CANBERRA - Australia is bracing itself for grim news tonight as Treasurer Joe Hockey prepares to present his first budget.

The thrust of the Government's economic strategy is to push the budget back towards surplus through brutal spending cuts, the axing or merging of federal departments and agencies, asset sales and the pruning of industry assistance.

Hockey described the budget as "shaping the nation's destiny", through a long term strategy to match spending to new realities such as the aging population.

He warned that the gains would not show in the short term, but would lead to last solutions.


"We are rebuilding the economy," Hockey said. "We all have to contribute and the dividend will flow over the next few years".

The Government's biggest job now will be to sell the budget to an already jaded public, and to sceptical economists and business leaders.

Yesterday morning Prime Minister Tony Abbott spoke to Government MPs, urging them to keep their nerve as the inevitable backlash began, saying that short-term pain was "pain with a purpose" whose benefits would emerge with an improving economy.

"This is a problem-solving budget because we do have a very serious problem of debt and deficit, stretching as far as the eye can see," Abbott said. "But it's also a nation-building budget."

For business, the budget carries both wins and losses. It will be hit hard by twice-yearly rises in the fuel excise, linked to inflation, and will suffer loss of Government support through axed assistance programmes.

The renewed indexing of fuel excise, abandoned in 1001 by former Liberal Prime Minister John Howard, will also be one of the Government's hardest sells to voters.

As well as direct hits at the petrol pumps, the move will feed into higher costs of production and distribution. Indexation is expected to raise about A$340 million in the first year, rising to A$1.5 billion by 2018.

Large companies will also pay a 1.5 per cent tax increase to part-fund Mr Abbott's controversial paid parental leave scheme, which will pay mothers full wages for six months after giving birth, capped at an income of A$100,000.

But offsetting this is the commitment to continue with a promised 1.5 per cent cut in the company tax rate, to 28.5 per cent. Miners and farmers will also continue to receive the existing diesel fuel rebate.

High income earners will pay a special levy to help reduce the budget deficit, and the pay of politicians and senior public servants will be frozen for a year in a bid to demonstrate the Government's determination to spread the pain.

MPs will also lose their gold passes that entitled them to free travel after leaving politics.

But infrastructure spending, especially on roads, will increase. The Government will spend A$40 billion on roads over the next six years, matched by the states and private business. Federal costs will be offset by revenue from the fuel excise increases.

The biggest axe will fall on health and welfare, with the pension age to rise to 70 by 2035, a A$7 fee for previously free visits to GPs and hospital emergency wards, tighter access to disability and childcare payments, increased university fees and reduced family benefits.

The public service will be hammered. Almost 70 departments and agencies will either be axed or merged into new bodies. More than 16,000 public servants are expected to lose their jobs.

Labor, the Greens, unions and a broad range of interest groups have already begun campaigning against budget measures they say fall disproportionately on the weak, poor and vulnerable.