The economy, Budget and wages policy

Once the 1984 federal election was over Cabinet set an ambitious agenda for fiscal reform. On 13 December 1984 Treasurer Paul Keating told Cabinet that the government must maintain its record of sound economic management, which had clearly contributed to the election victory. There had been rapid growth in activity, employment and real income, a reduction in inflation and interest rates, and an improved investment outlook. However this had been due partly to special factors such as recovery in the rest of the world and the end of the drought in Australia. The private sector had benefitted from strong growth in government spending in 1983–84, but with the current improvement in private spending the business community now favoured moderation in government spending and a reduced budget deficit.

Keating saw the four big policy issues of 1985 as the need to exercise significant restraint on expenditure to relieve pressure on borrowing and hence on interest and exchange rates, a review of Commonwealth–state financial relations, the maintenance of effective consensus on wage and price restraint, and review and reform of the tax system. Cabinet noted the need to preserve options for tax reform and to remove community anxiety that tax reform would lead to higher taxes. It also endorsed the so-called 'Trilogy' of budget restraint, which pledged that Commonwealth revenue would not increase as a percentage of gross domestic product (GDP) and that Commonwealth expenditure and budget deficit would not increase as a percentage of GDP.

On 18 February 1985 Cabinet considered its approach to the forthcoming National Wage Case. It was anticipated that employers would oppose any wage increase, while the Australian Council of Trade Unions (ACTU) would seek a 2.7 per cent wage increase to compensate for cost of living increases during the second half of 1984. Cabinet agreed to support the ACTU claim in line with its commitment to the Prices and Incomes Accord. However it would oppose the flow-on of the increase to public-sector unions engaged in industrial action in support of wage claims beyond the terms of the Accord.

In April 1985 the Trade Department gave Cabinet a fairly gloomy review of Australia's trade performance. The situation had deteriorated markedly in the first eight months of 1984–85, with the current account deficit standing at $7.57 billion, prompting a sharp fall in the value of the Australian dollar. There had been only a modest growth in exports, against a much larger growth in imports and the 'invisibles' deficit. Australia's share of world trade was declining and 75 per cent of its exports were primary products – in particular wheat, coal and petroleum products – whereas the main growth in world trade was in manufactured goods. Import growth was far outstripping export growth and some 60 per cent of imports entered Australia duty free or at non-protective tariff rates because they were products not manufactured in Australia. The report concluded that:

…the foreign exchange market is reacting quite rationally to the current and future outlook for Australia's trade. Australia's external position appears to be displaying all the characteristics of a country which is heavily exposed to the vagaries of world commodities markets and lacking a well-developed industry base to provide some counterbalance to adverse trends in commodities markets.

The Commonwealth traditionally borrowed funds for major infrastructure projects on behalf of the states, but the Fraser government's removal of state electricity authorities from Loan Council control in 1982, together with the use of devices such as leasing and deferred payments, had resulted in most borrowing by state authorities being undertaken independently of the Loan Council. The Loan Council had agreed in 1984 that all borrowing should be brought back under its control, but this decision was due for review and Keating was concerned that there might be another breakout as the states sought to counter a tightening of Commonwealth funding by increasing their own borrowings. Keating was also concerned that over-investment in power generation had forced up interest rates and that state authorities failed any reasonable test of commerciality because of their semi-monopoly position, inadequate rates of return and exemption from taxes. On 28 May 1985 Cabinet endorsed Keating's proposal to limit total payments to the states in real terms to slightly less than the 1984–85 level and to reduce both state and Commonwealth borrowings by 5–6 per cent (see A14039, 2945 and 2940).

Selected documents

Copyright National Archives of Australia 2014