Monday, January 01, 2007

Fraser outfoxes Treasury

Here's how it happened. Cabinet papers for 1976 released today by the Australian archives and Malcolm Fraser himself tell the story:

The Whitlam government may not have seen eye to eye with the Department of the Treasury, but it never tried to destroy it.

Malcolm Fraser embarked on such a course within in a year of succeeding Whitlam.

The execution warrant was a bland three-page Cabinet minute to be released today under the 30-year rule....

Dated 18 November 1976 it is headed “Administrative Arrangements: Department of Treasury”.

It outlines a decision taken by Cabinet’s economic committee “without submission” (that it, without the bureaucracy having a chance to comment on it) to split the Treasury in two.

A new Department of Finance would take over the Treasury’s responsibility for the management of government finances - Treasury’s original reason for being, and the function that gave it its name.

The Treasury itself would be left with “broad policy analysis and advice”.

But to make sure that the government had access to a separate stream of economic advice there would be a strengthening of the economic arm of the Department of Prime Minister and Cabinet. All three were to maintain “the closest co-ordination”. Since entrenched, the system has since become known as the trinity: economic advice is provided by the Treasury, Finance, and PM&C

“Treasury didn’t like it, it fought it” remembers Malcolm Fraser, “but if a government makes up its mind and is totally determined, it can’t be stopped.”

Unusually among Australian Prime Ministers, Malcolm Fraser had studied economics.

He wasn’t overawed by Treasury’s apparent mastery of its discipline and was furious at what he saw as its practice of only presenting the Cabinet with one option when offering advice.

He said to start with even the Governor of the Reserve Bank Harry Knight would recite the Treasury line when he appeared before the economic committee of Cabinet.

“I would say to him, Harry I can’t believe the Bank always supports the Treasury view. Doesn’t the bank have its own view? The government is entitled to have the Bank’s view.”

Tension between the government and the Treasury came to a head over the Prime Minister’s determination to devalue the dollar, a decision that was eventually taken on November 28. Both the Treasury and the Reserve Bank supported a devaluation but the Treasury wanted it to be small, expressing concern about inflation. The Prime Minister felt it had to be big.

“I had seen a number of countries in Europe and elsewhere devalue and devalue and then devalue again. It was almost like one devaluation began speculation on the next. I believed that you should have a devaluation that is so large that everyone would know that, providing other elements of policy remained firm, the next movement of the currency would be up” he said.

Bypassing the Treasury Malcolm Fraser and his Treasurer Philip Lynch put their view to the Governor of the Reserve Bank, Harry Knight.

As Malcolm Fraser remembers it: “Harry said: ‘I understand that because that is a very respectable approach.’ I said: ‘Harry – what is the smallest devaluation where you could guarantee me that the next movement would be up? Harry said: ‘15 per cent’, and I said: Would it break the bank totally if I take out a little bit of extra insurance and have 17.5 per cent?”

History proved the Prime Minister right. The next movement in the exchange rate was up and inflation continued to fall.

Malcolm Fraser rejects the view that his decision to split the Treasury was an attempt to settle scores.

“Punishment had absolutely nothing to do with it. It was an attempt to institutionalise and emphasise that governments are entitled to alternative sources of advice. And that could never come out of the Treasury as it was,” he said.

The former Prime Minister notes that no succeeding government has even contemplated reuniting Finance and the Treasury.

“And no governor of the Reserve Bank is ever again going to be beholden to Treasury. Once that battle was won, it was won for good.”