Australia faces ballooning debt and slowing growth due to the global commodities slump but will not resort to "extreme" measures such as heavy spending cuts.
In the first economic review delivered by Prime Minister Malcolm Turnbull since he took office in September, the government yesterday signalled it will respond to the downturn by trying to boost employment and growth rather than pursue big savings or austerity.
According to the mid-year update of its May budget, a steep US$9 drop to US$39 a tonne in the forecast value of Australia's main export, iron ore, had exacerbated the weakening position.
Canberra's forecast deficit this year has blown out to A$37.4 billion (S$38 billion), a significant increase from the A$35.1 billion predicted in May.
Business groups welcomed the outlook but urged Mr Turnbull to pursue tax reform and make further budget cuts.
SLOW AND STEADY
We are heading towards budget balance. We are going to get there patiently.
TREASURER SCOTT MORRISON, on Australia's economic outlook
There are also growing calls for the government to lift the consumption tax from its current 10 per cent.
Treasurer Scott Morrison said the government wanted to avoid "extreme responses" that could limit household spending and business investment. The budget, he said, was "a means to an end; it's not an end in itself".
"We need to take a safe and careful route and one that does not put at risk our jobs and growth," he told reporters.
As well as slowing global growth and falling prices of commodities, Australia's economy has suffered from a sluggish recovery from the end of a decade-long mining investment boom.
According to the outlook, the forecast economic growth rate has dropped to 2.5 per cent from the 2.75 per cent tipped in May - and next year's growth forecast has been slashed to 2.75 per cent from 3.25 per cent.
Mr Morrison said the economy was "growing very strongly, particularly compared to other advanced economies around the world".
"We have global headwinds coming towards us and a transitioning economy," the Treasurer told ABC News. "We are heading towards budget balance. We are going to get there patiently."
The government's outlook said a budget surplus was not expected until 2021, though the country has experienced more than two decades of continued growth.
Analysts largely welcomed the outlook but warned that the government is unlikely to achieve its return to surplus as early or as smoothly as forecast.
"I suspect we will be struggling to get there (to surplus) in a consistent way by the mid-2020s," economist Saul Eslake told ABC News.
The government's total extra deficits over the next four years are expected to balloon by A$26.1 billion, as peak total debt reaches A$647 billion in 2025-2026.
Spending on health, welfare, aged care and the environment is expected to deliver billions of dollars in savings.
But there are some positive signs, including stronger than expected job growth.
Unemployment this year is expected to be 6 per cent, rather than the 6.5 per cent forecast in May.
The Australian Chamber of Commerce and Industry said the government needed to reduce the high levels of spending it had been able to make during "the boom years".
"The Treasurer is right to take a balanced and methodical approach to identifying savings and reducing rates of spending growth," the chamber's head, Ms Kate Carnell, told The Australian Financial Review. "It's the only way we will begin to address the structural budget deficit and mounting public debt, but we must do a lot more."
The opposition criticised the move to cut the health and welfare budgets, saying Canberra should increase taxation of multinational companies and tobacco products.
"The government has chosen yet again to simply preside over blowouts in the budget deficit while attacking those who can least afford it," said Labor's Treasury spokesman Chris Bowen.
The outlook presents stark challenges for Mr Turnbull as he enters an election year in 2016.
He is expected to deliver his first budget in May before an election later in the year, but yesterday's figures suggest he will have little to spend on popular vote-winning measures.