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UPDATE 2-Australia PM warns high earners could be hit

Published 04/23/2009, 10:23 PM
NXGN
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* PM warns high earners could be slugged in future budgets

* Says no need at present to exceed A$200 bln debt limit (Adds analyst)

By Rob Taylor

CANBERRA, April 24 (Reuters) - Australia's government may follow Britain's example and lift tax for high-income earners to bolster its budget and curb rising debt, the prime minister said on Friday, as he grapples with a self-imposed A$200 billion ($141 billion) debt ceiling.

Kevin Rudd's centre-left government will in May hand down a budget that is tipped to be one of the toughest in years, against a backdrop of plummeting taxation revenues and recession.

"Longer term, you have to look at what can be afforded by way of additional support from those who are better off," Rudd told Australian radio on Friday, without giving away any details.

"Our discipline is don't allow taxes to get out of control, because you don't want to strangle an economic recovery. Within that, then of course it's always possible changes in the taxation mix," he added.

Britain's centre-left Labour government has already raised taxes to 50 percent from 40 percent for those earning more than 150,000 pounds a year as it forecast the recession-hit economy would shrink 3.5 percent this year.

Rudd's Labor, which faces re-election next year in the wake of what most economists tip to be a relatively mild recession in Australia, has promised more than A$52 billion in cash and infrastructure spending to soften the impact.

He has also vowed to raise pensions.

Adam Carr, senior economist at ICAP in Sydney, said any move to tax high earners would be a step back for Australia.

"If you start raising tax rates, you undo any good steps that you have taken to stimulate the economy," he told Reuters.

He added that a higher debt ceiling was likely to concern markets and deficit-wary voters.

"They could err on the side of caution by raising the overall debt limit, given they want to cushion the economy ahead of an election next year, but they need to get something good out of this like invest more in infrastructure," Carr said.

The Australian newspaper quoted some analysts on Friday as saying the May 12 budget could forecast debt levels will reach A$300 billion, or 30 percent of GDP, jeopardising Australia's triple-A credit rating and threatening higher interest rates.

Finance Minister Lindsay Tanner has said the government will have to consider whether its A$200 billion borrowing ceiling is sufficient, given the loss of A$115 billion in government revenue since the economic slowdown hit last year.

On Friday, Tanner said the budget would include deficit and debt forecasts for the next four years and beyond.

The country has kept its outstanding debt steady at around A$50 billion for the past five years, although the government's debt manager expects it to reach A$200 billion in the years ahead amid a spike in borrowings to offset the revenue shortfall.

Rudd said he did not see a need for the cap to be raised at present, but stressed it would depend on tax revenues as the downturn spiral continued, bringing unemployment to official forecasts of 7 percent or higher. Unemployment now stands at 5.7 percent.

"We don't see the need for that at this stage, but we are very concerned about what happens in the future about further collapses in taxation revenue. That is the key variable here," he said. ($1=1.414 Australian Dollar) (Additional reporting by Anirban Nag; Editing by Neil Fullick)

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