Forged letters jolt Keating on election eve

As the time approaches for Australians to go to the polls, a scandal involving forged letters has sent shockwaves through the ruling Labor Party and dealt a blow to its re-election prospects.

A campaign which had already shown signs of exhaustion before tomorrow's poll was sensationally re-ignited when federal police were called in yesterday to investigate the source of two letters with which Labor had tried to deal a final knockout blow to the opposition Liberal-National coalition, but which were quickly shown to be fakes.

Late on Wednesday, Ralph Willis, the Treasurer (finance minister) in Paul Keating's government called a press conference where he triumphantly brandished copies of two letters which he said had arrived at his office in a brown paper envelope. Both purported to have been sent to John Howard, the opposition leader, one from Peter Costello, Mr Howard's deputy, the other from Jeff Kennett, the Liberal state premier of Victoria.

Stamped "Protected", the purported Kennett letter referred to a plan by Mr Howard if he won the election to slash federal government financial grants to Australia's six states, to help to pay for his campaign promises. "This would involve a reduction of around $500m [pounds 250m] in Commonwealth [federal] funding for Victoria," it said.

Mr Howard and Mr Kennett denounced the letters as forgeries. Mr Willis, one of Labor's most respected ministers, normally renowned for his caution, was forced into making a humiliating retraction and apology. It transpired that he had not cleared his decision to use the letters with Mr Keating, who was campaigning in north Queensland at the time and who privately fumed when he learned of the hoax.

The "letters affair" has the hallmark of an American-style dirty tricks campaign of the sort which has rarely intruded into the Australian political scene, where open verbal abuse is more usual.

The questions outstanding last night were: Who forged the letters? Who planted them on the senior Labor government minister who then released them? How much has the affair damaged the bid by Paul Keating, the Prime Minister, to win a sixth mandate for Labor tomorrow?

Mr Kennett is a tough, uncompromising leader whom Margaret Thatcher has praised for his severe public spending cuts in Victoria. Mr Howard and the federal Liberals fear that Mr Kennett's unpopularity in Victoria may rebound against them in tomorrow's election and cost them seats in Australia's second most populous state. Yesterday, Mr Kennett dramatically exploited the letters affair when he claimed that the letters had been prepared by someone in Mr Willis's own office, and that he was prepared to give the name to the police.

When he returned to Canberra yesterday to make his final pre-election appearance at the National Press Club, Mr Keating dismissed such a claim as "tawdry" and "stretching credibility too far". He said: "Whoever has concocted these documents has done so not with the Labor Party's interests at heart." Mr Willis, he said, had committed an error of judgement, but he had been a "first class Treasurer" and would be reappointed should Labor win.

The letters affair has overshadowed all other issues in the run-up to the election, including the release yesterday of figures which showed a drop in Australia's current account deficit last month thanks to exports increasing.

Since most economists had predicted a rise in the deficit, the figure boosted Mr Keating at a critical moment. Although Labor has closed the opposition's lead in opinion polls to 3 points from 10 at the start of the campaign, the gap still suggests that the party's 10-seat parliamentary majority is in peril.

Mr Keating used his press club appearance to appeal for a fresh mandate for what he described as the new Australia that Labor had built over the past 13 years, based on "flair, imagination and drive". To dump Labor for the coalition, he argued, would be to return to an "insular, uncompetitive" world of the past.