A former Treasury official believes the Abbott government should start "war-gaming" a scenario in which it needs to stave off a recession, saying the economic environment is now "more dangerous" for Australia that at any time since the financial crisis.

The bleak message - delivered just a week out from Treasurer Joe Hockey's second budget - means the government's focus on budget repair may have to change and Treasury may have to update a "top drawer of project work" that could be rolled out quickly to stimulate the economy if needed.

The Reserve Bank is widely tipped to cut interest rates on Tuesday - dropping the official cash rate to an all-time low of 2 per cent - despite RBA governor Glenn Stevens admitting recently that each new rate cut lacks the firepower of previous rate reductions.

The RBA is expected to cut the cash rate on concerns about a deteriorating economic outlook, including an unexpected fall in non-mining investment, and a resurgent Australian dollar, despite legitimate worries about Sydney property prices.

But Chris Richardson, a director of Deloitte Access Economics and a former Treasury official, said the RBA's weakening ability to stimulate the economy could soon reach the point where the Commonwealth budget will have to be used "as the primary defence against downturn."

He warned that even though it is right for the Abbott government to keep trying repairing the budget for now, it should start preparing for economic conditions to worsen considerably in China - and as a consequence in Australia.

He also said China's economy was having a far bigger impact on Australia's budget than people realise.

"Australia can and should continue to actively pursue budget repair, but it is well and truly time for Canberra to war game the ugly scenario," Mr Richardson has written in Deloitte's well-respected Budget Monitor.

"If Australia were to start to slide into recession, then it would be time to switch to the Plan B budget, and [that budget] should have been well thought out beforehand."

Deloitte's latest Budget Monitor - a detailed update on the state of the Commonwealth budget - predicts the Abbott government will soon face much larger deficits that it had planned for just six months ago.

It says Commonwealth government revenues will fall shy of the latest official estimates by $5.2 billion in 2014-15 and by an ugly $10.8 billion in 2015-16.

That means the budget deficit will be $45.9 billion in 2014-15, which is $5.5 billion worse than projected in the government's mid-year budget update.

It also puts the budget deficit at $45.3 billion in 2015-16, which is $14.1 billion worse that recently projected.

Mr Richardson warned those larger-than-expected deficits could become even worse if China's economy kept weakening, and if commodity prices fell further, with much of the budget damage coming from lower company tax takes and record-low wage growth.

"Wage growth jumped ahead of productivity gains during the boom, but it is now only limping along as businesses try to claw back their competitiveness," the report notes.

"That's set to tear a new hole in the budget."

Mr Richardson believes Abbott government attempts to repair the federal budget by shifting some costs to state government budgets will become problematic, because states are "unlikely to be able to pay for them."

The Parliamentary Budget Office warned last week that federal government decisions to shift hospital and school spending obligations onto state governments would put more pressure on state budgets in the next few years.

US investment bank Goldman Sachs on Wednesday warned Australia risked losing its AAA credit rating from ratings agency Standard & Poor's due to the country's "poor fiscal performance."

Deloitte's report has also predicted that falling business investment will continue to hurt growth prospects for the next two years.

Tomorrow's expected interest rate cut by the Reserve Bank – taking the cash rate to a new record low of just 2.0 per cent and the retail rate of the most competitive variable loans to less than 5 per cent, – speaks to the scale of the economic problem but will also highlight the limitations of monetary policy alone in stimulating growth.

Australia 'can't afford a dull budget'

Meanwhile, Opposition Leader Bill Shorten has warned Australia cannot afford a "dull" budget, accusing Treasurer Joe Hockey of giving up on difficult reform in favour of spending money he doesn't have to rebuild his shattered image.

The government has flagged new spending in childcare and falling revenue estimates suggest the 2014-15 deficit has drifted further into the red by another $5.2 billion, taking it to almost $46 billion.

That has prompted the Opposition Leader to claim new spending is irresponsible if it is to be paid for from blocked savings announced in last year's budget and thus not realised.

"Incredibly, a week before this year's budget, we are still talking about last year's budget," Mr Shorten will say in his major pre-budget speech on Monday at the University of Sydney.

He will use the address to argue the Coalition has engaged in "Escher staircase economics" in which the journey is all uphill for no gain.

"All the harm and hardship came without a sustainable trajectory for improving the budget balance," Mr Shorten's notes say.

"In the long months of partial backflips and gradual back downs, 'dull' has become the adjective of choice.

"All this shows is the Liberals have learned the wrong lessons from last year's debacle."

The opposition attack comes as both sides of politics swing into the last full week before the budget, seen as crucial to Mr Hockey's survival as Treasurer and even that of Prime Minister Tony Abbott.

In a marked change from last year's emphasis on toughness and widespread pain, Mr Abbott on Sunday refused to comment directly on reports of abandoning an unpopular cut to age pension indexation, but said this year's budget would be different.

"I am absolutely confident that on budget night, it will be seen as responsible, measured and fair," he said in Sydney.

"It's a budget which is going to make Australians feel more optimistic and confident about the future."

The budget is expected to include money for childcare, and changes to the activity test requiring parents to participate in paid work to receive government benefits.

It will follow guaranteed funding of $840 million over two years for preschools.

Mr Abbott said childcare was not welfare as such and should be viewed as "a way of strengthening our economy".