The Federal Government has forecast a budget deficit of $37.1 billion this financial year, but says the budget is still on track to return to surplus by $1.5 billion in 2012-13.
Both figures reflect a worse economic performance than that predicted in May's budget, where the deficit was put at $22.6 billion and next year's surplus at $3.5 billion.
Releasing his Mid Year Economic and Fiscal Outlook (MYEFO) today, Treasurer Wayne Swan said $11.5 billion in new savings would be delivered by cutting back on the baby bonus, tax exemptions and other reforms.
Mr Swan said the cuts had been forced by a global economic situation which saw "storm clouds gathering, this time over Europe," and said the eurozone crisis was continuing to hurt Australia's economy.
But he was quick to note that, for the first time, Australia .
"At the end of the day, strong public finances and strong economic fundamentals are the best protection that we can provide for working people in our country," he said.
"Most countries could only dream of having growth at trend levels but that's what we are expecting here in Australia despite all the storm clouds that are on the horizon."
Where are the cuts?
The baby bonus will be reduced from $5,400 to $5,000, and there will be a three-year pause in indexation, measures which will save the Government $89.1 million in 2012-2013.
The Government will also crack down on the rorting of living away from home allowances, reduce the Dependent Spouse Offset, and defer four tax reforms by one year.
Mr Swan said the tax exemption for living away from home was being rorted by "highly-paid executives and foreign workers".
He said temporary residents will now only qualify for the allowance if they maintain a home in Australia from which they travel to other "fly in fly out" work, and workers will have to have documented evidence of their spending.
"No permanent resident legitimately using this tax exemption for accommodation and food expenses will lose any entitlements," Mr Swan said.
He said the crackdown would save $683.3 million over the next four years.
The changes to the Dependent Spouse Offset will not apply to those born before the middle of 1952, but for others taxation rates will rise with the income they earn.
The four postponed spending measures are:
The start date of the standard deduction for work related expenses will be deferred until 1 July 2013.
The start date of the 50 per cent tax discount for interest income will be deferred until 1 July 2013, allowing more time for consultation with stakeholders on issues previously raised by industry.
The start date of the phase down in interest withholding tax for financial institutions will be deferred until 2014-15.
The start date of the new tax system for managed investment trusts will be deferred until 1 July 2013, allowing more time for consultation with stakeholders about how to best implement the elements of the package.
These measures are predicted to save $2.1 billion over four years.
Mr Swan says "the combined effect of all policy decisions has improved the budget bottom line by $6.8 billion over the forward estimates."
"Global economic and financial conditions have deteriorated markedly in recent months, and the risks to global stability from the European sovereign debt crisis have intensified," he said in a statement.
"Global growth prospects have been downgraded markedly in 2012, with the euro area expected to return to recession.
"This has led to a weaker near-term economic and fiscal outlook for Australia since the Budget and substantial reductions to government revenues."
Shoulder the burden
The Public Service will shoulder some of the burden, facing a $1.5 billion cut to spending through a one-off increase in the efficiency dividend of 2.5 per cent in 2012-13.
The efficiency dividend is shorthand for budget savings within government departments, which unions have said will inevitably lead to reduced services and forced redundancies.
But Finance Minister Penny Wong says the savings can be found "in a range of areas".
"For example, reductions in the use of travel, consultants, hospitality and advertising," Senator Wong told reporters.
"I would remind people that we have delivered $10 billion of reform in government efficiency since we came to government."
And she said it was her "strong expectation" that government departments would meet the rigorous dividend "without resorting to forced redundancies".
The update writes down Government revenues by more than $20 billion over the four-year forward estimates period.
Real GDP is now expected to grow by 3.75 per cent in 2011-12 and 2012-13 - a downgrade of 0.75 of a percentage point in 2011-12 and 0.5 of a percentage point in 2012-13.
Opposition treasury spokesman Joe Hockey says the budget update figures are not credible.
"They are expecting us to believe they are going to have a $38 billion turnaround in the budget in the face of 12 months of slower economic growth in Europe, slower economic growth in China and an anaemic United States economy," he said.
Greens Leader Bob Brown has criticised the Government over the increase in the public service efficiency dividend.
"It's going to have a green problem on its hands because we don't believe in cutting the public service for the heck of it," he said.
"There's not a rationale to this, it's right across the board. With all the on-flowing loss of services and jobs, we'll be scrutinising very carefully where these cuts apply."