IT was a softening-up campaign aimed at preparing Australians for tough times ahead.
Then-Treasurer Paul Keating took to the airwaves to warn the nation that it risked becoming a "banana republic" if it didn't lift its game.
From today's perspective the federal government's ploy seems obvious - manage down expectations so hard remedies can be implemented to set the country on course for promised future prosperity.
"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," Keating told 2UE Sydney broadcaster John Laws on May 14, 1986.
"We will end up being a third-rate economy ... a banana republic."
For a nation that prided itself on being the "lucky country", this was a slap in the face.
It highlighted, as historian and journalist Paul Kelly later observed, the contradiction between Australia's first-world standard of living and its third-world export structure.
Keating's biographer John Edwards said he may have made a slip of the tongue, although it was clearly consistent with the gravity of the message he was seeking to convey.
It opened the way for further structural reforms, following from Labor's floating of the dollar four years earlier.
Cabinet papers for 1986-87, released by the National Archives of Australia, show Keating, under Labor Prime Minister Bob Hawke, was acutely aware that there was a serious problem.
Imports were growing faster than exports. Coupled with a decline in the Australian dollar - from around parity with the US dollar in 1983 to around 60 US cents by late 1986 - the current account deficit was rising with no clear end in sight.
Archives historical consultant Dr Jim Stokes said the government needed to bring the economy under control without creating a recession, which would lose it the next election in 1987.
In a submission to cabinet on May 24, 1986 - a fortnight after his banana republic comment - Keating said the current account had deteriorated significantly since the budget in February due to a weakening of export prices and an increase in import prices.
The current account deficit for 1985-86 was around 5.8 per cent of gross domestic product, double or triple the usual rate.
There were, Keating said, few options.
"A return to very high interest rates must be seen as a last act of desperation to prevent a growing current account deficit and a weak exchange rate from totally destabilising the Australian economy," he said.
The government opted to cut costs and boost revenue. It deferred tax cuts and jacked up sales tax on luxury cars, alcohol, flavoured milk and fruit juice and increased the Medicare levy by 0.25 per cent.
Underlining the need for action, global ratings agency Moody's cut Australia's credit rating from AAA to AA1 in September 1986.
Then there was the Labor heresy of disposing of government business enterprises, although it initially drew the line at iconic institutions - such as the Commonwealth Bank, Overseas Telecommunications Commission, Telecom and Australia Post.
Plenty of others were put on the sale block - including Qantas and Trans Australia Airlines, Australian National Line, Pipeline Authority and Commonwealth Serum Laboratories - tentatively valued at up to $3.5 billion.
The government decided not to move too quickly, choosing to examine options for the 1987-88 or later budgets.
It marked the start of a process culminating in the sale of those large entities over the next 20 years by successive governments.
In the February 1987 budget review, Keating noted that the government's strategy was producing results: domestic demand was slowing and there were signs of improvement in the current account, although it remained unsustainably large.
"Economic adjustments to major shocks of the kind we have experienced are inevitably long, drawn-out affairs and it will be some years yet before we can ease up in our efforts," he said.
But total Australian debt to the rest of the world continued to mount relentlessly.
"It is slowly dawning on the community that we cannot go on borrowing at such a rate," Keating said.
"It is even more apparent that the rest of the world will not go on lending to us at such a rate - unless they get a cheaper Australian dollar and/or higher interest rates," he said.
More pain was ahead.
In the May 1987 economic statement, Keating moved to tighten up welfare benefits by suspending the dole for those who left work voluntarily or through misconduct.
Wages were squeezed with increases beyond an initial $10-a-week rise needing to be justified by productivity increases.
It seemed to work. Keating reported to cabinet in August that the current account deficit was down to four per cent - albeit still too high, as was inflation and the unemployment rate.
The cabinet papers show Finance Minister Peter Walsh fought a constant rearguard action against increased government spending.
Amid such economic woes, any government could usually expect a hard time from voters but the opposition gained little traction at the July 11, 1987, election.
Labor was returned with an extra four seats.
But it wasn't out of the woods by a long shot.
On October 20, the stock market plummeted more than 40 per cent, following the rest of the world in the global crash.
Gareth Evans, who was a minister in the then-Labor government, said the government's position was greatly helped by Keating's ability to explain the need for action through his banana republic warning.
"For all the political pain and for all internal stresses that caused, there is no doubt that did have a softening-up impact on the public and made them conscious this was not just some sort of ideological exercise by the government in reducing expenditure for the sake of it," Evans said.
"It simply had to be done."
