Keating budgets for sixth Labor term of office

Gambling on what may be the last chance to regain support before facing a general election, the Labor government, headed by Paul Keating, yesterday introduced a tough budget which called on Australians to save more and spend less.

Mr Keating faces an election within a year, at which he will be seeking to win an unprecedented sixth term for Labor. Yesterday's budget, announced in parliament by Ralph Willis, the Treasurer (finance minister), had Mr Keating's stamp firmly on it in an effort to convince Australians that inflation, interest rates and unemployment will remain under control as the economy moves further into recovery.

While Mr Keating slashed public spending, his ambition to turn Australia into a republic by 2000 was spared. The budget provided A$25m (£11m) to set up courses on "civics and citizenship education" in schools and universities, after a report last year found widespread ignorance about the workings of Australia's written constitution.

The government knows that the eradication of such ignorance will be vital to winning public approval for changing to a republic.

The most controversial move yesterday was Mr Keating's decision to ditch tax cuts worth $5.2bn (£2.4bn) which he had promised three years ago to phase in for lower and middle-income earners. He campaigned on the cuts at the last election in 1993, even when they looked to be increasingly unaffordable, by boasting that they were "already L-A-W, law".

The budget "redirected" the tax cuts as pensions. It did so by earmarking a proportion of their incomes which employees must contribute towards their own pensions and promising that the government will match such contributions.

The strategy was designed to tackle Australia's chronic current-account deficit, which increased further in March to 6 per cent of gross domestic product, a situation brought about by the country's propensity to spend more than it earns and to import more than it produces.

After several years of running budget deficits as it sought to stimulate the economy out of recession, the government yesterday put on the brakes by announcing tight fiscal measures which will bring the budget into surplus next year, three years earlier than previously forecast. It projected strong growth, low inflation and falling unemployment next year.

Mr Keating will embark on a tour of Australia's big cities to sell the budget and to test the climate for an early election. "There's no such thing as a grand final in politics," he was reported as telling Labor MPs on Monday. "You always have semi-finals. Even after an election they have you dead the next week. The main thing is to keep winning."

If business and the markets respond favourably, and if mortgage interest rates come down in the budget's wake, he will be tempted to go to the polls between August and November rather than complete a full term.

Two opinion polls on Monday indicated that the government was closing the lead held by the opposition conservative coalition and that the honeymoon enjoyed by John Howard, the opposition leader, since his installation three months ago, was ending. In one poll, Mr Keating was preferred as prime minister over Mr Howard by 41 percentage points to 39.

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