AUSTRALIA: THE FRASER GOVERNMENT S GROWING POLITICAL PROBLEMS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84S00554R000200100001-5
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 14
• Document Creation Date: December 22, 2016
• Document Release Date: February 3, 2011
• Sequence Number: 1
• Publication Date: December 1, 1982
• Content Type: REPORT

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Directorate of
Intelligence
Australia:
The Fraser Government's
Growing Political Problems
An Intelligence Assessment
EA 82-10146
December 1982
COPY 305
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Council. Comments and queries are welcome and may
be addressed to the Chief, Southeast Asia Division,
It was coordinated with the National Intelligence
OEA~
Confidential
EA 82-10146
December 1982
Directorate of Confidential
Intelligence
Australia:
The Fraser Government's
Growing Political Problems
This paver was prepared by
of the Office of East Asian Ana ysis.
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Australia:
The Fraser Government's
Growing Political Problems
Key Judgments A staunch US ally, Prime Minister Malcolm Fraser faces serious political
Information available difficulties that threaten his government's hold on office. If elections were
as of 15 December 1982 held now, the opposition Labor Party would win by a small margin,
was used in this report.
according to Australian public opinion polls. Despite this reading, specula-
tion that Fraser might go to the polls within the next few months was re-
vived in the Australian press recently because Fraser's Liberal Party won
an unexpected victory in a byelection.
Public support for the Fraser government has eroded because of several
scandals-including widespread tax evasion-and the sharp deterioration
in Australia's economic performance, marked by the highest unemploy-
ment in 40 years, worsening inflation, and no real growth in 1982. Adding
to the government's economic woes is a severe drought that is taking a
heavy toll on agricultural production. Prospects for 1983 are equally grim,
and we expect unemployment to top 10 percent early next year.
Labor will make economic mismanagement its major campaign issue in the
next national election, which must be called by November 1983. A Labor
victory is not assured, however. We believe much depends on whether
Labor Party leader Bill Hayden contains longstanding factionalism in his
party and cultivates for the party an image of moderation on issues the
electorate deems important. For now, Hayden is doing both successfully,
but Fraser is a tough, resilient politician who has shown in the past that he
can come from behind.
iii Confidential
EA 82-10146
December 1982
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Australia:
The Fraser Government's
Growing Political Problems
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The Pre-Election Setting
Prime Minister Malcolm Fraser must call national
elections within the next year and no later than
November 1983.' As recently as last September,
prospects for an election in 1982 were good, according
to the US Embassy and the Australian press.2 Despite
public opinion polls that showed Labor winning by a
small margin, political observers in Australia assumed
that Fraser would want to face the electorate before
the domestic economy deteriorated further. However,
mounting problems, including record unemployment,
rising inflation, scandals surrounding the government,
and Fraser's hospitalization and surgery for a back
ailment in early November ended any prospect of
elections in 1982.
Speculation about an early election revived in Decem-
ber, when the government won an unexpected victory
in an important parliamentary byelection. According
to the Australian press, Fraser may decide to capital-
ize on what he sees as the voters' rejection of the
Labor Party. This scenario would have Fraser going
to the polls after the Australian summer holiday
season ends in late January.
Fraser's Multiplying Problems
The Scandals Surface ... Reports of involvement by
members of the Fraser government in several scandals
have dominated the Australian media over the past
' Australian parliamentary elections are held triennially for the
entire 125-seat House of Representatives and for half of the 64-seat
Senate, whose members have six-year terms. Although elections are
traditionally held between 1 October and 15 December, the
Constitution provides the option of "early elections," which must
precede the mandatory date by at least six months. Fraser led his
Liberal-National Party coalition to unmatched victories in 1975
and 1977 and to a smaller but comfortable House majority in 1980.
These victories helped to maintain a 33-year period of Liberal
control, interrupted only by a Labor government under Gough
Whitlam from 1972 to 1975.
' Nearly all the analysis in this assessment is base on US Embassy
reports and on unclassified statistical material published by the
Government of Australia and various international financial insti-
A 52-year-old wealthy rancher from Victoria state, Fraser has
dominated the Australian scene since he became Prime Minister in
late 1975. He strongly supports the United States on most
international issues. His forceful personality has ensured him
leadership of the Liberal Party and reelection twice to the prime-
year, creating the impression of a government lurch-
ing from crisis to crisis. The most damaging case grew
out of a Royal Commission set up to investigate
charges of corruption and organized crime by the
Labor Party-affiliated Federated Ship Painters and
Dockers Union. Fraser had hoped to use the Commis-
sion's findings against Labor, but the investigation
backfired when massive tax avoidance schemes in-
volving several prominent Liberal Party members
were uncovered.
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Before the full extent of government revenue losses
became known, the Commission reported in early
198:2:
This industry [the tax avoidance industry] has
developed in Australia, particularly over the
last five years, at a rate far in excess of any
other industry and has brought with it profits
comparable only to the heady days of the
Victorian gold rush.... The amounts involved
are very large indeed, amounting to many hun-
dreds of millions of dollars per year or more.
The impact on the community has been very
serious.
Current estimates by the government of the revenue
lost during 1975-82 range from $4-5 billion. The most
publicized scheme-sending a firm to "the bottom of
the harbor"- may have accounted for almost $500
million lost during 1975-80, or about 10 percent of
federal budget outlays in the fiscal year that began on
1 July 1982.
The Commission's report touched off a controversial
public debate at a time when inflation was pushing
the average Australian into a higher tax bracket. The
report noted, without citing names, that many of the
tax avoidance practices could have continued only
with the complicity of individuals in the Crown
Solicitor's (the Attorney General's) Office. Even more
damaging has been the revelation of federal govern-
ment inaction, despite legal advice as early as 1977
that promoters of tax avoidance schemes were prose-
cutable. As a result, even the most flagrant abuses
persisted until outlawed by a Taxation Offenses Bill
in December 1980.
Fraser wanted to use a proposed retroactive tax bill to
recover lost tax revenues and to blunt Labor's charges
of government mismanagement but ran into strong
opposition from members of his own party. In late
September, five of six Liberal Party state organiza-
tions opposed the retroactive legislation, which would
make stockholders as well as promoters liable for back
taxes.' Liberal Party opposition to the bill in Parlia-
ment was so strong that it was withdrawn, amended,
' The principal sticking point for many Liberal Party members is
that both "witting and unwitting" stockholders as well as promoters
Tax avoidance in Australia uses a variety of ap-
proaches, almost all of which depend in some way on
the absence of a capital gains tax. The widely
publicized and, to the government, costly "bottom-of-
the-harbor" schemes involved selling a corporation
(including its cash assets) to a promoter, thus allow-
ing stockholders to escape the 46 percent corporate
profits tax. For example:
A firm with cash assets of $1 million is sold to
a promoter for $960,000 (the difference being
the promoter's fee). If the company had not been
sold, it would have owed the 46 percent corpo-
rate tax, or $460,000. By selling to the promot-
er, the stockholders avoid the tax on profits and
thus receive a windfall gain of $420,000, untax-
able because there is no capital gains tax.
Until this type of scheme was outlawed in 1980, the
promoter disposed of whatever assets were left in the
company after the sale and in many cases offered the
corporate shell to lawyers and physicians to offset
partnership tax liabilities. Frequently, the sham cor-
poration had directors provided by the Federated
Ship Painters and Dockers Union-often itinerants
who could disappear if necessary or who had no
assets the Tax Office could attach. The promoter's
final step was to destroy company records, in some
cases dumping them in Sydney Harbor, to throw the
tax investigators off the track.
and reintroduced in late October. The new version
broadens the definition of promoter, making agents
and brokers also open to prosecution. The amended
bill is still being debated in Parliament, but we believe
it will soon pass, with Labor's support.
At the height of the furor over the Commission's
report, another Royal Commission investigating a
meat industry racket in which kangaroo meat was
substituted for beef exported to the United States
concluded that employees of the Ministry of Primary
Industries were involved and faulted Minister Peter
Nixon for not taking action earlier than he did. Fraser
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refused, however, to consider Labor's call for Nixon to
resign. The incident, coming on top of a customs
scandal earlier this year that resulted in the resigna-
tion of two Liberal Party Cabinet ministers, clearly
added to the public's perception of government mal-
feasance and loss of administrative control.
... While the Economy Worsens. Although public
reaction to the scandals may die down before the next
election, the economy, Fraser's major problem, is
likely to deteriorate further in the months ahead. The
country is suffering from the highest unemployment
in 40 years (8.6 percent in November), rising inflation
(a 13.5-percent annual rate in October), and a severe
and widespread drought that is devastating agricul-
ture.
The economy has deteriorated with remarkable swift-
ness, largely because ongoing investment spending
associated with the resources boom delayed the global
recession's arrival in Australia. Depressed interna-
tional commodity prices and high domestic interest
rates have taken their toll this year, however, and
industrial production has dropped by more than 10
percent since August 1981. The labor-intensive manu-
facturing and construction sectors have been hardest
hit by job losses. Housing construction is at record low
levels, largely because of high interest rates. Since
mid-1982 mineral exploration expenditures have fall-
en, and we believe they may drop as much as 20
percent below last year's record high, as projects on
the drawing boards are postponed or abandoned. In
addition, Japan is reducing coal and iron ore imports
below contracted levels and is hinting that purchases
may be as much as 20 percent below anticipated levels
for the remainder of the decade. The one bright spot
continues to be oil exploration expenditures, which we
believe will reach a new high this year
Business groups are threatening to increase layoffs to
attempt to win concessions and financial assistance
from the government, with varying success. The Con-
federation of Australian Industries (CAI) used this
tactic to persuade Fraser to abandon his planned
reduction in the level of import protection this year-
an embarrassment because Fraser called for reducing
international barriers to trade prior to his meeting
with President Reagan last May in Washington. At
the same time, however, Canberra refused to grant
Broken Hill Proprietary (BHP), Australia's largest
private employer and only integrated steel company,
all of the tax concessions or steel import quotas BHP
requested. The company refused to guarantee that it
would begin to modernize its facilities or reduce
planned layoffs (over 8,500 in 1982 alone). According 25X1
to the US Embassy, some businessmen-traditionally
staunch supporters of the Liberal Party-are even
beginning to speak favorably of Labor's publicly
stated position on increased protection from imports
to save jobs.
The driest growing season in 120 years is taking a
heavy toll on agricultural production and will lower
farm income and exports. We believe 1982 wheat
production will be less than half 198 l's 16 million
tons. Other grains and beef production have also been
hard hit, contributing to what we estimate will be a
50-percent drop in 1982 farm output. Among other
effects, the poor production outlook has put the Fraser
government in the embarrassing position of importing
grain for the first time since 1957.
We expect the economy to worsen over the next few
months. Both official and unofficial Australian fore-
casters now project zero growth for the fiscal year
that began 1 July. This follows the meager 1.9-
percent growth last year. As a result, we believe
unemployment will continue to rise and may top 10
percent early in 1983. We expect domestic interest
rates, despite a recent decline, to remain relatively
high in the near future because of growing budget
deficits and the need to attract foreign capital to
finance what Canberra forecasts will be a $9 billion
current account deficit. High interest rates will con-
tinue to retard construction and manufacturing in-
vestment. Furthermore, Australia's relatively high
wages and lack of international competitiveness in
manufacturing will moderate the impact of any recov-
ery in international commodity prices. Nor can the
Fraser government expect much relief from rising
inflation in the next few months as higher taxes,
increased government charges for social programs, the
depreciated Australian dollar, and recent large wage
gains won by militant unions push prices up.
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Figure 1
Australia: Economic Indicators
Unemployment Rate Inflation Rate
Percent Percent
Balance of Payments
Billion US $
Trade Balance
? Current Account
Growth Rates
Percent
80 82c -12 1975
0 1975 80 82a 0 1975 80 82b -9 1975
a November 1982.
bOctober 1982.
c Estimated.
The state of the economy gets constant attention in
the Australian media, with a major financial newspa-
per taking the position that the country is on the verge
of a depression. Even so, the financial press supports
Fraser's refusal to consider large-scale jobs programs
because of their effect on the federal budget deficit.
In late October, 800 miners and steelworkers demon-
strated outside Parliament for assistance for their
ailing industries. A smaller group broke down the
doors of Parliament and refused to leave until they
had. an audience with Fraser. Labor Party leader Bill
Hayden interceded to arrange the meeting and then
used the occasion to criticize Fraser's economic poli-
cies
The Labor Party Offensive
The Labor Party has already launched its election
campaign to take advantage of Fraser's considerable
problems. In our judgment, Labor's strategy rests on
three themes-Fraser's alleged economic mismanage-
ment, government impropriety, and the need to pro-
ject the image of Labor as a moderate and responsible
party
Labor's main line of offense is the charge of economic
mismanagement. Opposition leader Hayden is casti-
gating Fraser for economic policies that have allowed
unemployment and inflation to reach "catastrophic
proportions." In addition to putting the government
on the defensive, Labor hopes to counter earlier
charges that it has no solutions to the country's
economic difficulties by introducing an "Emergency
Rescue Plan" and the "Hayden Housing Plan." Both
proposals call for increasing government expenditures
on salaries, social programs, and housing construc-
tion. In response to criticism from Treasurer John
Howard that the proposals are inflationary, Labor has
put forward a wide-ranging incomes policy that would
require the cooperation of labor unions. It would limit
wage increases while imposing controls on other in-
comes and on prices.
In keeping with Australia's tradition of fierce, adver-
sarial politics, Labor is also attacking the integrity of
the government. Hayden describes the Fraser admin-
istration as the most scaneal ridden in Australia's
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Figure 2
Australia: Wheat Growing Areas Affected by Drought
Arafura
Sea
Northern
Territory
South
Australia
Western
Australia
Intensive wheat growing area
Area of severe drought
Area affected by drought
0 600 Kilometers
0 600 Statute Miles
Gulf of
Carpentaria
Torres b
Strad k
New South
Wales
y ney
pC~ ?~~erra
'^^~y-~`~us 21ian
Tasma
)art
Tasman
Sea
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Labor Party leader since late 1977, 49-year-old Hayden is a self-
made man from a Queensland working-class background. He is an
economist by training. Although essentially a political moderate,
Hayden has taken positions on nuclear issues and US-shared
defense facilities in Australia that would create problems for the
United States should Labor come to office in the next election.
history. He claims three Australians with knighthoods
were involved with organized crime and that tax
avoidance laws were not enforced because senior
Liberal Party members were benefiting. Hayden has
repeatedly called for the resignations of Attorney
General Peter Durack and Treasurer Howard for
their alleged knowledge and coverup of wrongdoing.
Labor is making a conscious effort to reassure the
public about the party's moderate position on major
issues. Still plagued by memories of the turbulent and
often controversial years of Labor government under
Gough Whitlam, Labor is taking pains to change its
image. Hayden has been courting the business com-
munity, promising that a Labor government of the
1980s will not resemble the free-spending Whitlam
years. The party has also modified its stance on a
number of provocative issues: it retreated from a
previously declared intention to enact a capital gains
tax, and it reaffirmed support of the ANZUS alli-
ance. Wary of stirring up controversy, Labor leaders
have refused to adopt the party left wing's position on
abortion, which would require Labor members in
Parliament to support liberalization of the abortion
law regardless of their personal convictions. Accord-
ing to the US Embassy, the party has also successfully
dissociated itself from the Federated Ship Painters
and Dockers Union, which was involved in recently
publicized criminal activities.
According to the Australian press, Fraser wants to
make Labor Party factionalism an issue in the Liberal
campaign. To counter this threat, Labor leaders have
been busy glossing over internal friction in order to
present an image of unity and strength. Thus far,
Hayden has been fairly successful, exhibiting particu-
lar skill in keeping Labor's often divisive left wing
under control. He has been somewhat less successful
vis-a-vis Bob Hawke, who narrowly lost his bid to lead
the party during the party convention last July.
Hawke has given his full public support to Hayden,
and his personal style and media savvy have contrib-
uted enormously to Labor's recent appeal among the
electorate. But recent press reports suggest that
Hawke may consider challenging Hayden again. Ac-
cording to the US Embassy, this possibility has
alarmed Labor leaders, who-believe such a move
would indicate party weakness and give Fraser the
political ammunition he needs.'
Labor's offensive has gained the party strong standing
in recent public opinion polls. Even though Hayden's
economic proposals do not offer much more than a
repudiation of the Fraser government's policies, the
US Embassy believes the Australian people probably
will support any plan that attempts to remedy the
current state of economic affairs rather than accept
the government's "steady as she goes" policies.
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Australia's best known and most popular Labor Party and trade
union figure, 52-year-old Hawke last July made an unsuccessful
bid for leadership of the Labor Party. The son of a Congregational
minister, he earned his national reputation as President of the
Australian Council of Trade Unions, federal President (titular
head) of the Labor Party, and member of Parliament. His expertise
in labor negotiations, popular image, and moderate socialist
politics make him a powerful force in the Labor Party and a figure
Fraser Fights Back
Fraser is a tough, resilient politician who has a history
of rallying public support very late in a campaign.
Public opinion polls, for example, showed Labor
ahead just three days before the 1980 election.
Although Fraser's first strategy for dealing with the
tax avoidance scandals-retroactive legislation-cre-
ated even more problems in his own party, his adher-
ence to this principle has won grudging admiration
from the public and even from some Labor members
of Parliament, according to the Australian press.
Recent indictments of "bottom-of-the-harbor"pro-
moters and broadening the scope of liability for back
taxes have also strengthened Fraser's position. If no
new difficulties arise, we believe the worst effects of
the scandals are over.
Fraser is also having some success mending fences in
the Liberal Party. In October he named former
Foreign and Industrial Relations Minister Andrew
Peacock to replace the ailing Minister of Industry and
Commerce. Peacock, who resigned from the Cabinet
in 1981 after charging Fraser with undercutting his
authority, made a bid for Liberal Party leadership
early this year but lost decisively. We believe the
appointment of Peacock, a smooth media performer,
will improve the government's standing in public
opinion polls.
Fraser has responded to the drought with an extensive
relief program. In addition to efforts to buy foreign
grain and expand markets for beef exports, the Cabi-
net has approved subsidizing interest rates over 12
percent and subsidizing the cost of fodder. Other
measures under consideration include subsidies for
water transport and for the cost of new wells.
The government's drought-relief program has gotten
mixed reviews. The Labor Party argues that current
relief measures are grossly inadequate, while fiscal
conservatives attack the $350 million program as
contrary to Fraser's avowed policy against inflation.
In the wake of the recent scandals, the Australian
press is openly speculating about the possibilities for
the abuse of relief funds.
Fraser has little room to maneuver on the economy.
Concern over growing federal budget deficits, the
need to pursue a high-interest-rate policy to maintain
foreign capital inflows, and his view that slowing
inflation has the highest priority are constraints. The
budget for the fiscal year that began on 1 July
projected a deficit of only $1.6 billion because esti-
mates of unemployment compensation, drought-relief
costs, and tax revenue were highly unrealistic. Cur-
rent estimates project a deficit exceeding $4 billion.
We believe a deficit of this size makes it unlikely that
Frazer will support large increases in government
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The son of a prominent businessman, 43-year-old Peacock was
first elected to Parliament in 1966 and has held a variety of
influential positions in government. As Minister of Foreign Affairs,
Peacock clashed openly with Fraser, leading to his temporary
retreat from politics earlier this year. Matters were smoothed over
in October 1982 when Peacock was named Minister of Industry
and Commerce. He is considered a strong contender for leadership
of the Liberal Party.
spending on jobs programs. According to a recent
study cited in the Australian press, a $1 billion jobs
program would reduce the unemployment rate by only
1 percent. To reduce the unemployment rate to what
Australians would consider a reasonable level, about 5
percent, would cost Canberra some $3.5 billion above
the projected deficit.
Instead, the Fraser government has recently adopted
an economic recovery program centered on a national
"wage pause." In early December, Canberra persuad-
ed the six state premiers to join in a public-sector
(state and federal employee) wage freeze, thus bor-
rowing the wage restraint plank from Labor's pro-
gram without the accompanying controls over prices
Will Unions Accept a Cut in Real Wages?
The Fraser government maintains that recent wage
settlements are a key ingredient in Australia's re-
duced international competitiveness and argues that
workers must accept a cut in real (inflation-adjusted)
wages to prevent unemployment from rising further.
According to government statistics, average wage
settlements over the past year rose 18 percent, far in
excess of the 11 percent inflation rate.
Until recently, government monetary policy-anti-
irtflationary rhetoric notwithstanding-has allowed
wage increases to be passed on in the form of higher
prices in order to maintain employment. We believe
Fraser has now decided to use the recession to try to
break the wage price spiral. In addition to the public-
sector wage freeze, Canberra is fully supporting em-
ployer groups in their efforts to extend existing
contracts with no wage hikes.
Although union leaders continue to oppose the "wage
pause, " we believe the rank and file are increasingly
concerned with job security and will not support
strikes for higher wages. Therefore, we believe wage
settlements in the next few months will be lower than
in the past year, thus moderating inflation. In fact,
"give backs" in the form of lower wage settlements
and reduced hours are increasing, especially in small
businesses. Nonetheless, we expect wage push infla-
lion to reappear as soon as world demand for Austra-
lian exports revives and is translated by Australian
unions into higher across-the-board wage increases.
and other incomes. The government plans to use the
estimated savings of $300 million to fund a jobs
program. It is also taking administrative measures to
limit imports, such as speeding up the processing of
import dumping cases, to aid Australian industry.
We do not believe the recovery program is large
enough to have a major impact on employment.
Furthermore, the public-sector wage freeze faces
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problems. Union leaders who had expressed willing-
ness to go along with a six-month wage freeze,
followed by a catchup wage increase, are now saying
that the 12-month freeze proposed by Canberra is
unacceptable and are predicting public employee
strikes. In addition, the three state premiers who
belong to the Labor Party agreed to only a six-month
freeze and did not rule out a catchup wage increase.
Fraser is counting on the public sector's example to
encourage the private sector to hold down wage
increases but plans no legislation to impose a freeze,
according to the US Embassy. Rather, the govern-
ment hopes to convince most private sector employers
to resist union demands for full cost-of-living adjust-
ments. This strategy has produced mixed results. A
recent oil industry contract provided for wage and
benefit increases exceeding 15 percent, but this indus-
try's wage settlements frequently do not set the trend
for other industries. More important as a pacesetter is
the metals industry settlement currently under negoti-
ation. Canberra is strongly supporting management's
proposal for a six-month contract extension with no
wage increases, and we believe this is forcing labor to
back off on its demands. By mid-December, for
example, the Australian Council of Trade Unions had
abandoned its public position of maintaining real
wages because union leaders found the rank and file
more concerned with job security than with taking
industrial action, according to the US Embassy and
Australian press reports. As a result, we believe the
government's "wage pause" has a reasonably good
chance of succeeding if Canberra wins the full cooper-
ation of the private sector.
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