The European financial crisis has cut Australia's budget by $20 billion. However, Treasurer Wayne Swan, who will release on Tuesday the midyear budget review, forecasts a return to surplus.

The losses would come from lower-than-expected capital gains tax paid by companies, individuals and super funds. Collection from personal income tax is also expected to go down.

Even if Swan has factored in the $20-billion loss spread over four years since the federal budget was released in May, the treasurer is confident of the return to surplus because of over $5 billion in spending cuts and savings.

"We need to strike the right balance between fiscal discipline and continuing to support job creation and growth, between those who say we should take an axe to the budget, and those who tell us to forget about the surplus," The Sydney Morning Herald quoted Swan.

Prior to the European debt crisis the Labor government promised to bring back the budget to surplus in the next financial year. Swan forecast a $3.5-billion surplus in the May budget. He is expected to show a lower estimate on Tuesday.

It is not only Swan who is optimistic in his outlook for Australia, even the Organisation for Economic Co-operation and Development (OECD) predicted a year-on-year growth rate of four per cent for Australia, the same forecast for Chile and slightly higher than the OECD's forecast of 3.8 per cent growth for South Korea.

Mr Swan is expected to announce $200 million budget cuts on teacher bonuses, $209 million in vaccination incentives, and lesser tax perks for executives who receive living-away-from home allowance. There may also be budget cuts to Defence spending.

Australia is expected to register in 2011 financial year a budget deficit of $30 billion, higher from the May forecast of $22.6 billion deficit.

However, it is not all cuts in the next four year. The government is expected to increase the flood reconstruction budget for Queensland by $1.4 billion.

Shadow Treasurer Joe Hockey insisted that the government budget review should properly reflect the worsening economic situation in Europe.

"This is a government that will engage in budget gymnastics to try and give the appearance of a budget surplus. We will not tolerate the government overestimating economic growth in the face of a deteriorating Europe," The Courier-Mail quoted Hockey.