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Deep spending cuts to avoid banana republic
Paul Keating.

Cabinet papers from 1986 and 1987 have been released today. Economics editor Shane Wright casts his eye over them ...

Cuts to soldiers' pay and politicians' cheap dinners were all considered by the Hawke Government as it sought to prevent Australia becoming a "banana republic".

Previously secret Cabinet papers, released today by the National Archives, reveal a Government in 1986 and then 1987 that delivered spending cuts that today would lead to big falls in opinion polls and spark talk of leadership challenges.

But in May 1986, the Government was concerned about a huge collapse in the price for key commodities.

In a radio interview with broadcaster John Laws, Treasurer Paul Keating ruminated that Australians had to be "honest" and "truthful" about what this meant for the nation.

"If this Government cannot get the adjustment, get manufacturing going again, and keep moderate wage outcomes and a sensible economic policy, then Australia is basically done for," he said on May 14.

"We will just end up being a third-rate economy - a banana republic."

Prime Minister Bob Hawke was overseas and, when told what his Treasurer had said, could not believe it.

Transport Minister Gareth Evans said the comments, even if they were a mistake, helped force many people inside and outside the Government to focus on cutting spending.

Describing the full Cabinet meeting after the banana republic comment, Professor Evans said everyone in the room knew what was at stake.

"Over the course of several hours debate and discussion, we really grasped the nettle, realised we basically had to tear up the '86 Budget, start again to give some hugely dramatic signals to the market, to the world that we were serious about tackling this," he said.

Ultimately, about $4 billion in cuts were made. In today's dollars that would equate to more than $21 billion in a single year.

The 1986 Budget became the first since the early 1960s to contain an inflation-adjusted cut in Government spending. The next two Budgets would follow in terms of cuts with no repetition until 2010-11.

The Cabinet considered abolishing leave loading for public servants and members of the defence force that would have saved tens of millions of dollars.

It looked at increasing 20 per cent the prices for food and drink in the Parliament's members and staff "refreshment" rooms in a move that was dumped for fear of the anger it would cause among MPs.

Mr Keating was aware well before his "banana republic" comment of the issues facing the country. In a Cabinet submission from February of 1986 he said interest rates were too high, putting areas such as housing, small business and agriculture at risk.

He signalled that States, which had gone on borrowing binges, would have to be brought to heel. They would ultimately suffer deep cuts in Federal grants.

Mr Keating said spending cuts had to be taken. "The costs of not achieving sufficient fiscal restraint will be expensive as time passes," he warned.

The cuts also extended to the sale of public assets including pipelines, satellites and the eventual privatisation of Qantas.