A maximum budget deficit of 2.5 billiondlrs for fiscal 1987/88 ending June 30 is needed if financial
markets are to be impressed with the government's resolve to
tackle Australia's economic problems, Westpac Banking Corp
&lt;WSTP.S> said.
    This compares with the budgeted deficit of 3.5 billion dlrs
for the current 1986/87 year although the market expects the
actual shortfall to be some 500 mln dlrs higher.
    In its latest Economic Review, Westpac said powerful
arguments could be advanced for eliminating the deficit
altogether next year or even budgeting for a modest surplus.
    Westpac said such a policy would deliver the message the
government was determined to face deep-seated economic
problems. But it said it would be a great deal to expect of a
government in what was probably an election year.
    It said even a relatively minor cut in the deficit would
require some unpleasant decisions, noting a repeat of the
1986/87 budget's zero real growth in spending would only bring
the deficit to about 4.3 billion dlrs.
    A cut of greater than two pct in real terms was needed if a
2.5 billion dlr deficit was to be achieved and this required
some radical surgery to existing programs, the bank said.
    Westpac said the government's mid-May mini-budget provided
an opportunity for bold measures, both in relation to the size
of the government's role in the economy and the principles
governing that activity, notably indexation of outlays.
    It said official figures show 93 pct of outlays in some way
indexed, hard to justify when living standards outside the
public sector were being eroded.
    In current circumstances, the alternative to fiscal
discipline is the sure road to bigger external debts, further
currency depreciation, a boost to inflation and, ultimately,
capital flight, the bank said.
 REUTER
