The International Monetary Fund says abandoning a budget surplus this financial year is an option for the Gillard government if the economy worsens significantly this financial year.
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With much of the economy straining under the high dollar, the fund also says there is room for more cuts in interest rates from the Reserve Bank.
In its latest report on Australia, the fund is broadly supportive of the government's plan to return the budget to surplus this financial year through a mix of spending cuts and tax changes.
However, it adds: ''in the event of a sharp deterioration in the economic outlook, and hence revenue underperformance, delaying the return to surpluses could be an option, given Australia's modest debt-to GDP ratio.''
On interest rates, the fund said the Reserve Bank's move to cut the cash rate to 3.25 per cent was ''broadly appropriate'', but there was ''scope for further easing if warranted by economic circumstances''.
The comments come after a recent softening in the government's rhetoric on the surplus, which is forecast to be just $1.1 billion this financial year.
Since the government announced $16 billion in spending cuts in last month's mid-year budget update, it has avoided reaffirming its promise to post a surplus, instead referring to a ''plan".
The IMF backed the government's broad approach to reining in the budget, saying this would bolster the government's finances against future shocks and the cost of an ageing population.
The economy would grow by 3 per cent next year, it forecast, though this would be ''narrowly driven by a mining investment boom'', leaving Australia vulnerable to external shocks.
Treasurer Wayne Swan said the report represented a ''big tick'' for Australia's economic management.
''The government understands that not everyone is doing it easy, but reports like these demonstrate why all Australians can be proud of what we have achieved working together in the face of acute global challenges,'' Mr Swan said.
Mr Swan also seized on the IMF's comment that the budget changes announced so far struck a balance between ''the benefits of reducing public debt and the need to contain any adverse impact on economic growth''.
While the fund commended Australian authorities on their economic management, it also highlighted some weak points in the economy.
The dollar, which has stayed above US$1 despite a slump in commodity prices, has squeezed non-mining exporters, causing the current account deficit to widen, it said.
Household debt levels – which remain near all-time highs – should also be key priorities for regulators of financial system, it said.
