The federal budget deficit has leapt from $18 billion forecast in the May budget to $30.1 billion in 2013-14, as the government grapples with a new revenue write down of $33 billion over the next four years.
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The softening economy will see the jobless rate climb above 6 per cent this year and next, putting more Australians out of work than at any time during the global financial crisis.
As Labor clears the way for a federal election, which is expected to be announced within days, it has also backed away from its commitment to return to a balanced budget in 2015-16, claiming there will now be a "modest deficit" in that financial year.
But it is steadfastly sticking with its plan to be back in black by 2016-17, claiming there would still be a "modest surplus". To do so, it has identified $17.4 billion worth of cuts, which it describes as "responsible savings" and will see an increase in cuts to the public service and an already announced hit to smokers.
Labor has also revealed that the cost of its new plan to process and resettle asylum seekers in Papua New Guinea will cost $1.1 billion over four years, including $175 million in 2013-14. This will be partially funded from a $423 million reduction in operating costs of the detention network in Australia.
Included in the $1.1 billion figure is $236 million over four years to support boat arrivals to live in the community. This spending has been offset by the reduction in AusAID's budget.
As part of its deal with PNG, announced in July, Australia will now also provide an extra $420 million in aid over four years.
Economy in 'transition'
In Canberra on Friday, new Treasurer Chris Bowen said that Australia's economy was not undergoing a "crisis" but it was experiencing a "transition".
Mr Bowen said that because global growth was down it was having an impact on Australia's economy.
He said Australia's nominal GDP growth has fallen from 5 per cent in May to 3.75 per cent in the update.
The 84-page document handed down by Mr Bowen and Finance Minister Penny Wong outlines hits to the public service as well as delaying the growth of overseas aid.
Mr Bowen said that the economic plan outlined on Friday would be the plan that Labor would take to the election. There will be another update on the nation's finances during the election campaign, when the Pre-Election Economic and Fiscal Outlook is released by Finance and the Treasury within the first ten days of the campaign.
According to Mr Bowen and Senator Wong, Australia's economic fundamentals remain strong but there have been significant downgrades in tax revenues since the May budget that was handed down by former treasurer Wayne Swan.
Mr Bowen said that the decision to bring down a deficit of $4.7 billion in 2015-16 instead of a balance was an ''explicit'' decision to ensure that growth continued.
He said other decisions in the statement had been ''difficult'', referring to the cigarette tax hike and the larger efficiency dividend in the public services.
Mr Bowen said these savings measures come with no reduction in family payments or the pension. Despite speculation that the schoolkids bonus would go in the budget update, it is also safe.
Public service, aid budget hit
According to the statement, the growth of Australia's aid budget will be slowed, which would decrease payments by $879 million over four years to 2016-17, however, the government says it is standing by its commitment, updated in May, to meet its target of 0.5 per cent of Gross National Income on aid by 2017-18.
The public service will be hit with an increased efficiency dividend – from 1.25 to 2.25 per cent – that will reduce payments by $262 million in 2014-15 while Defence payments will fall by $89 million in 2015-16 and $1 billion in 2016-17.
Senator Wong said that the jump in the efficiency dividend for the public service could be achieved without forced redundancies.
Senator Wong said that her Finance Department had advised that most government agencies would be able to ''absorb'' the cost cuts through natural attrition, voluntary redundancies and other cost savings.
As already flagged by the government before the statement was handed down, an increase in rate of the tobacco excise will also help return the budget to surplus, generating an additional $5.3 billion for the government's coffers.
The government's controversial decision to crackdown on the car fringe benefits tax, announced last month, will generate $1.8 billion over four years.
Another crackdown on unpaid tax and superannuation is also expected to generate $827 million over four years.
A levy on bank deposits of 0.05 per cent - to provide insurance if bailouts are required - which was flagged on Thursday, is expected to bring in $733 million over four years.
The government's recent decision to move to the emissions trading scheme one year early created an already known $3.8 billion hole in the budget.
Labor 'losing control of economy'
Shadow treasurer Joe Hockey said Labor's economic statement proved the government had ''lost control of the budget and is losing control of the economy''.
''It is the same old Labor and the same old Kevin Rudd,'' Mr Hockey said. ''The budget is in free fall.''
Mr Hockey demanded Prime Minister Kevin Rudd call the election this weekend or recall the Parliament so they could debate raising Australia's debt cap.
Greens leader Christine Milne described Labor's economic statement as ''$1 billion worth of cruelty inflicted on asylum seekers''.
Senator Milne took issue with Labor paying for the resettlement of refugees on PNG by slashing the aid budget and imposing an ''efficiency dividend'' on the public service.
Instead of cutting from these areas, Labor should raise taxes on the big mining companies, she said.
