Australia to pay up as Keating breaks pledges: Labor embarks on tough budget reform after the March election victory it never expected

AUSTRALIANS will pay higher taxes on wine, petrol, tobacco and a wide range of business perquisites under a sober budget introduced last night by Paul Keating's Labor government to try to reduce the deficit.

In its first budget since its unexpected re-election in March, the government embarked on the daunting task of putting aside several big- spending election pledges, including income-tax cuts, and broadening its revenue base by increasing indirect taxes on almost every Australian.

John Dawkins, the Treasurer, told the federal parliament in Canberra the budget's central aim was to reduce the deficit from Adollars 16bn ( pounds 7.5bn), or about 4 per cent of gross domestic product, this financial year, to Adollars 6bn, or 1 per cent of GDP by 1996-97.

He proposed five main budget measures. The most controversial will be the decision to defer, at least until 1998, the second of two rounds of personal income-tax cuts which the government had promised to introduce in July 1994 and January 1996.

As a sweetener to this broken election promise, Mr Dawkins announced that the first round of tax cuts for middle-income earners would be brought forward to start in November this year, at a cost to the government of about Adollars 1.6bn.

The government will also target business executives and other high- salary earners by bringing such 'package' benefits as club membership, domestic travel and accommodation costs under fringe benefits tax.

The rate of wholesale sales tax, affecting the prices of all consumer goods, will be increased by 2 per cent over two years. Taxes on wine and cigarettes will go up, and petrol will rise by five cents a litre. Leaded petrol will incur double this increase.

Mr Dawkins claimed the measures would help to reduce the budget deficit by Adollars 9bn over the next four years. He also announced Adollars 2bn in government spending cuts over the same period, including tightening benefits from Medicare, the national health insurance scheme, reducing defence spending, and clamping down on allowances to students from well-off families.

The budget was framed against the background of an economy that has been growing at about 2.5 per cent over the past year, below government forecasts. Much of the growth so far has been stimulated by housing and increased government spending on infrastructure projects. World demand for Australian commodities and business investment at home both remain fairly sluggish.

Economic growth is not expected to be much higher next year, which means that unemployment is likely to remain stuck at 10.75 per cent, or about 1 million people.

While Mr Dawkins announced extra help for the long-term unemployed, he made it clear last night the government was pinning its hopes on a higher rate of business investment to maintain the momentum of growth. 'From next financial year, the process of withdrawing the stimulus and cutting the deficit will begin,' Mr Dawkins said.

The budget effectively completed the government's progressive retreat over the past five months from many of its election spending pledges. Some Labor figures now concede the government had never expected to have to live with the pledges because it did not expect to return to power.

An opinion poll published in Time magazine last week found 91 per cent of Australians were 'aware' that Mr Keating was breaking some election promises, and 55 per cent were 'concerned' by it.

The most stinging reaction to the budget came from Martin Ferguson, head of the Australian Council of Trade Unions, who said the cuts to Medicare benefits were 'indefensible and an absolute disgrace'. Ian Salmon, of the Business Council of Australia, cautiously welcomed the budget, describing it as 'courageous'.