John Howard - Federal Treasurer (1977–1983)

Federal Treasurer (1977–1983)

In December 1977, at the age of 38, Howard was appointed Treasurer. During his five years in the position, he became an adherent of free-market economics, which was challenging economic orthodoxies in place for most of the century. He came to favour tax reform including broad-based taxation (later the GST), a freer industrial system including the dismantling of the centralised wage-fixing system, the abolition of compulsory trade unionism, privatisation and deregulation.

In 1978, the Fraser government instigated the Campbell Committee to investigate financial system reforms. Howard supported the Campbell report, but adopted an incremental approach with Cabinet, as there was wide opposition to deregulation within the government and the treasury. The process of reform began before the committee reported 2½ years later, with the introduction of the tender system for the sale of Treasury notes in 1979, and Treasury bonds in 1982. Ian Macfarlane (Governor of the Reserve Bank of Australia, 1996–2006) described these reforms as "second only in importance to the float of the Australian dollar in 1983." In 1981, Howard proposed a broad-based indirect tax with compensatory cuts in personal rates; however, cabinet rejected it citing both inflationary and political reasons. After the free-marketeers or "drys" of the Liberals challenged the protectionist policies of Minister for Industry and Commerce Phillip Lynch, they shifted their loyalties to Howard. Following an unsuccessful leadership challenge by Andrew Peacock to unseat Fraser as prime minister, Howard was elected deputy leader of the Liberal Party in April 1982. His election depended largely on the support of the "drys", and he became the party's champion of the growing free-market lobby.

The economic crises of the early 1980s brought Howard into conflict with the economically conservative Fraser. As the economy headed towards the worst recession since the 1930s, Keynesian Fraser pushed an expansionary fiscal position much to Howard's and Treasury's horror. With his authority as treasurer being flouted, Howard considered resigning in July 1982, but, after discussions with his wife and senior advisor John Hewson, he decided to "tough it out". The 1982 wages explosion—wages rose 16 per cent across the country—resulted in stagflation; unemployment touched double-digits and inflation peaked at 12.5% (official interest rates peaked at 21%).

The Fraser Government with Howard as Treasurer lost the 1983 election to the Labor Party led by Bob Hawke. Over the course of the 1980s, the Liberal party came to accept the free-market policies that Fraser had resisted and Howard had espoused. Policies included low protection, decentralisation of wage fixation, financial deregulation, a broadly-based indirect tax, and the rejection of counter-cyclical fiscal policy.