European cash crisis slices $7 billion from tax revenue

THIS week's budget update will show the government still on track for a 2012-13 surplus, despite the euro crisis wiping a whopping $7billion over four years off expected capital gain tax revenue since May.

The crisis has driven down the value of shares and other assets.

Treasurer Wayne Swan will unveil spending cuts to help reach the surplus target but said yesterday it would be wrong to "take an axe" to the economy when the overseas situation was so uncertain.

With the European crisis hitting revenue hard, Mr Swan said the government would strike a balance between strong fiscal discipline and supporting job creation and growth.

The financial crisis has consistently knocked revenue - there has already been a $130billion write-down over five years to 2012-13, compared with the forecast.

The $7billion reduction in the capital gains estimate follows a 15per cent fall in the Australian share market since the May budget, which Mr Swan said would result in lower-than-expected capital gains tax from companies, superannuation funds and individuals.

Despite saying the government would not hit the economy too hard with cuts, Mr Swan warned the statement would involve some "difficult decisions" on savings.

"Maintaining our fiscal rigour is absolutely critical at a time when international financial markets are punishing those countries that lack discipline," he said.

Finance Minister Penny Wong said the government had made about $100billion in savings in its last four budgets "and there are no easy saves left".

The government in recent months has appeared to waver on whether a 2012-13 surplus would be attainable but has now toughened its language.

The budget's bottom line in 2012-13 and later years will be helped by speeding up more than $1billion of Queensland flood relief into this financial year.

Savings were announced last week in programs for teachers performance pay and immunisation. The measures each saved about $200million over four years.

The budget update will include a crackdown on tax breaks for foreign workers and executives who get living-away-from-home allowances that are tax dodges, yielding hundreds of millions in savings. Senator Wong said these were raised in the recent tax forum as being "problematic".

Such claims have jumped from $162million to $740million in five years. The changes will not hit Australians getting legitimate allowances.

Last Friday, the government moved to remove a huge tax deduction that could be claimed in corporate mergers - a loophole that could have threatened the revenue by $10 billion.