Gough Whitlam’s Legacy – What Worked; What Didn’t

The Whitlam Governments – from December 1972 to November 1975 – led a reform revolution in many areas, from education and health to the environment and foreign policy. But alongside the great achievements were great failures and, ultimately, great tragedy when the government was dismissed. On Wednesday 11 December, The Sydney Institute brought together four of the contributors to the recently released The Whitlam Legacy to discuss the impact of Whitlam’s time in power. Troy Bramston, a columnist with The Australian and contributing editor of The Whitlam Legacy, joined former Labor minister Susan Ryan AO, The Sydney Institute’s Gerard Henderson and Deloitte Access Economics Director and former economics advisor to Kevin Rudd and Julia Gillard John O’Mahony in this review of the Whitlam years.

 

WHITLAM’S ECONOMIC POLICY

JOHN O’MAHONY[1]

 

When the Whitlam Government took office after 23 years of conservative stewardship, it inherited an underperforming, inflation-prone and insular economy. So as the commodity boom, oil shock and upheaval in the international financial system exposed the economy’s vulnerabilities in the early 1970s, the new government was left floundering, trying to implement its ambitious policy program as economic conditions rapidly deteriorated. The “golden era” of economic stability that had existed for most years since the Second World War was over. Full employment and low inflation were out; stagflation was in.

Looking back, the early 1970s was an important inflection point in Australia’s economic history, as it was for nearly all Western economies. It divided the decades of relative economic stability, that came before, from a new era of persistent inflation and unemployment problems that would persist until almost the end of the century. It was also a period in which the policy consensus over economic management rapidly unravelled.

One reading of that era blames the Whitlam Government for Australia’s subsequent economic woes. Certainly, its response to the unfolding economic crisis was undermined by excessive growth in wages and government spending. But, in its defence, the government was surprised to find that traditional levers of economic policy now abruptly malfunctioned. It had no crystal ball to explain that the long post-war boom was ending and the old playbook for economic policy no longer worked. And yet, from a longer term perspective, the Whitlam Government implemented reforms that would eventually improve economic management such as tariff reduction, the outlawing of restrictive trade practices, and long term investments in education and infrastructure. 

Election promises

Contrary to perceptions that Labor was disdainful of economics, it made economic mismanagement a key issue in its assault on the McMahon Government. Among the many other questions put to the audience in the “It’s Time” speech in the Blacktown Civic Centre on the evening of 13 November 1972, Whitlam asked:

Will you again entrust the nation’s economy to the men who deliberately, but needlessly, created Australia’s worst unemployment for ten years? Or to the same men who have presided over the worst inflation for 20 years? … The whole period of the McMahon Government has been marked by the lowest rate of growth experienced in Australia since the 1930s and one of the lowest in the developed world – a paltry 3 per cent a year.

Labor promised to “restore genuine full employment – without qualification, without hedging” and optimistically promised to “achieve a growth rate of 6 per cent to 7 per cent in each of the next three years”.

The economic inheritance and inflation challenge

When the Whitlam Government took office, Australia’s economy had been underperforming for some years. Economic growth was below the advanced economy average.[2] Unemployment had swelled to its highest level in ten years. Inflation was a significant problem – after averaging 2.5 per cent during the 1960s, it had accelerated to over 7 per cent by the early 1970s. There were also structural weaknesses in an economy where sheltered businesses had excessive pricing power and powerful unions could demand their “cut” of the pie.

Most economic policies in its first six months were focused on addressing inflationary pressures. The first came soon after the end of the first Whitlam Government, presided over by a duumvirate of Whitlam and his deputy Lance Barnard, with the 7 per cent revaluation of the Australian dollar in December 1972. The dollar was revalued twice more in 1973.

The most dramatic strike against inflation was the 1973 decision to cut tariffs across the board by 25 per cent. Lower tariffs were aimed at reducing the price of imported goods, allowing imports to meet excessive demand pressures and increasing price competition.

The Prices Justification Tribunal, established in mid-1973 was to use open inquiry, publicity, and “moral suasion” to limit price increases for key products. Whitlam argues companies complied with the Tribunal’s decisions voluntarily, and it reduced inflation by somewhere between one and two percentage points.[3]

Wages policy in this early period of the government was not used to contain inflationary pressures; it in fact did the opposite. The government supported increased wage and non-wage benefits for the Commonwealth public service so it was a pacesetter for the private sector. In the May 1973 National Wage Case, it supported a 27.5 per cent increase in the minimum wage (four decades later this would be equivalent to around $150 extra per week). The government argued that “an appreciable rise in wages” was possible “without undesirable inflationary consequences” – but it was to be proved wrong the following year.[4]

First Whitlam Budget

 

Of the three Whitlam Government budgets, the first one delivered in 1973 was the least influenced by the emerging international economic volatility. In retrospect, the budget was not restrictive enough for a period of such strong economic conditions.[5] Treasurer Frank Crean described the fiscal strategy thus: “(I)n a buoyant and strongly growing economy, with inflationary pressures intense, we are limited by the over-riding need to bring down a Budget which does not add to these pressures”.[6] Yet the planned deficit for 1973-74 represented only a trivial narrowing compared to the previous financial year. The final budget outcome was lower than expected – wages exploded in the first half of 1974, pitching workers’ incomes up the tax scale and causing greater bracket creep. However, measures of the “structural” deficit, which net out the effect of economic conditions, may suggest a deterioration in the budget position.[7] Fiscal settings were inappropriate for a year of strong growth, a labour market “at full stretch” and inflation accelerating from 8 per cent to almost 15 per cent. [8]

Floundering

Soon after the 1974 election, economic conditions rapidly became more complicated. Whitlam was to later admit: “Like all Western governments, my government floundered for a period in 1974-75 under the impact of unprecedented difficulty in the world economy.”[9]

The government’s claims that it was a period of unprecedented economic difficulty in the world economy were not unfounded. The early 1970s saw the end of the long post-war boom with the breakdown of the Bretton Woods system of fixed exchange rates, world monetary expansion originating in the United States, an oil crisis in which prices of oil quadrupled, the collapse of stock markets, outbreaks of industrial action, surging inflation, and major recessions in the United States and United Kingdom economies. Governments everywhere struggled, and in many economies the policy responses made things worse.

A sharp increase in wages dramatically changed the economic landscape in 1974, with average weekly earnings growth hitting 18.8 per cent by the middle of the year. Whitlam later acknowledged that the wages blowout was the “chief economic failure”[10] of the government and said that it needed to better communicate the benefits of the “social wage” to moderate union wage demands.

With the industrial relations system unable to restrain wage pressures, the government unsuccessfully looked to other policy tools to combat inflation. The Trade Practices Act 1974 was an historic competition reform, making restrictive trade practices illegal and reducing the pricing power of firms – but it was no antidote to short-term inflationary pressures.

From mid-1974, the Australian economy encountered an unfamiliar problem: simultaneously rising inflation and unemployment. In the two months leading up to the Budget (it was delayed by a month until September), unemployment had risen from 71,000 to 111,000, while inflation was 14.4 per cent. The new phenomenon, “stagflation”, went against the logic of economic thinking at the time.

For the 1974-75 Budget, Crean and Whitlam proposed lower increases in spending than ministers were demanding, but the ministry and the caucus were having none of it. Led by Chairman of the Caucus Economic Committee, Jim Cairns, they wanted an expansionary budget to help reflate the economy.While publicly defending the budget, in confidential cabinet submissions the Treasurer expressed deep concerns about its economic impacts:

I believe that the impact of the 1974-75 Budget, as framed will be grossly inflationary … I must state my sad conviction that what we have opted for is likely to give us the worst of all worlds … The result is likely to be a vicious circle of spiraling inflation and depressed employment and activity – the classic “stagflation” situation.[11]

The 1974-75 Budget was a big spending budget: outlays grew 46 per cent, and the budget deficit blew out to $2.5 billion, or around 4 per cent of GDP.[12] Even extracting the effects of weaker conditions through the year, the structural budget deficit worsened.[13]

While the 1974-75 Budget deficit was significant at the time, it looks less so from the distance of four decades. In fact, owing to the exclusion of “net advances” in calculation of the underlying cash balance, the 1974-75 Budget outcome is now officially recorded by Treasury as a modest $181 million surplus. (Similarly, the 1973-74 Budget outcome is now recorded as a $1.15 billion surplus.)

Jim Cairns became Treasurer in late 1974; Frank Crean was dumped for arguing the tougher position of the Treasury in the 1974 Budget. Cairns had a PhD in economics but his philosophy of the “economics of love” did spawn some unusual economic proposals including a selective bank lending policy based on government priorities, and a “campaign of public education” to fight inflation.[14]

Last Budget

The first half of 1975 saw efforts by the government to regain control of the economy. The Arbitration Commission decided in April on wage indexation to curb runaway wage growth. The first ever Cabinet Expenditure Review Committee began its work identifying savings from early 1975. Nevertheless, the second half 1975, when Bill Hayden replaced Cairns as Treasurer and James McClelland took over from Clyde Cameron as Labour Minister, is often viewed as a period of economic redemption for Labor after the chaos of the preceding twelve months. According to Whitlam’s economic adviser Fred Gruen:

The public perception of an incompetent government lurching from crisis to crisis is based on a period of about one-third of the length of time this government was in office. Both before the May 1974 election and after Hayden and McClelland were appointed Treasurer and Minister for Labor respectively, a reasonably creditable case can be made for that government’s handling of our economic affairs.[15]

During the 1975 Budget preparation, Hayden had unsuccessfully proposed reducing the budget deficit by cutting welfare housing, Aboriginal advancement programs, infrastructure works and, from 1 July 1976, by reintroducing fees for university students.[16] The final budget outcome was a $3.6 billion deficit – the largest of any of the Whitlam Government Budgets. And, while economic changes impacted the budget, the structural deficit widened further.[17] Debate about the budget and economy raged in the final three months of the Whitlam Government.

Assessment and legacy

The three years of the Whitlam Government saw the economic growth rate halve, unemployment double and inflation triple. If simplistic comparisons with previous economic conditions were fair, they would be an indictment of the Labor government. And yet, despite the limitations of such approaches,[18] it is likely that common perceptions of the Labor government’s economic failure are based to a significant extent on how things got worse once Gough Whitlam became prime minister.

The Whitlam Government’s average economic growth rate of 2.1 per cent was below that of the preceding decade and below that achieved under subsequent governments. Whitlam is able to argue, reasonably, that “Australia was one of the comparative economic successes of the world during the period 1972-1975”[19] because while the previous Australian government had below OECD-average growth rates, Whitlam’s were similar to the OECD average.[20]

Despite falling in the government’s first year, overall unemployment rose from 2.5 per cent in 1972 to 4.6 per cent by 1975.[21] Thereafter it continued to climb and it was to be three decades before Australia was to again see an annual unemployment rate below 5 per cent. At least some of Australia’s subsequent poor unemployment performance can be traced back to economic mismanagement in the early 1970s.[22] Yet, from another perspective, Australia’s unemployment experience matched what happened across the developed world, and was substantially better than the United States, which pursued the more contractionary settings rejected by the Whitlam Government. Unemployment also became much higher under later governments.

The worst economic problem under the Whitlam Government was inflation. According to at least two economists, by the time the dollar was revalued in late 1972, it was already “too late to head off inflation. Further policy action . . . came after most of the damage had been done”.[23] There were also biases in the Whitlam Government’s policy response. While all manner of policies were thrown at the inflation problem in the government’s first two years – currency revaluations, capital controls, tariff cuts, the Prices Justification Tribunal, tax rises and a credit squeeze – the government tried to place most of the burden of adjustment on business, while doing too little to address runaway growth in workers’ wages and government spending programs.

The Budget did not play the role it could have in managing the crisis. By comparison, economist Ross Garnaut credits the Menzies’ Government’s “horror budget” of 1951-52 delivered by Treasurer Arthur Fadden as being critical to reducing inflation during a previous commodity boom in the early 1950s.[24]

In industrial relations, the government did not realise the potential of its relationship with the trade union movement to moderate wages growth. While it acknowledged its mistakes in wages policy, the Whitlam Government’s remedial action of indexing wages to prices locked in real wage rises and arguably prolonged the period for the labour market to readjust.[25]

Alongside mistakes, in short term economic management, were long term reform achievements. Tariff reduction and the replacement of the Tariff Board with the Industries Assistance Commission was a major reform.[26] Moving industry policy from tariffs and bounties towards targeted support for structural adjustment and R&D was a reform. Four decades later, the Whitlam Government’s Trade Practices Act, now the Competition and Consumer Act, remains central to competition policy in Australia.

Significant economic debate surrounds the substantial increases in the size of the public sector under Whitlam. Government outlays as a percentage of GDP increased by around 6 percentage points over the three budgets. Outlays increased only half as much during the downturns of the early 1990s and late 2000s. The Whitlam Government claimed a strong mandate for increasing the size of the public sector because it had been elected to expand public services. Indeed, decades later, such government spending on education, health, transport and urban development would be billed as productivity-enhancing investments in “human capital” and “hard infrastructure”. We now know the Whitlam Government’s vision for a larger public sector was conceivably fiscally sustainable. Successive governments achieved fiscal sustainability not by unwinding government spending, but instead by matching it with a higher level of taxation.[27] But at the time, in those economic circumstances, the speed with which government spending rose had consequences for capacity utilisation, inflation and credit, and ultimately adverse consequences for unemployment. According to Bill Hayden: “There is nothing sacrosanct about the particular public and private sector shares of GDP. But sharp movements in these shares can be disruptive.”[28]

Another economic legacy of the Whitlam years is the higher priority given to the objective of low inflation by subsequent governments. However, the strategies of subsequent governments to fight inflation were not immediately successful. Monetary targeting was unsuccessfully tried from 1976 to 1985. The Prices and Incomes Accord of the Hawke-Keating Government was able to stabilise moderate levels of inflation but not achieve low inflation. The goal of low inflation was not achieved until the early 1990s.

Labor after Whitlam

Rebuilding Labor’s economic credibility was a substantial task. Paul Kelly credits Opposition Leader Bill Hayden as a “vital architect of that bridge” to the successful Hawke era.[29]

The Hawke-Keating governments were profoundly influenced by the Whitlam legacy. Their main economic arsenal in the 1980s – fiscal consolidation and the Accord with the trade union movement – was aimed at avoiding the chief problems of the Whitlam years.

Labor’s economic strategy in Opposition from 1996 to 2007 was overshadowed more by the Hawke-Keating governments’ legacy than the Whitlam Government’s legacy. Labor spent much of that time trying to shake off the legacy of the recession of the early 1990s. In 2004, Mark Latham’s signing of the novelty sized piece of cardboard, a guarantee of low interest rates, owed more to the experience of high interest rates in the early 1990s than to the credit squeeze of 1974.[30] Kevin Rudd’s 2007 “economic conservative” TV ads were probably more about the state of the budget in 1996 than in 1975.

For the Rudd Government, the influence of the Whitlam Government was as much a benchmark for pursuing reforms as it was a haunting economic nightmare not to be relived.  In office, both governments faced extreme international economic volatility. When the Rudd Government increased spending in 2009-10 to respond to the global financial crisis, the comparisons were to Whitlam.[31] A key difference was that the Rudd Government had more timely and accurate information about the global financial crisis, and much of the spending in response was structured to be temporary, unlike the Whitlam Government’s. Both governments saw the prime minister removed from office in unprecedented circumstances after less than three years in government (albeit by different means) but there were also stark differences: economic failings contributed to Whitlam’s downfall; Rudd’s was despite his government’s effective response to the economic turmoil.

As the Whitlam era recedes into distant memory, debates over the Whitlam era will of course increasingly take a back seat to conflict over more recent legacies: Hawke and Keating, Rudd and Gillard, and the mix of domestic and overseas factors that have contributed to the economic successes of the early twenty-first century. Nevertheless, for a government that served only a short time in office, its lessons remain richly valuable and should not be lost to future generations. Its mistakes – economic and political – were many. But its achievements were also profound and enduring.

 

ENDNOTES