How Treasury Lost its Intellectual Standing

Before beginning my review proper of Chan­ging Fortunes, several things should be said. First, this book has involved an enormous amount of painstaking research by Paul Tilley—a former Treasury officer—and contains, in its nine appendices alone, a wealth of carefully ordered factual information which, to my knowledge, has never before been made so readily available.

Second, it is accurately described as “a” history of the Treasury. Professional historians would doubtless write the history differently, in terms of coverage or perspective. Nevertheless, and whatever my criticisms below, the book is valuable, being the first real attempt at a history of one of Australia’s great institutions. Greg Whitwell’s The Treasury Line (1986) was valuable but much more limited. The production of the only previous history of the department, The Centenary of Treasury 1901–2001: 100 Years of Public Service (2001), written to celebrate the centenary of Australia’s founding, was entrusted, inexplicably, to a firm of consultants, and the result was shamefully inadequate. So Tilley is filling a long-standing gap, and for that we should all be grateful.

This review appears in October’s Quadrant.
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Third, it is quickly clear that Tilley, while undoubtedly seeking to present an objective appraisal of events, does so from a certain political perspective. The first clue to that is the foreword, entrusted to Greg Smith, whose devotion to the Labor Party quickly became clear to me, as Treasury Secretary, when he joined the department—a devotion that has only strengthened since. Other telltale signs could be listed, including having the book launched (at the ANU, naturally) by Michelle Grattan, whom I have known for over forty-five years, and whose philosophical attachment to Labor has never wavered.

Fourth and finally, on opening the book and applying the late Frank Devine’s “index test”, I was astonished to find more page references to myself than to any other individual (including such truly noteworthy people as Paul Keating and John Howard). I also figure predominantly in the bibliography. Although the Editor of Quadrant foresees no problem in my reviewing the book, I confess to some unease about what will inescapably be some self-referential comments.

Balance

Tilley is notably stronger in recording the post-Whitlam years than the 1901–1975 period. This doubtless reflects his own experience in entering the Treasury in the mid-1980s, but is none the less regrettable, resulting in some important events being inadequately treated—in the Loans Affair case, grossly so. The first major example—Tilley’s treatment of the Premiers’ Plan for dealing with the externally induced onset of the Great Depression—presents a “conventional wisdom” analysis. In fact, the Premiers’ Plan, notwithstanding criticism of its “austerity” by the usual proponents of what would later be called “Keynesian” fiscal stimulus policies, resulted in Australia’s recovering years earlier than countries that did adopt such policies. Keynes himself later admitted, in a Melbourne Herald article following a visit to Australia, that it had been a remarkably successful response. None of this is even hinted at by Tilley.

More significant is Tilley’s superficial coverage of the Whitlam government’s two major economic disasters. I refer first to the 1974-75 budget. Though presented by Treasurer Frank Crean, this was almost entirely the work of his successor-to-be, Jim Cairns. Advancing the “expansionist” nostrums of the so-called “Adelaide School”, and misled by an unforgivable analytical error by an adviser to the Minister for Urban and Regional Development, Michael Keating, Cairns blew out budget expenditure by an originally estimated 32.4 per cent (outcome, 39.6 per cent). Only after Cairns’s later sacking over the Loans Affair and his replacement by Bill Hayden was some degree of budgetary order restored, but by then the government’s fate was sealed. To this pivotal event in our fiscal history, which produced a rise in spending as a proportion of GDP from 18.4 per cent in 1973-74 to 24.3 per cent in 1975-76, Tilley devotes a cursory two pages.

The second major disaster of Whitlam’s years was not just of economic significance. The Loans Affair (to this day, capitalised whenever mentioned) was also the greatest political disaster, not only for Whitlam’s government (where it had a lot of competition), but for any government in Australia’s history. One might therefore have expected Tilley to cover it in some detail, and to draw from it some lessons (for example, the result of selecting party political trusties, rather than public servants proper, to head departments) relevant to some of his later themes. One can only ponder why his treatment of this episode is not merely inadequate but, as remarked earlier, grossly so.

The Loans Affair began in November 1974 when the Minister for Labour and Immigration, Clyde Cameron, was approached by one Tirath Khemlani, who claimed to be able, via unnamed Middle Eastern sources, to borrow almost unlimited amounts of petro-dollars that, following the 1973 “oil shock”, were then flooding international financial markets. Cameron conveyed this approach to the Minister for Minerals and Energy, Rex Connor, a man chiefly notable for his contempt for business leaders generally and mining industry leaders (his “hillbillies”) in particular. Deeply committed to a vast infrastructure program, with gas pipelines criss-crossing the continent (in what, to anticipate a later usage of the phrase in a different context, might have been aptly described as “spaghetti nation”), Connor was frustrated by lack of funding for his vision. In all this Connor was supported by the permanent head (as departmental secretaries were then still called) of his department, Sir Lennox Hewitt.

I was then Deputy Secretary (Economic) of the Treasury, under then Secretary Sir Frederick Wheeler, and my personal papers include a complete record (five bulging files) of the Loans Affair from the moment in December 1974 when it was first brought to Treasury’s attention by the Attorney-General’s Department (approached by Hewitt seeking legal advice about projected loan raisings by his minister). Over the next seven months, Wheeler fought tirelessly to warn not only Cairns, who had become Treasurer a few days after we first learned of the matter, but also Whitlam, both directly as opportunity offered, and via his recently appointed departmental head, John Menadue—a political appointee who, to Whitlam’s cost, was not up to his job.

Treasury, through its representatives in London and New York and its long-standing contacts with the Union Bank of Switzerland, quickly learned that Khemlani was just a con man. (Some years later he was arrested in New York and jailed for passing dud cheques.) By this time, however, the Loans Affair was well and truly launched, with Whitlam, Connor, Cairns and Attorney-General Lionel Murphy having signed (ironically, on Friday, December 13) an Executive Council minute authorising Connor to arrange a US$4 billion borrowing. As the days ticked by, Connor was reported sleeping in his ministerial office so that he could immediately receive the telex message by which Khemlani had promised to inform him when the borrowing was effected. What he received instead was a string of excuses always promising “jam tomorrow”.

The original Executive Council minute was revoked in January 1975 on the grounds of Khemlani’s non-performance; but instead of then leaving what was already not-so-well alone, the government replaced it in February 1975 with a new Executive Council minute authorising a US$2 billion borrowing. This authority remained in force until May, when it was finally revoked; but meanwhile, to render things even more chaotic, Cairns had embarked on a frolic of his own, issuing a letter to a Melbourne acquaintance, one George Harris, authorising him to seek borrowings on the government’s behalf which, if successful, would result in payment of a large commission to Harris.

So much for the course of events. Meanwhile, however, a storm of journalistic rumour and Opposition political questioning had begun to build. What else was to be expected when people like Khemlani and Harris were traipsing around financial markets, displaying their borrowing “credentials” to every merchant banker they approached?

Wheeler had maintained a meticulous record of this Affair from the day we first heard of it. When news of the Harris letter reached us, he sought advice from the Attorney-General’s Department on whether such a letter constituted a commitment to pay a secret (unauthorised) commission. Confirmation that it did was conveyed to Whitlam. After Whitlam learned of the Wheeler record (a copy of which he then demanded and was given), this led both to the termination of Connor’s authority and the eventual (July 1975) sacking of Cairns. So far from being grateful to Wheeler for his due diligence, however, Whitlam’s over-riding reaction was to seek to shoot the messenger!

What does Tilley say about these momentous (or as Opposition leader Malcolm Fraser was to call them, “reprehensible”) events? He devotes only three pages to them (in a 450-page text). While the facts, or most of them, are set down accurately enough, what is lacking is any sense of the drama of an episode that, after all, led to the premature fall of the Whitlam government.

The Whitlam years once behind him, three other matters are worth mentioning in assessing the “balance” of Tilley’s coverage: the splitting of the Treasury, the dollar devaluation episode and the response of the Rudd and Gillard governments to the Global Financial Crisis.

Malcolm Fraser’s 1976 decision to split the Treasury arose from a meeting of Cabinet’s Economic Committee in which the Treasury, backed up by then Treasurer Phillip Lynch and the Reserve Bank Governor, successfully resisted Fraser’s push to devalue the dollar immediately by 17.5 per cent. Fraser’s anger, and his decision to proceed with the split, was magnified (understandably) by a Kenneth Davidson article in the Age a few days later giving a detailed, and accurate, account of how Fraser had been “bested” in the Economic Committee meeting. (There was more to this leak which, I am sorry to say, did not reflect well on Wheeler, but I shall leave it there.) Although I believed then, and still do, that the split would lead (as it subsequently did) to less effective government control of a bureaucracy always well-disposed to spending, there is clearly room for two opinions, and Tilley’s treatment is not to be faulted merely because he holds the other one.

Tilley treats the 1983 dollar devaluation episode, including my own role in it, at length. While recounting fully the criticisms that rained down upon the Treasury, and me personally, at the time, he also makes a genuine effort to establish where the truth lay. As he says:

While Stone, as Secretary to the Treasury, was opposed to the decision … taken on 9 December, he has since argued that this did not mean Treasury opposed floating the exchange rate in principle. Rather, it was about timing and sequencing. It is this claim that I will seek to assess.

He is then as good as his word. I shall not traverse the detail, which is comprehensively set out on pages 172 to 183, other than to note what he says about the role of the Reserve Bank:

Selwyn Cornish [with access to the RBA archives as the Bank’s official historian] set out in an article how the Bank, with Johnston as Governor … had been discussing the RBA’s views with the Treasurer during 1983. Stone has said that these discussions were not reported to him, which he believes was in contravention of the Reserve Bank Act, which provides that the bank Governor and the Treasury secretary keep each other fully informed on matters of joint concern.

Suffice to say that in the end I find myself acquitted: “I think, however, that the evidence supports Stone’s claim that his position was changing from around October 1983, and from that point on he did support moving to a deregulated exchange rate, albeit more slowly.”

In his discussion of the devaluation episode, and elsewhere, Tilley often refers to the “conservative” nature of Treasury advice to successive governments under Secretaries prepared to give such “frank and fearless” advice despite knowing it would not be palatable to the government. As my last examination of the book’s balance, I have therefore chosen his coverage of Rudd’s and Gillard’s governments response to the Global Financial Crisis.

In mid-October 2008 the Rudd government, on advice from Treasury Secretary Ken Henry, brought down a $10.4 billion fiscal stimulus package to combat the domestic effects of the GFC. Treasury later argued, and Tilley seems to accept, that this saved Australia from recession. This claim is highly questionable. Much more important was the series of sharp cuts in the RBA’s official cash rate which, feeding through to equally sharp cuts in household mortgage payments, considerably enhanced household disposable incomes. However that may be, what is hardly in question is that a second fiscal stimulus package in February 2009, amounting to $42 billion over the forward estimates, was of little or no relevance to combating the GFC, but set up Labor’s budgets for a series of huge deficits in the years ahead. There seems to be no record of Treasury opposing this fiscal stupidity, and Tilley’s treatment of the whole episode, while factually accurate, lacks any “bite” so far as the role of the Henry Treasury is concerned.   

So much for these specific instances of imbalance. More generally, the book suffers from a too-heavy weighting towards taxation policy. While Tilley has worked in numerous policy areas, it is clear that his first love still lies where his Treasury career began, in the Taxation and Industry Division. This Division, headed by a strongly Labor-affiliated officer in David Morgan, also contained Greg Smith. It would hardly be surprising if a young new recruit should find himself influenced by such strong personalities; the excessive space devoted to tax policy may find its origin there.

Themes

Tilley pursues throughout two separable, but related, themes. He is chiefly concerned with the waxing and waning over the years of Treasury’s “influence” over governments. Treasury, he says:

finds itself on the horns of a dilemma regarding its role with government. To be influential it needs to be close to government, but not so close as to compromise its ability to provide frank and fearless advice … This book seeks to assess how it has navigated this dilemma.

Assessing the related roles of successive Treasury Secretaries, Tilley notes the change, gradual at first but gathering pace, from those who gave “frank and fearless” advice even when knowing their governments would not relish it, to the situation today where, beginning with Ken Henry and continuing a fortiori with Martin Parkinson, Treasury’s advice (when given at all) has become totally “responsive” to the government’s policies. (John Fraser’s three-and-a-half-year “interregnum” did something to stop the rot, but was not long enough to reverse it.)

When I joined Treasury in 1954 it was led by Sir Roland Wilson, whom I have elsewhere described as having been the greatest public servant in the Commonwealth’s history, with the possible exception of Sir Robert Garran. His advice to the Menzies government, combining both his outstanding intellect and his powers of forceful expression, was an example to us all. In 1966 he was succeeded by Sir Richard (“Dick”) Randall, who not only gave equally forthright advice to the Holt, Gorton and McMahon governments, but also insisted on that advice being committed to paper. Nothing was more important, he said, than “the power of print”. In turn, his late 1971 successor, Sir Frederick Wheeler, while more of a “mandarin” than either Wilson or Randall, still never swerved from the “frank and fearless” principle. Tilley’s conclusion on him is that he “was ultimately a controversial figure because of his role in the Loans Affair”, suggesting that Wheeler’s conduct then was wrong-headed because it brought him into conflict with the government and thereby caused Treasury to lose “influence”. On the contrary, it was his finest hour, and my admiration of him during those seven months, in which he fought to save the Whitlam government from its own folly, remains unstinting.

Which brings me, I fear, to myself. To quote Tilley:

Wheeler was replaced by John Stone as Secretary in 1979. Stone, undaunted by the Prime Minister’s wrath three years earlier, continued the approach of Treasury providing large amounts of forthright advice—including when it was not asked for … The traditional method of providing written briefs with a clear policy recommendation was followed … The upside of this approach was that Treasury provided clear policy advice—frank and fearless. The downside was that the Treasury’s advice was at times ignored when it was inconsistent with the government’s policy direction—a lack of responsiveness.

After Keating became Treasurer in March 1983 my relationship with him, although fully formal on my part, was entirely cordial; but after the floating of the dollar in December, “Stone was painted as the villain of the piece and his relationship with Keating never recovered”.

As Tilley rightly says:

The departure of Stone [in September 1984] marked the end of the very formal relationship between Treasury and the government. Wheeler and Stone had steered Treasury through some very difficult and bruising times … With Wilson, Randall, Wheeler and Stone as secretaries, the department’s relationship with the government was generally a formal one, with the roles of Treasury and the Treasurer quite distinct … With [my successor, Bernie] Fraser as Secretary … a different, less formal relationship emerged.

Yes, indeed, to the point where, after Keating had later made Fraser Governor of the RBA, he boasted publicly that he “had the Reserve Bank in his pocket”!

I pass over (without in any way seeking to diminish) Fraser’s two immediate successors, Chris Higgins and Tony Cole, and come to the appointment of Ted Evans, who served both Keating and Costello before retiring in April 2001. My only criticism of Ted, whom I otherwise hold in the highest regard, was that, while giving forthright advice himself to both those Treasurers, he clearly groomed Ken Henry to be appointed his successor, after which time (with Henry followed by the ineffable Martin Parkinson) it has been downhill all the way. As Tilley (despite his personal regard for both of them) concedes, “if it was known that the Treasurer did not agree with a position … no policy advice would be provided … In an effort to be seen to be more responsive, Treasury largely went along with this changing relationship …”

Conclusion

Tilley’s assessment of how Treasury has “navigated” what he sees as the dilemma of its relationship with Treasurers suffers, I believe, from a crucial failure of insight. While he is correct in seeing that providing advice to a government that has no appetite for it can, and does, lead to a loss of “influence”, what he fails to comprehend is the effect on the department of doing otherwise. A Treasury giving honest advice to its minister will be a Treasury in which bright young people want to work. One which retreats into the coward’s castle of “responsiveness” will quickly earn their disdain and early departure. The resulting decline in the department’s intellectual standing is a heavy price to pay.

Tilley recognises what has happened to the department:

Post [the Keating and Costello years], however, the pendulum continued to swing towards responsiveness … A relentless push for greater responsiveness … dragged Treasury into a relationship where, when it mattered, policy advice was often not being provided.

Or, as his back-cover blurb notes: “Treasury has been dragged closer to government and in the process become a less effective policy adviser.”

Perhaps I may have the last word. As Tilley records:

At his farewell drinks, Stone emphasised the different, and separable, role for ministers and departments: “Always remember that ministers are a different category of beings. No matter how much you may feel you have got close to them and they have become friends of yours, when the chips are down they will always betray you … good bureaucratic practice is that it is never good to get too close to ministers.”

Treasury’s failure, since 2001, to observe that practice has brought it to its present pass.  

John Stone is a former head of Treasury and a former National Party senator.

Changing Fortunes: A History of the Australian Treasury
by Paul Tilley
Melbourne University Press, 2019, 526 pages, $44.99