Australia sees budget deficit blowout of $42 billion

Australia inherited deficit from Labor: Joe Hockey
Australia inherited deficit from Labor: Joe Hockey

Australia's government, led by new Prime Minister Tony Abbott, said its budget deficit could swell to 47 billion Australian dollars ($42 billion) in the year ending June 2014, according to its latest mid-year economic and fiscal report released Tuesday.

This is a substantial increase from the 30.1 billion Australian dollars forecast by the previous Labour government back in August.

Gross domestic product growth for the current fiscal year is expected to come in at 2.5 percent, unchanged from the Treasury's forecast before the elections in September, but still a far cry from quarterly growth rates of as high as 4 percent last year.

(Read more: Has the tide turned for corporate Australia?)

Addressing reporters in Canberra, Treasurer Joe Hockey said that the budget deficit would balloon to 123 billion Australia dollars over the next four years, and, without policy changes, the budget would be in deficit every year until 2024.

Australia Treasurer Joe Hockey
Getty Images

"The current budget is not sustainable. Doing nothing is not an option for Australia," said Hockey. "We will fix the budget. We will deliver a stronger economy. But it will need a response that has the support and active involvement of the entire Australian economy."

Hockey emphasized that the "heavy lifting" of deficit reduction will have to come from spending restraints rather than a raft of new taxes. "One thing is for sure, no country has ever taxed itself to prosperity," he said.

According Hockey, net debt could jump to 667 billion Australia dollars over the next decade if no action is taken.

(Read more: Australia to be 'odd one out' in 2014: Goldman Sachs)

Australia's economy has been hit by a downturn in its key resources sector, and the government's moves to transition into non-mining sectors to spur growth have been slow.

How can Australia reduce its budget deficit?
How can Australia reduce its budget deficit?

Slowing growth, contained inflation and rising jobless numbers have prompted the Reserve Bank of Australia (RBA) to cut interest rates to a record low of 2.5 percent this year. In minutes released earlier on Tuesday, the RBA clearly reiterated its easing bias, saying it will not rule out further rate cuts if required.

According to a note from Goldman Sachs, the bank expects Australia's "broader recovery to fall short of expectations," leading the central bank to cut rates by another 25 basis points next March.

(Read more: RBA says low rates working, won't rule out more cuts)

The Australian dollar traded lower on the news, hovering at $0.8933 in the early afternoon, but not as much as it should have, analysts say.

"The AUD/USD showed limited movement on this detail and seemingly paid a great deal of attention to the Shanghai Composite, which is crazy given the Treasury's forecasts over the coming years argue for the RBA to move significantly," Chris Weston, chief market strategist at IG Markets said in a note.

- Reuters contributed to this report.

- By CNBC's Li Anne Wong. Follow her on Twitter @LiAnneCNBC