Tony Abbott could take a political and economic lesson from Paul Keating

The release of the cabinet papers each year by the National Archives typically provides an unvarnished insight into the workings of government, and a lesson or two for the present generation of politicians. The release of documents for 1986 and 1987 is no exception.

By the mid-1980s, the Australian population was weary of change. The floating of the dollar had led to its sharp decline; reductions in tariffs and other industry support had caused jobs to disappear and uncertainty to increase.

Still emerging from the worst postwar recession, the economy was returning to growth but was bedevilled by the “twin deficits” scourge – high budget and current account deficits.

It was in May 1986 that Paul Keating made his famous banana republic remarks, in an interview with broadcaster John Laws. Without further reform, Australia would become a “third-rate economy”, he said. It could no longer rely on selling a “mound of rock” and a “bit of wheat and a bit of wool” to underpin its prosperity.

The Labor government set about framing a belt-tightening budget to boost national savings. Personal income tax cuts were deferred; a range of indirect taxes lifted; and students were slugged with an administrative fee. Pension adjustments were delayed; unemployment benefits tightened.

Drug subsidies were curtailed; the Medicare rebate was lifted; subsidies reduced for private hospital stays; and there was a 0.25 per cent increase in the Medicare levy.

While not as big a fiscal rebalancing as the first budget of the Howard government, it was significant. It improved the budget deficit to about 3.8 per cent of gross domestic product in 1986-87, down from a whopping 6.7 per cent of GDP in 1983-84. To put that in context, the budget deficit now is about 3 per cent of GDP.

Nonetheless, the urgency to repair the budget remains for the Abbott government, especially with a worrying medium-term outlook due to an ageing population and the expansion of entitlements paid for by a mining boom on the wane.

The Abbott government’s first budget is looming as the central political event for 2014, and there is considerable apprehension already about what it may bring. The government needs to find savings and new revenue of about $20 billion to $30 billion a year to set the budget on track for structural balance.

And here is where it can draw some lessons from the Keating budget of 1986, which spread the pain by using both arms of fiscal policy: revenue and expenditure. The Prime Minister has ruled out any tax increases this term, even though Australia has the fifth lowest level of taxation in the industrialised world. He has quarantined large areas of the budget from overall cuts and vowed to increase defence spending. These constraints will make it far more difficult for the government to repair the budget fairly. For big structural reforms to be accepted by interest groups and the public at large, they must believe the burden is shared.

Keating’s banana republic remarks were part of his ceaseless efforts to explain the economic challenge to Australians and why reform was in their long-term interests.

As Gareth Evans, resources minister at the time, told journalists at the Archives lock-up: “This was not a government that went around with a wet finger in the air”. If a focus group showed voters were sceptical, even fearful, of reform, the government did not backtrack but redoubled efforts to change public perceptions.

So far, the Abbott government has been adept at highlighting the fiscal problems, and sheeting blame home to Labor. But its vision of what kind of economy – and society – it wants to build remains threadbare.

This buy-in from the community is essential for good policy. It is also good politics. Labor gained an increased majority in the 1987 election, despite a tough budget less than a year before. The bizarre Joh-for-Canberra tilt helped its cause but a balanced approach to a difficult budget and its public diplomacy laid the groundwork for victory.

Focus group-driven politics and exploiting fear served the Coalition well in opposition. Now it needs to use the pulpit of the Treasury benches to overcome community fear, to make the tough but fair decisions, and to chart a course to continuing prosperity.