* Government unveils 26.5 bln euros in savings, tax hikes
* Pact emerges after weeks of talks
* Vienna pursues deal to tax undeclared assets in Swiss accounts (Adds details from government plan)
By Michael Shields
VIENNA, Feb 10 (Reuters) - Austria’s fractious governing coalition has embarked on its most ambitious project to date - balancing the budget by 2016 in a risky campaign before an election battle next year against the resurgent far right.
The Social Democrats (SPO) and conservative People’s Party (OVP) unveiled details on Friday of a cumulative 26.5 billion euro ($35 billion) package of spending cuts and tax hikes.
The goal is to chop structural budget deficits within five years, on the way to getting state debt below the European Union’s ceiling of 60 percent of economic output this decade, from an expected peak of 75.4 percent next year.
Chancellor Werner Faymann of the SPO and Vice Chancellor Michael Spindelegger of the OVP laboured for weeks on the package, which gained added momentum when Standard & Poor’s stripped Austria of its top notch triple-A debt rating last month.
Spending curbs make up around 70 percent of the mixture and tax hikes 30 percent. State and local governments will contribute more than 5 billion euros to the pot.
The deal makes Austria a shining example of euro zone countries’ efforts to convince financial markets they are serious about taming deficits. But the cost could be high with voters.
Retirees will see pensions rise by less than inflation in 2013 and 2014. It will be harder to take early retirement, a key step in a country where few work until the regular retirement age.
Civil servants face a pay freeze next year and a minor increase in 2014. The government slapped a hiring freeze on posts outside the police, justice and teaching sectors.
People who earn more than 184,000 euros a year face tax surcharges until 2016 and investors who sell properties after 10 years will no longer escape capital gains taxes, but the SPO failed to push through the general wealth tax it favours.
The pact limits corporate tax deductions for losses abroad; sees income from an EU-wide financial transaction tax from 2014; slashes costs for health care and infrastructure projects; and cuts the size of parliament - a step more for symbolism than savings.
It said taxing an estimated 12-20 billion euros in undeclared Austrian assets in Swiss accounts - along the lines of a deal Germany struck with Switzerland - could raise around 1 billion in 2013 and 50 million a year later.
The deal hammered out over weeks of talks links the fates of Faymann and Spindelegger, whose parties have dominated post-war Austrian politics.
In a humorous play on the “Merkozy” tag for the allied leaders of Germany and France, the Kurier paper wondered in a cartoon whether to call the domestic duo Faylegger or Spinmann.
But with a resurgent right-wing and eurosceptic Freedom Party waiting in the wings before parliamentary elections due by September 2013, the future of the consolidation pact is no laughing matter.
Political analyst Peter Filzmaier noted that opinion polls since the end of 2010 have shown that neither party has been able to match its showing in 2008 elections, when the SPO won 30 percent and the OVP 26 percent.
“It is not the case that (the proposed) concrete savings and tax measures will bring the chances of the parties to a middling level. It is more whether the government can really implement them,” he told Austrian radio.
“If yes, it shows determination, the ability to make decisions and leadership qualities, which could give them an advantage over the opposition. If the image of the least common denominator (approach) firms up, then chances for the opposition parties will of course rise further.”
The pact still has to make its way through parliament, which gives lobby groups more time to exert pressure for changes.
“The final chapter has not been written on the savings package. Now we have to wait and see how hefty the protests are and if the government gives in,” wrote Claus Pandi, columnist for the mass-circulation Krone newspaper. ($1 = 0.7517 euros) (Editing by Susan Fenton)