Letter From Sir John Kerr

This letter covers commentary following the Budget including the statement by the Leader of the Opposition, Malcolm Fraser MP that “no election will be precipitated this year unless some unexpected and serious change occurs.” It should be noted that the Opposition, comprising the Liberal and Country Parties, had the support of two independent senators, this giving them a majority in the Senate. (see the paper ‘Reminiscences – 1975’ extracted from the book by P Benwell ‘In Defence of Australia’s Constitutional Monarchy.’

PERSONAL AND CONFIDENTIAL

Government House,
Canberra. 2600.

29 August 1975.

My Dear Private Secretary

I should perhaps bring you up to date on the recent political situation.

The Budget, which arose from a number of compromises within the Cabinet, was reasonably well received in the country and in the Press. It kept the deficit down to about $2,600 million by substantial cutting of Government spending and by special revenue measures including an export duty on coal and an excise duty on locally produced crude oil together with certain indirect taxes. It radically altered the Tax Law in a complicated way, and I am not sure that I understand myself. It appears to have reduced taxation more or less across-the-board and wore significantly for the middle-income groups.

You will appreciate that in this country, as in others, heavy inflation has the result, when wage and salary increases are made, of pushing various groups of taxpayers into higher tax brackets. This means that they pay a larger proportion of their newly established income in tax than they did of their old.

If the increase has done no more than compensate them for the increased cost of living this means that in real terms, they are worse off. What has happened in fact is that income earners in all walks of life have been unwilling to tolerate this and have been demanding wage and salary increases sufficient to leave them at least as well off after tax as they had previously been and, if possible better off.

The resulting demands for wage and salary increases have accordingly been inflationary, though there are, as we all know, many other causes of inflation derived from overseas.

In Australia, many unions appeared to be willing to help to cope with inflationary pressures by accepting a system of wage indexation which would provide for, more or less, automatic increases in actual paid (i.e. over award) wages and salaries to cope with increased cost of living, provided that the tax scale was altered so as to introduce tax indexation.

There was accordingly, as part of the so-called social contract which the Government was trying to bring into existence, an expectation on the part of the trade union movement that in return for wage indexation, there would be tax indexation. The Budget however, did not provide for this, the reason being that the Government could not bring itself to adopt such cuts in Government expenditure as would permit tax indexation. The latter would have meant serious depletion of revenues and hence much more serious diminution of Government expenditure than the Government could tolerate politically. One of the main reasons why this course of action could not be tolerated politically was the Government's expectation that it would have a seriously adverse effect on employment. In the result, a different approach to the tax law was adopted. It gives some benefit to taxpayers, but by no means as much as tax indexation would have done.

The expected result of the Budget is that inflation will continue, though possibly not at the same rate, unemployment will rise and the economic position will probably be worse in the earlier months of next year than it is at the present time. Thereafter, the Government hopes that things will pick up, inflation will slow down, and unemployment be mitigated to some extent.

The Budget, as introduced, did not offer to the Leader of the Opposition, an opportunity to claim that it was so bad as to entitle the Opposition parties to reject it in the Senate, thus precipitating an election which would produce a double dissolution.

Mr Fraser has accordingly announced that although the Budget will be criticised by the Opposition, and he has criticised it, no election will be precipitated this year unless some unexpected and serious change occurs.

He has criticised the Budget mainly on the basis that it does not sufficiently cut Government expenditure and does not reduce taxation sufficiently. The latter point applies both to individual taxation and to corporate taxation.

He claims that the private sector has not been sufficiently encouraged to begin re-investment.

The Treasurer hopes that the Budget will have psychological effects encouraging to the private sector and will produce an increase of private investment. This psychological consequence of the Budget is, however, thought by many to be unlikely to occur. Indeed, there is a fairly widespread belief that the business community is not likely to re-invest in any significant way unless, and until, there is a change of Government. This is one of those imponderable economic factors about which I cannot myself make any predictions, and events will determine the matter.

In his reply to the Budget Speech, the Leader of the Opposition has also promised full taxation indexation if the Opposition is returned to Government.

People on both sides in politics seem to hold the view that it is very possible indeed that economic circumstances in the early part of next year will be such as to enable, and indeed to force Mr Fraser to deny supply in April/May, and to produce a double dissolution towards the end of the first half of next year.

I realise that all of this must sound like the re-run of an old movie to you as I recollect saying somewhat similar things in April/May this year.

One factor to be taken into account about the ability of Mr Fraser to produce an election in the first half of next year, is the position of some of his Senators who have a few years to run before retirement and who may object to go to the people in a double dissolution before retirement. Some are said to be unwilling to do this and could rebel, giving the numbers to the Government to stay in power. All of this is, however, a matter of political development within the Opposition parties which are difficult to predict.

So far as the constitutional position is concerned, it is unlikely that my visit to Canada, London, and possibly Europe will be interfered with by the development of any constitutional crisis.

The Prime Minister had expected it to be possible that an election would occur on December 5th, if supply were denied, but Mr Fraser has been leaving the impression that the Prime Minister could juggle the election date so as to avoid an election till February, even if supply were denied. This may be no more than a rationalisation for refusing to accept responsibility for running the country whilst it is still going down hill. He may prefer to take it over in the middle of next year after the economic situation has "bottomed out", if that unhappy situation is ever reached.

I am accordingly looking forward, and so is my wife, to our visit. We shall probably travel, though it is not yet settled, in our own Air Force aircraft which will give us much more convenience and comfort though there will be longer flying time involved.

I am taking the liberty of enclosing with this letter two copies of the Australian Foreign Affairs Record. These are for your own scanning as I would not wish to burden Her Majesty with them unless she is interested.

In the issue for May, there is an article about my visit to South Asia. I had nothing to do with its publication and did not know it was to be produced until in due course, the journal passed across my desk. It will give you an indication of the way in which my overseas visits are being treated by our Foreign Affairs Department and presented to the world.

The issue for June 1975 may also be of some interest to you and you may judge it to be of some use as background briefing material for His Royal Highness The Prince of Wales. It contains an article on the emerging foreign policy of Papua New Guinea, together with a report of a speech made by the Papua New Guinea Foreign Minister Sir Maori Kiki on 6th December 1974, under the title "An Assessment Report on Foreign Policy".

I have today, sent the promised official documentation on the Papua New Guinea Constitution, together with correspondence from the Australian Prime Minister and the Papua New Guinea Chief Minister which contains the appropriate advice. I shall not write to you on this subject until after 1st September when I shall know more about events in Bougainville.

However, now that Her Majesty is in possession of the Prime Minister's official advice, anything that I say in this personal correspondence will, of course, be no more than background information.

Please assure Her Majesty of my continued loyalty and humble duty.

Your sincerely,

SIGNED  John R Kerr

P.S.

This morning the Prime Minister predicted no election in May next year saying that he thought that the Leader of the Opposition had, in effect, a better sense of values than his predecessors and would wait till 1977.

Lieutenant Colonel the Right Honourable Sir Martin Charteris, K.C.B., K.C.V.O., O.B.E.,
Private Secretary to The Queen,
Buckingham Palace,
LONDON ENGLAND