The PJK Way


Six months after coming to power in the 1996 federal election, John Howard’s Coalition government dismantled the final part of Paul Keating’s push towards a national employees’ superannuation scheme founded on 15 per cent of workers’ wages.

The new treasurer, Peter Costello, killed off the progression planned by Keating, so that the contribution rate was capped at 9 per cent. It became an illustration of something that often happens in politics and public life: an arbitrary figure can take on a life of its own and run on as received wisdom without rhyme or reason.

The 9 per cent superannuation figure, which is now known to every businessman and trade union official in the country, has no basis in economic or social logic. It just happened to be the ratio of superannuation payments to wages applying at the time that Keating’s last budget ran out.

On the other hand, the target of 15 per cent by 2000 towards which Keating had aimed his l995-96 budget does have a substantial point in logic. It was set following objective advice to Keating that this was the level at which a middle-income earner could know that he or she was prepared for a comfortable old age. It also had the virtue of equating national savings to national spending at a level that would limit foreign borrowings and contain our external debt to levels that could forever be benign.

After the defeat of the Keating government, and the denial of the inferences previously given by John Howard during the election campaign that his government would go on with the "co-payments" progress to a higher degree of government-sponsored employee superannuation payments, I began to do some research. How was it that the progression, first to 12 per cent and then to the ultimate 15 per cent, had so completely disappeared off the official radar?

I worked at the top of Treasury on an off-the-record basis, and discovered that the 15 per cent calculation had originated from within Treasury itself. Concerned at the prospective burden of a rapidly ageing population, Treasury staff had been working on this since the late 1980s. Paul Keating as treasurer and prime minister had picked up on their work, and his imagination had fixed upon it as he saw how the 15 per cent figure would be so beneficial for the other factors in his golden circle: the external account, the strength of the dollar, the basis for new private-sector enterprises like Macquarie Group, and so on.

I have observed that we live in a world where huge amounts of privately owned and controlled funds and financial paper sweep across civilisation, outside the control of such protective institutions as the American Federal Reserve, the International Monetary Fund, or the Bank for International Settlements at Basle. We have seen them smash the South-East Asian nations’ boom in the 1990s through speculative raids against their currencies.

Australia’s vulnerability to the currency hedge funds has resided in a chronic tendency to spend abroad more than it saves. This originally took the form of Australian governments running large public-sector deficits. But as public-sector financial discipline has improved, the "budget deficit" has become less of a problem for us than it once was. Its place has been taken by a private-sector deficit: the big commercial banks borrowing short-term funds abroad to finance such things as housing booms.

This spill of bank short-term borrowing abroad came to settle – give or take a percentage point – at about 6 per cent of national income. In the mid-1990s, Paul Keating figured out that once he had raised superannuation payments from 9 per cent of incomes to 15 per cent – that is, by six percentage points – he would have solved Australia’s vulnerability to the "current account deficit" because our banks’ propensity to borrow that extra 6 per cent would be matched roughly by the domestic workforce’s propensity to save an extra 6 per cent of pay: the borrowing spill abroad would diminish to the point of near-irrelevancy.

Keating, with his ultimately heightened grasp of economic dynamics, would usually accompany this point with a warning about our terms of trade that ran along these lines: because, unit for unit, the prices for goods we sell abroad – coal, iron ore, wool, cattle, wheat, and so on – had for years run ahead of the unit prices of goods we bought from abroad – television sets, computers, electronics of all kinds (the prices for most of which were actually falling), we had what was seen as a superior terms-of-trade position. That is, the prices of things we sold were rising considerably faster than the prices of thing we bought. This was a gain in real income, and it salved our tendency to push too many Australian dollars abroad into the hands of the raiders.

But how long could we continue to rely on having our external account problem solved by this considerable relative strength in our export prices? Who could predict that? How many points of growth might China slow down per year in a switch of attention to "green" matters, or to household matters? Say the oft-talked about recession in America did occur, due to the rot in mortgage capital, perhaps exacerbated by a slump in national confidence stemming from a sudden realisation that the United States, for all its glory, had been beaten by a collection of mad mullahs? Such geo-political factors as these could switch the international balance of demand and supply in such a way as to swiftly and adversely turn around Australia’s favourable "terms of trade".

Keating liked to point out the consequences of such a development with a scenario running as follows. A group of international currency traders are sitting around a coffee shop in Amsterdam swapping notes.

"I suddenly find I’m holding more Australian dollars than I usually do," says one. "Do you want to buy some?"
"Funny you should mention that," says another. "I’ve got a load more than I want."
"Time to launch a selling blitzkrieg here, boys, don’t you think?" says another.

It turns out that Keating has been somewhat premature in the "hedge traders’ bazaar" aspect of his concern about an excess of Australian dollars floating abroad. Australia’s favourable terms of trade have lasted a lot longer than his musings allowed, for reasons not apparent when he first indulged in them. But something like this is certainly not fanciful if the international terms of trade do switch against Australia, and in the next two years we will know if that is going to happen.

The only way to guard against his Amsterdam coffee shop scenario is to increase domestic savings, to generate a better match between international buying and selling of the local currency. And the only practical way to expect this to occur as a profound step would be to lift the percentage of saved wages going into pension funds.

Paul Keating is right about the climacteric threat. We are psychologically vulnerable because the greater part of our population has not experienced a period of history when the prices of our export staples do not go on rising inexorably. But such periods are well and truly there within historical memory and, if they occur in a setting of a chronic excess of external short-term debt over credit, the impact here would be devastating. This is why Australia suffered so badly in the Great Depression.

The prospect of such a disaster was not the primary thing in the mind of the Treasury team working away on the 15 per cent pension-fund prescription under the fascinated gaze of treasurer Keating and then prime minister Keating. The main impellent of the team was the conclusion that if Australia was going to make a policy feature of workers’ pension funds, 15 per cent was what was required to ensure a comfortable old age.

It was Keating and his recent exposure to what the international hedge funds as a group could do when in full flight that conjured up the golden circle and the Amsterdam coffee house scenario: he had witnessed the sack of so recently lauded "miracle economies" such as Thailand and Indonesia. He wanted to achieve equilibrium between the domestic balance and the external balance, which was what a 15 per cent savings ratio could bring. One of the benefits of this would be a resilient dollar in any "terms of trade" setting – and not only this, but a low and stable interest-rate setting à la Switzerland, where interest-rate obsession ceases to become the little-understood but nonetheless incessant stuff of politics that it is in Australia.

I discovered through my enquiries that, when the Howard government came to power, the Treasury duly presented the fruits of their years of domestic savings-ratio research labours to treasurer Costello. The Treasury people were amazed to find that Costello wanted to go no further with this work. Was Costello an intelligent man? I asked. Yes, they said, he was a very intelligent man. What was his reasoning, then, for cutting this thoroughly reasoned scheme off at the 9 per cent at which it stood on Keating’s departure?

Treasury’s answer to me, to the question of why their own work on savings and superannuation was put on ice, was that the matter was "political". Political? I have long been aware that I would have been a disastrous Treasury man. I could not have shut up about the Treasury’s work towards the 15 per cent workers’ pension fund that went on for years and came to a sudden end. A good Treasury man can keep his mouth closed not only about the work, but also about speculation as to why a new government should suddenly terminate it, worthy though it had seemed.

I was left to draw my own inferences. It was difficult not to conclude that Peter Costello and John Howard had chopped the work off at the knees because it had become Paul Keating’s darling, and that they had done so out of political spleen, distrust of the unions, and a tactical desire to keep budget tax-cuts uncomplicated.

In the years immediately after the 1996 election, Paul Keating went cap in hand to both the Coalition and his own party, telling the story of the golden circle policy and the benefits that would accrue from it, and stressing that a quick movement to the 15 per cent savings ratio for pension funds was required. So much for the supposed innate arrogance of the man. There was an almost child-like trust on Keating’s part that his peers would grasp his points.

But his reasoned humility counted for nothing. Powerful people turned away; they simply did not want to know about it.

This is an extract from Unfinished Business: Paul Keating’s interrupted revolution (Scribe), launched by the former PM in Sydney on Wednesday.

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