaign. I stayed in Sydney the day of the by-election, 4 December, and rather nervously awaited the result. Finally, I rang Grahame Morris, who had been ‘minding’ Peter Reith throughout the campaign, and to my great delight he said, ‘I am about to go in and tell Peter that he has been elected as the member for Flinders. It has been a great result. The swing against us was only 3 per cent.’ This was an amazing outcome, the deficiencies of Rogan Ward notwithstanding. It had huge implications for both the Government and the opposition.
Labor’s dismay was palpable. How could it be, that, in the middle of a recession, with unemployment heading towards 10 per cent and the incumbent government having been there for seven years, it was not possible to achieve a swing of 5 per cent? It defied all political reasoning. Inside the Labor Party, the near-universal judgement was that Hayden was the problem. The media hounded Hawke for a response. He had one of his celebrated temper outbursts, telling some television journalists to ‘get a grip of yourselves!’ This kind of response only reinforced his appeal to the Australian public.
The Flinders by-election came to occupy a special place in Australian political history. It crippled Bill Hayden’s leadership,