* Proposals include end of free universal healthcare, pension changes
* 99 govt bodies identified for sale, merger or scrapping
* Australia's debt and deficit position 'incredibly healthy' - economist (Adds quotes from commission, economist, treasurer)
By Matt Siegel
CANBERRA, May 1 (Reuters) - A much-anticipated audit of the Australian economy released on Thursday recommended broad structural changes and a tight rein on costs aimed at stemming what the government warns is a looming "fiscal crisis", setting the stage for a tough Federal budget later this month.
The Report on the National Commission of Audit made 86 recommendations for changes to the 15 largest and fastest growing sectors of government spending, which it says could save A$60 billion-A$70 billion ($55 billion-$65 billion) a year within a decade and return the budget to surplus.
Among the controversial proposals were changes to the pension system and federal healthcare insurance, a raft of privatisations, the devolution of power to state governments and the abolition, sale or merger of 99 government bodies.
Australia's A$1.5 trillion economy sailed through the global financial crisis, but a slump in mining investment and a sluggish response to record low interest rates has hit government tax income as expenditure continues to grow.
"The choices are to continue to believe in luck and hope that we can achieve past record levels of growth and productivity, or we can accept the evidence," Commission chair Tony Shepherd said.
"We can make the decision to move carefully, incrementally and fairly to put our fiscal policy back on its traditional sustainable path while the economy is still in reasonable shape."
Australian Prime Minister Tony Abbott and his treasurer, Joe Hockey, have been girding voters for hefty spending cuts and other measures in the May 13 Federal budget to tackle deficits forecast at A$47 billion this year and totalling A$123 billion over the next four years.
On Tuesday, Abbott flagged the prospect of a temporary income tax levy on higher income workers to help tackle the deficit, a proposal that was met with criticism from opponents and a cool response from business groups.
The recommendations in the audit, which the government is not bound to accept, could offer voters their best idea of what to expect in the budget while also serving as a trial balloon for tough measures under consideration by the government.
"Some of the recommendations the government will be proceeding with in the budget, some of the recommendations the government will not proceed with and some of the recommendations are clearly in the public domain for debate and discussion," Hockey said.
Among the most controversial recommendations are an A$15 fee for doctors' visits, which have previously been covered by federally administered healthcare insurance, and the mooting of a U.S.-style healthcare model in which all Australians would be required to buy private health insurance.
Other potentially thorny proposals are a change in the calculation of the pension age that would see it rise from 67 in 2023 to around 70 years old in 2053, and a raft of privatisations including naval shipbuilder ASC and the national mail carrier.
Some economists, however, have questioned whether Australia needs to engage in the type of belt-tightening recommended in the report and raised the possibility it could have a negative impact on an economy still recovering from the financial crisis.
"If European countries had a debt and deficit problem like Australia, they'd be lighting candles in every cathedral. People outside of Australia would be astounded how much debate there is over a non-problem," said Mike Rafferty, a research fellow at the University of Sydney's business school.
"The deficit is largely meaningless, which is not to say that debt is never a problem, but Australia's debt and deficit position is incredibly healthy."
Although debt is expected to peak above A$400 billion, that would be less than 30 percent of Australia's annual gross domestic product.
In the United States and the euro area of 15 countries, government debt accounts for more than 100 percent of GDP, figures from the Organisation for Economic Co-operation and Development show.
Australia remains one of only a handful of countries that still boasts a triple A credit rating, making its debt especially attractive to foreign central banks and sovereign wealth funds. ($1 = 1.0793 Australian Dollars) (Editing by Lincoln Feast and Chris Gallagher)