Australia prepares for tough Budget

Australian Prime Minister Julia Gillard and Treasurer Wayne Swan. Photo / Getty Images

Treasurer Wayne Swan has prepared Australia for an austerity Budget tonight, warning of tough cuts to federal spending to offset falling revenue and looming deficits.

But there will also be some sweeteners for the worst-hit, and Swan's strategy will be lodged firmly in the expectation of relatively short-term pain followed by strong, resource-fuelled growth.

Swan will also aim to spread the benefits of the mining boom more evenly to ease the pressures of a two-speed economy, keep inflation under control and return the budget to surplus by 2012-2013.

His assurances on an early return to surplus have been attacked by the Opposition - which warns his figures will not include the impact of the proposed carbon tax - and by a number of analysts who question the emphasis on a rush back to the black.

But Swan said the Budget would have "one eye on the present and one on the future".

"In the short term, the summer's natural disasters, the after-effects of the global recession and a patchwork economy mean we face much lower tax revenues," he said.

"One aspect of the patchwork economy is that many businesses - particularly small businesses - which aren't in the mining boom fast-lane are doing it tough.

"However, while we face short-term softness, over the longer term our fundamentals are strong with low unemployment, record terms of trade and a huge pipeline of investment in the resources industry."

Swan's immediate priority is to deal with the hammering the economy has taken from lingering aftershocks of the global financial crisis, the blows from floods, storms and a cyclone, and the Japanese tsunami.

The combined impact will strip at least A$6.5 billion ($8.4 billion) from federal revenue, adding to an expected dive in tax receipts.

Company profits have been hit by the strength of the surging dollar, and the key housing sector has been hit by falling prices and approvals.

Swan has also been constrained by the requirement to keep growth in spending to 2 per cent or less, requiring a combination of savings and axing of proposed programmes and spending increases.

The 2010-11 deficit is expected to be about A$51 billion - A$9 billion down on the mid-year forecast - and to shrink to about A$20 billion for the next financial year.

Treasury forecasts for tonight's budgets are expected to be close to Reserve Bank predictions of 2.5 per cent growth for 2010-11 and 4.5 per cent in 2011-12.

Small business will be allowed an immediate write-off of the first $5000 of motor vehicle purchases from 2012-2013, and up to 720,000 small businesses will benefit from a reduction in the company tax rate to 29 per cent.

More skilled workers will be accepted provided they work in regional Australia for two years, low-income families will gain tax relief and higher rent assistance, and pensioners will be given digital TV set-top boxes so they can continue using existing sets when the analogue system shuts down in two years.