The federal government is expected to slash public spending by at least $3 billion so it can keep a promise to return the budget to surplus this financial year.
Labor is due to hand down its mid-year budget update on Monday, after cabinet signs off on the document reviewing growth and budget outcomes laid down in May.
Treasurer Wayne Swan says the cuts will be 'significant', to offset declines in revenue created by a weaker global economy and lower commodity prices in the past six months.
'The savings will be significant, but they will be targeted and responsible, minimising the impact on the economy,' he said in an economic note released on Sunday.
New Treasury analysis showed that after factoring in the new measures, the underlying cash balance was now expected to improve by 0.9 per cent of gross domestic product in 2012/13, Mr Swan said.
The government is committed to delivering a $1.5 billion surplus this year, with growth expected to remain solid at around 3.25 per cent and the central bank having room to cut official interest rates further to stimulate demand.
'You want the government, at a time when the economy is growing, to be putting fiscal policy back on a more normal setting,' Finance Minister Penny Wong told Sky News on Sunday.
'And you want monetary policy to do more work.'
Financial market economists predict the government is facing a budget hole of at least $3 billion due to bigger than expected slump in Australia's terms of trade.
'A savings package of this magnitude is achievable,' Westpac chief economist Bill Evans said.
Some measures already floated include raising tobacco tax by 25 per cent, which could deliver more than $1 billion, and increasing visa charges for skilled migrants, backpackers and spouses of Australian citizens.
As well, the government is set to receive a $300 million dividend from the government-owned health insurer Medibank Private and plans to scrap $240 million in university grants.
But business groups fear industry could bear the bulk of the savings measures through cuts to tax concessions and have told the government it shouldn't be locked into a surplus.
'We always said this should not be at any cost and should be revisited if economic conditions deteriorated,' Business Council of Australia president Tony Shepherd said in a statement.
While Labor is making cuts, it also has to find money for some large programs, including a National Disability Insurance Scheme, a dental scheme and schools funding.
There are also costs linked to processing and detaining rising numbers of asylum seekers.
Mr Swan said the cuts to be announced in the mid-year economic and fiscal outlook (MYEFO) would protect the most vulnerable in the community.
The parliamentary secretary to Opposition Leader Tony Abbott, Senator Arthur Sinodinos, criticised Labor's budget framework.
'This government's made an art over the last few budgets of overestimating revenue,' he told Network Ten.
Opposition Leader Tony Abbott said Labor could not be trusted with public money.
'Their record is always the same - it's more spending, it's higher taxes and it's cooking the books,' he told reporters in Sydney.