Prime Minister Kevin Rudd says the government is willing to let its budget temporarily fall into deficit.
It is the first time the government has admitted it won't maintain a budget surplus to address the effects of the global financial crisis.
Mr Rudd, in a lengthy statement to parliament on Wednesday, said if global growth continued to deteriorate, there would be a further slowing of growth in the Australian economy "as surely as night follows day".
The government has forecast growth of two per cent for the current fiscal year.
"If Australian economic growth slows further because of a further deepening of the global financial crisis then it follows that the Australian government revenues will reduce further," he said.
"Under those circumstances it would be responsible to draw further from the surplus and if necessary to use a temporary deficit to begin investing in our future infrastructure."
Opposition Leader Malcolm Turnbull accused the government of seeking a leave pass to abandon fiscal discipline.
"Experience and history tell us that Labor deficits are never temporary", he told parliament.
"The last Labor deficit lasted for six years.
"It only came to an end with the election of a coalition government."
It is the first time the government has admitted it won't maintain a budget surplus to address the effects of the global financial crisis.
Mr Rudd said falling commodity prices meant the outlook for Australia's terms of trade was weakening.
The mid-year economic and fiscal outlook forecast a fall of 8.5 per cent in the terms of trade in 2009-10.
"(But) a sharper fall can't be ruled out if the global downturn intensifies and this would further reduce national income growth," he said.
The government would do everything possible to "swim against the global tide" to support both growth and the surplus.
"But it is getting tougher and tougher.
"We will continue to be candid with the Australian public about the volatile global economic environment that has been created by the global financial crisis and the uncertainties that, therefore, lie ahead.
"The government remains prepared to take whatever action is necessary in the future to support economic growth and Australian jobs."
Mr Turnbull said two days ago the prime minister and Finance Minister Lindsay Tanner insisted Labor wouldn't run a deficit.
"Forty-eight hours (later) and that has been completely abandoned," he said.
Labor had mismanaged the financial crisis by focusing on inflation for far too long earlier this year.
"It was the only government in the developed world that was ignoring the global financial crisis ... and was declaring its own war on inflation, when much darker storm clouds were on the horizon."