Oz firms fear worst as Budget day looms

Australian business is bracing for a rough ride in Labor's second Budget, to be unveiled tomorrow night as the Government struggles to balance promises and priorities against a deepening recession.

Commentators believe Treasurer Wayne Swan is likely to strip concessions from business and target higher income earners to soften to some degree an expected A$200 billion ($254 million) slump in tax revenue.

The deficit is expected to rise above A$60 billion, as the Government sinks into the red to fund existing programmes and commitments and to pay for promised tax cuts and infrastructure programmes.

"We've taken tough decisions in the Budget, tough decisions on temporary borrowing and temporary deficit, because that is necessary to support continued investment in hospitals, continued investment in providing the infrastructure we need for the future, because that generates jobs on the way through," Prime Minister Kevin Rudd said.

The "temporary" deficit is not expected to be reversed until 2016.

Budget forecasts will confirm the grim immediate future facing Australia predicted last week in an economic update from the Reserve Bank.

The bank said it expected the economy to contract by 1.25 per cent in the year to June, marked by rising unemployment in the next few months, and a large rise in the number of people working shorter hours.

Business confidence remained low, and many companies had scaled back investment plans.

But the bank did offer some optimism, noting that Australia may be nearing the bottom of the trough, with reasonable grounds to expect that recovery could begin by the end of the year - provided the global economy continued to stabilise.

It pointed to indications that housing construction might pick up in the second half of the year, helped by Government incentives that have pushed demand by first-home buyers, and signs that the Chinese economy was again picking up pace.

Even so, Swan warned that the Budget had been framed on the expectation of continuing hard times, emphasised by a "stunning" rise in unemployment in the United States, taking the jobless rate to 8.9 per cent.

"I think we've had a very timely reminder of the magnitude of the global recession."

An unexpected dip in Australia's April unemployment rate to 5.4 per cent is generally regarded as a blip in an otherwise rising trend.

Swan's Budget strategy will be heavily weighted towards spending on infrastructure and other measures to boost employment.

"Notwithstanding the better job figures ... there is still a need to support employment through economic stimulus," he said.

"There is still a need to make the necessary investments in the productive capacity of the economy, to support employment as we go forward - and that will be the focus of the Budget."

The Australian reported that a feature is expected to be a A$25 billion programme to fund infrastructure projects, including a A$7.2 billion north-south inland rail freight corridor, and roads and highway projects.

Hospitals are also expected to gain, a long-promised parental leave scheme will be announced, and incentives will be provided to the jobless for training, and to companies to keep apprentices.

Age pensioners will be given a rise of a forecast A$30 a week.