Australia's budget deficit will blow out to 37.4 billion Australian dollars in the year to June in what is set to be a struggling economy for the island nation over the next few years.

Australia's growth forecasts were downgraded in the government's mid-year budget update on Tuesday to 2.5 percent in the 2015/16 financial year, rising to 2.75 percent in 2016/17 financial year. Growth will remain below historical trend and a significant downgrade from the 3.25 percent forecast in the nation's May budget.

As widely expected by Australia's economists, the budget deficit has blown out to 37.4 billion Australian dollars (27.18 billion U.S. dollars), compared to the 35.1 billion Australian dollar (25.51 billion U.S. dollar) forecast in May, and unlikely to achieve surplus by the Treasury department's 2019/20 prediction, local media reported.

The plummeting commodity prices and low growth which opened holes in fiscal revenue are the main reasons behind Australia's debt blow out, though the Mid-Year Economic and Fiscal Outlook (MYEFO) is fractionally better than feared, "but not much", AMP Capital chief economist Shane Oliver said.

"Australian public debt as a percent of GDP is low compared with OECD countries, but a worse run of deficits as percent GDP than the early 90s and ongoing return to surplus delay is a concern," Oliver said.

Australia, which survived the global financial crisis off the back of the mining boom, has maintained an unprecedented string of growth since its last recession in the early 1990s.

Net debt is forecasted to peak at 18.5 percent of GDP in the 2017/18 before gradually declining, while unemployment will peak at six percent this year.

Australian Treasurer Scott Morrison told reporters in Perth on Tuesday the nation's economy was heading in the right direction and insists Treasury's "more realistic outlook" for economic growth should be seen "as a statement of confidence".

"The destination we are heading towards is a more diversified economy where the impact of things like the iron ore price in the future will not have the result it has in these figures in the future because we'll have a more diversified economy," Morrison said.

Australia's economy is undergoing one of its most significant diversifications in recent times, leading away from mining-led growth into a diversified services, technology-based and agriculture focused lead to capitalize on the emergent Asian middle class.

The country has recently signed the significant free trade agreements with China, Japan and South Korea, while Trade Minister Andrew Robb is reportedly in negotiations for a treaty with India and potentially Indonesia.

Though growth will be sluggish over the coming years, Australian analysts have said the higher deficits are unlikely to be severe enough to cause ratings agencies to change their overall view and downgrade the nation's coveted AAA credit rating.

The forecasted growth, however, is below with ratings agency Standard & Poor's Asia-Pacific growth projection of 5.3 percent for 2016 and 5.2 percent for 2017.

The agency on Tuesday said "The next six months could have significant implications for Australia's budget outlook" with tax reform under consideration and fiscal cuts currently under scrutiny in Australia's federal parliament.