The budget policies of the Group of 7 industrialized nations are ''unsustainable," and major cuts will be needed in health-care and pension spending to right the problem, International Monetary Fund Research Director Michael Mussa said last Friday.

In remarks for delivery to a Federal Reserve Bank of Kansas City conference, Mr. Mussa warned that budget deficits will begin to widen anew after 2000 because of rising health-care costs and the commitment to maintaining "expensive" public pension systems.The budget outlook in the G-7 nations for the next three to five years may improve due to current efforts by nations to reduce their budget gaps, Mr. Mussa said.

But that improvement probably is temporary, he said, since in many cases the "tough decisions" needed to cut the deficits have not yet been taken.


Mr. Mussa identified the growth of public pension benefit programs, such as the Social Security system in the United States, as the primary cause of the budget problems in the major industrial nations.

Government spending on aid to the poor, which is targeted for cutbacks in the United States, has played only a secondary role in contributing to an increase in U.S. government spending, he said.


To deal with the potential budget troubles, Mr. Mussa urged G-7 nations to focus on spending cuts rather than tax hikes, since "high levels of taxation" now discourage employment in several countries.

As for ways of cutting politically popular pension programs, Mr. Mussa recommended gradually raising the retirement age to qualify for full benefits. He also suggested changing the way the programs are indexed to adjust for inflation, arguing that the consumer price measures in industrial nations overstate inflation by about 1 percentage point. Correcting this distortion could cut public pension spending by a third over 30 years, he said.


Here is Mr. Mussa's assessment of the long-term budget outlook in each of the G-7 nations:

* UNITED STATES: Current deficit-cutting proposals fail to tackle the prospective widening in the deficit after 2000. Also, the proposals fail to specify measures needed to curb the growth of health-care spending.

* JAPAN: The budget deficit has widened because of economic weakness and "desirable" efforts to restrain recession. The "structural" budget deficit should narrow from its current 3.75 percent of gross domestic product as the economy picks up momentum. "But the unfavorable effects of population aging" will soon begin to reduce the social security surplus and the overall deficit should widen again by 2000.

* GERMANY: Over the next five years, the government will need to lower spending to reduce the deficit and to provide room for a cut in the ''high tax burden." Much of the current reduction in the budget deficit ''has come at the cost of tax increases."

* FRANCE: A major effort will be needed to cut the budget deficit to 3 percent of GDP within two years from 6 percent of GDP in 1994 to meet the requirements of European Monetary Union. The health-care and social security system will need to be revamped.

* BRITAIN: Although the deficit has narrowed substantially, the government needs to ensure that its deficits for the next several years are met. That "does not allow room for tax cuts unless these are matched by additional spending restraint."

* ITALY: The overall ratio of debt to GDP, the highest among the G-7, appears to be headed down in the short term. But further long-term measures to

cut pension spending and to broaden the tax base will be needed, since Italy already has "relatively high tax rates."

* CANADA: The deficit problem remains serious despite a decade of programs to cut the gap. Current budget policies should lead to some improvement but benefits to the elderly and the unemployment insurance system need to be reformed.