AUSTRALIA: AUSTRALIA BUDGET CUTS OF A$2-3 BLN SEEN IN 1995/96.

Date: Feb 2, 1995

By Bernard Hickey

CANBERRA, Feb 3 (Reuter) - The Australia government will have to make collective spending cuts and tax hikes in the 1995/96 year of A$2 billion to A$3 billion if it wants to be able to reach a surplus the following year, economists said.

Assuming a successful sale of Qantas Airways Ltd and A$1 billion to A$3 billion of budget dividend from stronger economic growth, Treasurer Ralph Willis is likely to announce on May 9 a planned budget deficit of between A$2 billion and A$5 billion for 1995/96, they said.

"If they can manage A$2 billion of cuts next year for a (1995/96) deficit of A$2-3 billion, surplus in the following year wouldn't be a difficult task," said one economist.

Willis announced on Tuesday the government would significantly tighten fiscal policy in 1995/96 and reach surplus in the following year. Unexpectedly strong economic growth and a blowout in the current account deficit forced the move.

Using the government's May 1994 estimate for the expected deficit in 1995/96 of A$9.8 billion, economists saw a deficit in that year of A$4-8 billion after the effects of strong growth, but before any new fiscal tightening is taken into effect.

This is known as the starting point deficit.

Given expected budget cuts of A$2-3 billion, this gives an expected final deficit of A$2-5 billion in 1995/96.

Economists said that despite its rhetoric of recent days, the government will be forced to reap most of the budget cuts by hiking taxes.

"Our view is that the government will be doing well in the medium term to keep spending to currently projected levels, let alone doing better," said Bankers Trust senior economist Rory Robertson.

The government has already built spending restraint into its forecasts, projecting real spending increases of less than a percent a year for the coming three years.

The government's tax hike options are severely constrained by the opposition parties' control of the upper house of parliament and by the prospect of an election in the next 12 to 14 months at the most.

The tax options seen most likely, given the opposition of the Green Parties and left-leaning Australian Democrats to widespread new income or indirect taxes, include;

- a one to three percent tax surcharge on annual incomes over 38,000, raising A$1 billion annually,

- a tax on domestic carbon dioxide emissions of A$1.25 per tonne of emmissions,

- the widening of indirect sales taxes to include some services like hotel rooms and restaurant meals, and,

- a higher wholesales sales tax.

A table follows with estimates of how the 1995/96 budget deficit will be reached. The starting point has been calculated using the May 1994 estimate of A$9.8 billion and subtracting A$2 billion for the Qantas and some amount for stronger growth.

A$ bln Starting point Budget cuts Deficit

Bankers Trust 6-7 2-3 3-4

Citibank 5.8 2.8 3.0

Macquarie 8.0 3.0 5.0

SBNSW 4.8 2.0 2.8

Dresdner 4.8 2.0 2.75

National Farmers Fed 6.5 2.0 4.5

-- Canberra bureau 61-6 273-2730

(c) Reuters Limited 1995. All rights reserved.