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Australia Plans Medicare Levy Hike As Election Looms

04/30/2013 | 09:45pm US/Eastern
   By Enda Curran 

SYDNEY--A steeper-than-expected fall in annual revenues has left Australia's Labor government planning a hike in a medical insurance levy to fund a new disability healthcare scheme, a move that will raise 3.3 billion Australian dollars (US$3.4 billion) but will set it up for a potentially bruising battle with voters just months ahead of a scheduled election.

The move by Prime Minister Julia Gillard comes just days after she warned of a A$12 billion revenue shortfall and said all options to fill the funding gap would be considered. Having once sold its economic management as one of the government's key strengths, the weakening budget position has piled pressure on Ms. Gillard ahead of an election later this year that the government is tipped to lose.

Ms. Gillard has promised billions of dollars in extra funding for healthcare and education reforms, hoping to reverse voter polls indicating that the center-right Liberal-National coalition, led by Tony Abbott, will win a general election scheduled for Sept. 14.

Until recently Ms. Gillard had staked her government's political reputation on returning a budget surplus in the current fiscal year. It backed off from that pledge in December as it became clear the target was unrealistic.

Australia recorded a A$44 billion budget deficit last fiscal year, and had originally eyed a surplus of A$1.08 billion in the current year which ends June 30. The annual budget is due on May 14, and some analysts have said they expect Treasurer Wayne Swan to forecast a deficit of up to A$25 billion--or about 1.7% of the nation's gross domestic product.

In her latest maneuver, Ms. Gillard said she wants the Medicare levy to be increased to 2.0% from 1.5% if her party returns to office after the election. If approved, the increase would be effective from mid 2014 and would raise up to A$20 billion in the years after.

"There is less tax money available to government than we were expecting," Ms. Gillard told reporters. "It's not an easy choice."

The government's fiscal position has worsened in recent months as a stubbornly high Australian dollar has squeezed the profits of manufacturers and others that rely on overseas markets. The Aussie dollar, as it is known locally, continues to trade near record highs against a handful of major currencies, including the U.S. dollar, even after a yearlong campaign of interest rate cuts by the country's central bank.

The Reserve Bank of Australia has cut its benchmark cash rate six times since late 2011 to 3%, matching the low reached in the depths of the global financial crisis. It has sought to offset weakness in the world economy and stoke other parts of the resource-rich economy as miners scaled back projects.

Write to Enda Curran at enda.curran@wsj.com

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