A year before his famous "banana republic" warning, Paul Keating told the Hawke Government that Australia was already living beyond its means.

The 1984-85 Cabinet papers, released today, and comments from former frontbencher Susan Ryan have provided a new insight into how the Australian economy was transformed between 1983 and 1986.

The dollar was floated, cuts made to manufacturing tariffs, banks opened to competition, the tax system overhauled and the assets test introduced on the age pension.

Ms Ryan said the economic debate in Cabinet was strong with a heavy focus on achievements that would deliver long-term benefits to ordinary workers.

However, the floating of the dollar - and what that meant to the Government's economic focus - was paramount. She revealed Mr Keating would take into Cabinet meetings an "electronic device" which gave him constant updates on the value of the Australian dollar. The Treasurer would effectively give a running commentary on the currency's performance.

In May 1986 on a Sydney radio station, Mr Keating warned that Australia faced becoming a banana republic if it could not reduce its current account deficit.

A year earlier Mr Keating had, though not in such a colourful manner, told Cabinet members of the problems ahead if the deficit was not reduced and the Australian dollar crashed in response.

"The sharp rise in the current account deficit in recent times suggests that Australia has been living beyond its means," he wrote in a July 1985 Cabinet submission.

"Regrettably, but necessarily, this means that the growth in living standards (and real wages) must slow in the short term relative to what might have been if we continued (for a time) to draw on overseas savings to sustain them."

Ms Ryan recalled that Mr Keating had a persuasive argument against leaving the major domestic banks free of overseas competition. "What have they done for working people? Why should we be protecting their monopoly," she quoted him as saying.

Mr Keating warned that house prices were being pushed up and interest rates held higher than necessary because of negative gearing as he sought to axe the subsidy.

He argued there would be community support for his plan to curtail elements of a system he said favoured high-income earners and disadvantaged renters.

In the wake of that year's tax summit, at which Mr Keating lost his argument to introduce a broad-ranging consumption tax, the Treasurer pursued other initiatives. Overhauling elements of negative gearing, he said, would help future governments with a system that was getting out of control.

Cabinet backed the move but within two years it was ditched, in part because of pressure from the Sydney real estate industry.

The West Australian

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