Peter Costello – Speech to the Sydney Institute – 1 October 2008

If I have a criticism of our side of politics it is that it doesn’t take history or ideas seriously enough.  And you only have to get into the business of writing books and reading reviews of your books to realise that most of the reviewers and most of the writers come from the left side of politics.  There aren’t many on our side engaged in this activity.  And I thought for that reason it was important that someone on our side of politics – the centre right of politics – actually take the time to write something of the history of our Government before it was written for us.  I wanted to tell it before it got re-written. 

The re-writing of history really began on the day after the election.  I watched Mr Rudd and Mr Swan try to tell the Australian public how bad the Australian economy was when they were elected – how inflation was so high and, poor them, they had inherited an economy that was growing beyond capacity.

They have changed their tune somewhat.  Now that there is financial instability around the world – something I warned of before the election – they are emphasising how well Australia is placed compared to other countries.  It apparently doesn’t cause them to ask who strengthened it and who prepared us for these challenges.  But we will take the compliment even if they didn’t intend it.

Over the last forty years governments have changed infrequently in Australia and you can see recurring patterns when they do.  I remember the change of Government in 1975 when Fraser defeated Whitlam.  Australia was suffering from double digit inflation, unemployment was rising, the economy was souring – there was a reason why the public turned on, and defeated, the Whitlam Government.

In 1983 Australia was in the midst of severe drought and recession when Hawke defeated Fraser.  The economy turned into a potent issue in the hands of the Opposition.  It was a major factor for electors to vote out the Government.

I would say it was much the same in March of 1996 when the Keating Government was defeated and our own Government, led by John Howard, was elected.  We had been through a deep recession, unemployment was still over 8 per cent in 1996, interest rates were higher than they are today, the Budget was in deep deficit.  I think the public would have got rid of Keating earlier – in the 1993 election – had it not been for a stroke of genius on our side of politics, that conjured up a series of policies which made it virtually impossible for swinging voters to vote for us.  As a result we lost the unlosable election.  But the swing voters were ready to avenge themselves by 1996 when we won by a landslide.

So how do you explain the November 2007 defeat of the Howard Government?  As I write in this book we had been through an ‘Age of Prosperity’.  This had been the longest period of economic growth in Australia’s history:- net household wealth tripled – it tripled – in 11 years from 1996 to 2007.  Unemployment had fallen to 4 per cent.  We were at a position of full employment.  Interest rates were lower when we were voted out of office than when we came into office.  We had balanced the Budget, we had paid off all net government debt.  And if I were looking to take the recurring pattern the 2007 Election doesn’t fit it, it doesn’t fit the analysis of 1975, 1983 or 1996. 

So this is the question I ask in the book:  How is it that a Government which had created such a period of prosperity – whose economic record was the envy of the world – was voted out of office in November 2007?  And the book is my attempt to answer that question.  In my analysis it wasn’t that the public was angry with the Government, it wasn’t that the public felt the Government had failed.  But the public wanted change.  And that’s why I would pair this election with 1972 when the McMahon Government was voted out of Office after a long period of Coalition rule.  My view was, and is, that in the lead up to the 2007 Election if the Liberal Party didn’t give the electorate the change it wanted the electorate was going to give the Government change it wanted.  In the end it did that emphatically, voting us out of Government and, unfortunately, voting John Howard out in his own seat of Bennelong.

And the lesson that I draw from that, a lesson I hope that the Liberal Party will take to heart, is that a political party like a business, like a charity, like a school, has to focus on succession planning.  Any organisation that wants to live beyond one chief executive or one leader no matter how good they are knows that they have to focus on succession planning.  We mismanaged our succession planning, we mismanaged our leadership transition, we were caught at the end of November 2007 with an electorate which had stopped listening to the Government – a Government which it thought had had a long run and was nearing the end of its time – and which wanted change. 

The Labor Party has figured this out.  When the New South Wales electorate stopped listening to Bob Carr he stood down in favour of Morris Iemma. The public may now realise how hoodwinked it was by this leadership transition and the “fresh face” but it managed to give the Labor Government in New South Wales another term.  Beattie did the same in Queensland standing down in favour of Anna Bligh.  In Victoria Steve Bracks has just done the same in favour of John Brumby.  Gallop in Western Australia stood down for Carpenter.  Lennon stood down for his successor Bartlett in Tasmania.

The Labor Party has much more a culture of the Party than the Liberal Party.  Individuals will stand aside for the good of the Party.  In the final chapter of my book I say that the Labor Party has the cult of Party, the Liberal Party has the cult of the leader.  And there are historical reasons why that is the case.  But the cult of leadership has not always served the Liberal Party well.  And it certainly hasn’t served it well in recent years where it now finds itself, apart from the recently elected government in Western Australia, out of office in every state and territory and at the federal level. 

I have a chapter in my book on leadership and obviously that’s the one that has excited most of the press.  I trace the leadership discussions, the manoeuvrings between John Howard, myself and others from December 1994 through John Howard’s 64^th Birthday in 2003, to the Athens declaration after the 2004 Election, to the APEC Meeting in September 2007.  I describe the week of the APEC Meeting here in Sydney almost exactly a year ago as a “week of madness”.  This was Australia’s largest ever diplomatic event.  Here in Sydney we had the President of the United States: George Bush; the President of China: Hu Jintao; the President of Russia: Vladimir Putin.  We have never had a President of Russia come to Australia before and over three successive days our Senior Ministers had meetings with each of those leaders – Bush, Hu Jintao, and Putin.  And during those meetings we were discussing Afghanistan, Iran and Iraq.  We were discussing terrorism and greenhouse issues.  I remember vividly a dinner at Kirribilli House with George Bush where I discussed with him the US sub-prime crisis then only beginning to emerge in September of 2007. 

And whilst these face to face meetings were going on with John Howard and his Senior Ministers, the moment they finished the Senior Ministers were meeting, at the Prime Minister’s request, to decide whether or not he should vacate his office.  We were in parallel universes:- with our foreign guests we maintained the façade that it was business as usual – under Howard for the long term – but the Ministers themselves had concluded he should go within the week.

It illustrates to me how much of politics is conducted at the shop front window level to the public whilst real decisions are being made out the back in the workshop where it is all being put together.  Bismarck the Chancellor of Germany once said:- “There are two things you should never see – one is how sausages are made and the other is how politics is made.” 

In our Government which commenced in March of 1996 and finished in November of 2007 there were three people that were in the Cabinet for the whole period – they were John Howard, Alexander Downer and myself.  I was there on day one and I was there when it all went down.  And it was a very long period.  Because the three of us were in that Government for the whole duration Howard became the second longest serving Prime Minister in Australia’s history, Downer became the longest serving Foreign Minister in Australia’s history and I became the longest serving Treasurer in Australia’s history.  In fact delivering 12 Budgets I have delivered more than 10 per cent of the Federal Budgets in the whole of Australian history.  Now people say that’s a great accolade.  Another way of looking at it is to say that if I’d have been any better I would have got myself out of that job before I delivered 12 of them!

And it was an extraordinarily productive period at least in the economic sense.  I am very confident about the judgement of history.  I think when the history of this period is written it will be judged one of the greatest economic periods that we have ever experienced.  It was certainly the longest period of continuous economic expansion that we have ever experienced.  It was the greatest accumulation of household wealth that we have ever experienced.  We recovered for the first time since the 1960s and the early1970s to a position of full employment.  In fact by the time the Government was voted out you began to hear a phrase you hadn’t heard in Australia for 30 or 40 years – labour shortage.  Our opponents think this is a bad thing.  They criticise our government because there were skill shortages.  Nobody was talking about skill shortages back in 1996 when we were elected.  They were talking about job shortages.  And labour shortage was something that re-entered the Australian lexicon.  Under our Government, after 10 years, we had more jobs chasing people rather than more people chasing jobs.

I also try to recount in the book some of the amusing ways in which politics and personalities interacted.  I do that because I want people to actually read the book.  There was an editorial published in the Asian Wall Street Journal yesterday on my book which is headlined:- “A-How-To-Run-An-Economy-Manual”.  Now that’s a very kind thing for the Wall Street Journal to say about my book.  But how many people will buy it if they think it is “A-How-To-Run-An-Economy-Manual”?  I want to tell you it is much more interesting than that title would imply.

For example I will never forget when I went to Canberra to do my first Budget in 1996.  We had gone through a whole election campaign being told the Budget was in balance.  Two days after the election I was told that wasn’t the truth.  In fact the Budget was around about 1½ per cent of GDP in deficit.  The first term of our Government would be dominated by efforts to try and get the Budget into balance, something that Australia hadn’t experienced for quite some time. 

I flew up to Canberra with Tanya, my wife, to deliver the Budget and my mother came around to look after our children.  My son Sebastian was 9 years of age at the time.  And when the time came to deliver the Budget my mother, his grandmother, said come and watch TV, we will watch Dad deliver the Budget.  And Sebastian at the age of 9 said “Nah that’s boring.”  She said “Oh no it will not be boring.  It is very interesting.  Dad will be speaking.  You will be interested to hear what he has got to say.”  “No that’s boring” he said.  She said “Well you haven’t seen it so how do you know it’s boring?”  And Sebastian aged 9 said “I went into his study yesterday and I read the speech.  It was on his desk.” 

I recounted the story publicly.  Sure enough a year later on the day before the Budget the phone rings at home so I answer it.  “It’s Laurie Oakes here.”  “Oh g’day Laurie how are you?”  Oakes said: “I was wondering if I could speak to Sebastian.  I want to ask him if he read any speeches on your desk yesterday?”

Of course interweaved with all of these events are the personal stories of many of my colleagues and some of the humorous anecdotes of what actually happened.  The press have obviously focussed on leadership issues but the book is much more serious than that.  It tells the story of our fiscal history, how monetary policy got made, the story of the GST and the difficulties of implementing it. 

Some of these achievements are taken for granted now and no one would suggest for a moment reversing them.  But they were hard fought at the time.  And introducing the GST where we changed the price of three billion goods and services on one night was a reform of mammoth proportions.  In fact unbeknown to me I started grinding my teeth in my sleep at night worrying about the implementation of GST.  My dentist prepared a gold crown for one of my damaged teeth.  And when I went to the dentist to have it fitted he pulled out the gold crown and looked at it and started laughing.  And he said “Oh the technician has got a sense of humour.” And I said “Why is that?”  And he said “The technician who made the crown has engraved some initials on it, it reads G – S – T.”  He then stuck it in my mouth.  He said “If we ever need to identify you from dental records we’ll know who it is.  You’re the one with GST engraved on his teeth.”  And that gave me great confidence.  If I ever die in an accident somewhere out there is a gold crown which will identify me and only me. 

We went through a financial crisis at the end of 1997 where we had the Asian financial and economic collapse.   I will never forget it.  I had to go into work on Christmas Day 1997 to authorise a one billion dollar loan to Korea which had run out of foreign reserves.  And the Korean Government was appealing to its citizens to donate gold jewellery so it could build foreign reserves.  And they were queuing to donate their gold jewellery to the Korean Government.  I have often mused about that – imagine asking Australians to donate their gold jewellery to the Government to save the Australian economy.  Do you think we would get queues outside the Tax Office?

But I learnt a few lessons coming out of that financial crisis – how important financial regulation is and that is one of the reasons why we set up our regulatory system with the Australian Prudential Regulatory Authority – APRA.  It is one of the reasons why we had much tighter supervision of credit standards than the United States throughout that period and it is one of the reasons why we began the great task of paying off Commonwealth Government debt. 

And the Prime Minister, Mr Rudd, regularly says – listening to him may be an effort, but listen to him – when he talks about the reasons why Australia should be insulated from the worst excesses of the current financial instability – he says we have got a good regulatory system.  He is right, it wasn’t always like that.  It was put in place back in the late 1990s.  He says we have well capitalised and profitable banks – we do, it wasn’t always like that.  Those of us who have been around a long time remember banks getting into quite considerable trouble in the 1980s.  He should go on and say we don’t carry any government debt which makes us different to the United States with a debt to GDP ratio of 50 per cent.

I would rather go into a financial crisis with no debt and no interest payments than a $9.6 trillion debt as the US Government has whilst they try and finance another bail-out package of $700 billion – another $0.7 trillion to add to their already debt ceiling of $9.6 trillion.  It gives you a bit of strength you see.  But it wasn’t always like that.  And I try and explain the decisions that we made to put that position in place.

I will never forget one incident from the 2007 Election campaign.  I was being trailed by media and cameras wherever I went and I turned up at the Ashburton Primary School in Melbourne.  And the school principal had deputised a child from each grade to ask me a question.  So we started off with Grade 6 and the student got up and said “Mr Costello can you use a computer?”  “Oh well yes I can, yes, yes.”  Next question: “Mr Costello what football team do you barrack for?”  “Oh I barrack for the mighty Bombers.”  Next question: “Mr Costello do you have any children?”  “Yes I have three children.” 

We got right down to the youngest class – the kindy class in the school – and in front of the whole school and unbeknown to him in front of the whole press pack of Australia this cute little boy grabbed the microphone and said “Mr Costello my name is Rourke and I want to know who made cactuses?” Well it was the question of the campaign.  Didn’t the press have a field day?  The banner headline in the Sydney Morning Herald the next day was “Mr Costello are you cactus?”   And I use that to explain the 2007 election campaign in a chapter entitled “Going Cactus”.  I describe how we went cactus in the 2007 Election campaign.  It should have come as no surprise to anybody.  Every poll for 18 months had said that the Coalition was behind.  There were 50 polls in a row Nielsen, Newspoll and Galaxy – 50 polls in a row said the Government was going to be defeated.  I have never seen anything like it in my political lifetime.  At some point in 2007 we were 16 points behind.  John Howard used the word “annihilation” to describe our prospects.  We ended up better than that.  But the closest we got that year was on the election day itself.

It is a book that also acknowledges failures.  I think there were failures of our Government.  I think we got reconciliation wrong.  If we had made a positive movement on the symbolism of reconciliation earlier we would have prevented the polarisation that went on and dogged the Government throughout nearly 10 years.  If the purpose was to prevent an apology from ever being given or to avoid legal liability it didn’t work because it’s been done anyway.  I think if we’d have taken hold of the issue earlier on and dealt with it, it would have been better.  The State Liberal Premiers by and large did that. 

I think we failed on a Republic.  I don’t think the Republic issue will go away.  I think the Liberal Party should have grabbed it and used it to introduce a model with which it was comfortable rather than leave that to other hands.  This will prove a very difficult issue for the Liberal Party to handle in opposition – much more difficult to handle in opposition than in government. 

And I try and write as objectively and as openly as I can about some of those failures.  It has been a year since the defeat of the Coalition – almost – in November of 2007.  Normally when political parties lose an election they do an analysis as to the reasons why.  I believe an analysis has been done but I am not sure who knows about its findings.  I am not sure if anybody in the Liberal Party has yet seen it.  And you don’t want to waste too much time in Federal politics because it is a three year term and we are nearly one third through it.  This book may be the first serious analysis as to why we lost.  And I think the Party has to come to grips with that before it starts rebuilding and positioning itself for the 2010 election.  It is my contribution.  I try and do it as objectively as I can.  I try to analyse the reasons for our loss because if you don’t make the right diagnosis you won’t prescribe the right treatment.  If we have a false diagnosis as to why we lost the election we may try all sorts of things but a treatment which doesn’t address the illness is no treatment at all.  And that is why I think that it is very, very important that our Party comes to grips with that. 

Let me conclude by summarising the economic record one other way.  In 2007 in Canberra I hosted an official dinner for Lee Kwan Yew.  Lee Kwan Yew was Minister Mentor in the Singaporean Government.  He is, I think, one of the great regional leaders.  He has been intimately involved in the development of his country from its beginning.  He sat down at dinner and started talking about the Australian Prime Ministers he had dealt with starting with Sir Robert Menzies.  He has had a long engagement with Australia.  And when the dinner finished I said to Lee Kwan Yew, I said to him “Minister Mentor do you recall saying in the 1980s that Australia risked becoming the poor white trash of Asia?”  And he said “How could I forget?  Every time I meet an Australian I am reminded of it!”  I said “Well, what is your view now?”  And he said “You have changed.  Your country is in a different place now.”  And we are different.  We did change.  We changed a lot and we made the country much stronger economically. 

We are no longer the economic pariah of the region.  We are seen as one of the strong economies of the region.  And I think Australian’s attitudes towards themselves changed as a consequence of that.  And if this book can tell something of that story then it’s been well worth doing.