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Crunch Time Down Under (Int'l Edition)


International -- Asian Business: AUSTRALIA

CRUNCH TIME DOWN UNDER (int'l edition)

The Prime Minister sticks to his budget cuts, despite riots

Australia's Prime Minister, John Howard, swept into office last March as a Down Under Newt Gingrich. The Liberal Party leader, a fan of U.S. Republicans, vowed to cut the country's huge budget deficit, overhaul the welfare system, move power away from the federal government, and cut taxes. Now, the backlash has started. On Aug. 20, Howard presented a budget that slashed 5.5% from government spending. That touched off the worst violence in decades in Canberra, where tens of thousands of students, workers, and indigenous people rioted, smashing windows and hurling urine at police.

So far Howard is sticking to his program. He's betting that the middle class won't desert him in his effort to shake up the economy after 13 years of Labor Party rule. He says his spending cuts will eliminate the $8 billion deficit by 1999. The budget whacks spending on job training and welfare, cuts health care and elderly services, and hands responsibility to the states. Two million middle-class families will get tax breaks worth $800 million, while entitlements such as Medicare remain off limits.

CHUGGING ALONG. One unknown is how hard Howard's plan--which cuts spending equal to 1.6% of gross domestic product--will hit the economy. Economists say growth could fall from 4.1% last year to 3.5% this year. With the jobless rate already at 8.6%, that will provide an opening for Howard's critics. The budget "does nothing to solve, and much to make worse, Australia's biggest economic problem--unemployment," says Labor Party treasury spokesman Gareth J. Evans.

Howard says that growing confidence among global investors will keep Australia chugging forward. In July, the central bank cut short-term rates by half a percentage point, to 7%, without hurting the currency. Another cut is in store after the likely approval of the budget.

Still, fomenting fiscal revolution is risky business in Australia, where most are happy with their safety net. But given the landslide victory that won him his office, Howard figures that he can succeed where like-minded Americans have stumbled.By Tracey Aubin in Canberra


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