Australia's centre-left government must make some ugly choices this week as it hands down its first budget since winning office, economists say.

The voters who swept Prime Minister Kevin Rudd's Labor Party to power in November are hurting from a series of interest rate rises that have made the cost of borrowing in Australia among the highest in the industrialised world.

Yet Rudd's Treasurer Wayne Swan must deliver a budget on Tuesday that honour's the government's election pledge of 31 billion dollars (29.1 billion US) in tax cuts, a move economists say could fuel inflation and spark further rate rises.

In addition, opposing forces are buffeting Australia's economy, with the China-driven resource boom stimulating growth and providing the government with windfall revenue while the global credit crunch weighs on economic activity.

'economist concern'

JP Morgan chief economist Stephen Walters said it added up to an uncertain outlook for the Australian economy, meaning Swan needed to perform a "precarious high wire act" on budget night.

"The treasurer simultaneously will have to appear to hand down an austere budget to show that the government is serious about fighting inflation, while also handing out buckets of cash to low and middle-income earners via tax cuts," he says.

Access Economics head of macroeconomics Chris Richardson said the choice facing Swan was stark. "Either we get a horror budget, or we get horror interest rates," he says. "That's the ugly choice, but it's one policymakers face."

"Unless there are substantial budget night announcements of new policy savings, the budget will be pouring money atop an economy at full stretch -- adding to pressures on inflation, and so worsening the policy dilemma faced by the Reserve Bank."

The government is expected to unveil a budget surplus of at least 20 billion dollars, or 1.7 percent of gross domestic product (GDP), according to AMP Capital Investors chief economist Shane Oliver.

Rudd will be keen to live up to the "economic conservative" tag he gave himself during the election by pruning billions of dollars from government spending.

'inflation woes'

With inflation at a 16-year high of 4.2 percent and interest rates at 7.25 percent, their highest in 12 years, Mr Rudd has promised a "responsible" budget that helps what he calls "working families," a key electoral demographic.

One of the big-ticket budget items is set to be a 4.7 billion dollar high-speed national broadband network promised during the election.

There is also speculation that the government will place the billions reaped from the commodity boom into a fund called the Building Australia Fund, which will pay for future roads, ports and water infrastructure.

Budget measures already leaked to the media include means testing the 5,000 dollar "baby bonus" paid to families for each newborn.

The government has also said it will increase taxes on pre-mixed drinks, so-called alcopops, a move that will raise 500 million annually and which Rudd hopes will curb what he calls an epidemic of binge drinking among young people.

The 20 billion dollar-plus defence budget is expected to be largely untouched, although there could be some administrative cuts.