Treasurer Wayne Swan says the OECD has firmly endorsed Australia's budget strategy in its latest economic outlook.
The Organisation for Economic Co-operation and Development warned the Gillard government overnight it needs to be prepared to prop up the economy if Europe's debt crisis deteriorates.
Mr Swan noted the OECD's reference to the need for stringent spending control, in line with the government's plans, to offset the drop in revenue due to the financial crisis and natural disasters.
The treasurer will release the government's mid-year budget review at 11am (AEDT) on Tuesday.
He is expected to announce the deficit for this financial year will blow out to more than $30 billion from the $22.6 billion forecast six months ago, due to lower tax revenue and the cost of flood and disaster reconstruction, and to detail spending cuts to return the budget to surplus.
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It also says Australian interest rates would have to be slashed in a worst-case scenario.
But overall, the OECD paints a relatively rosy outlook for the Australian economy, predicting 4.0 per cent economic growth in 2012 and 3.2 per cent in 2013, after slowing to 1.8 per cent in 2011 because of natural disasters.
It expects the unemployment rate will hover around 5.25 per cent during the next two years, while inflation should stabilise around 2.5 per cent, in the middle of the Reserve Bank's preferred two to three per cent target band.
Mr Swan says the report confirms the fundamentals and outlook for the Australian economy remain solid, despite a major deterioration in Europe and a further slowing in the global economy in recent months.
"The OECD firmly endorses Australia's budget strategy," he said in a statement.
"In these uncertain times for the global economy the government recognises the importance of striking the right balance between budget discipline and continuing to support job creation and growth," he said.
"Just as it would be wrong to abandon our determination to return to surplus in 2012/13 it would also be counterproductive to take an axe to the budget."
