Australia's government has set a budget that trades cutbacks in welfare for higher spending on defence.

Finance Minister Peter Costello's widely-leaked spending plans will take the country's budget into deficit for the first time in six years.

But Australia's economy is growing more robustly than many other industrialised countries.

Mr Costello raised his forecast for Australia's economic growth by a quarter of a percent to 3.5% for the financial year to March 2002.

Terrorism fears

Setting out an overall budget of 165bn Australian dollars ($90.1bn; �62.1bn), Mr Costello pencilled in a deficit of A$1.2bn.

Defence spending and measures to prevent illegal immigrants reaching Australia by sea featured strongly.

Against a background of the United States anti-terrorist campaign, Mr Costello pledged to spend an extra A$1.3bn on defence.

The money will help pay for high tech signals equipment, improved security at ports and airports and better employment terms for the military.

About 150 Australian troops are deployed in Afghanistan.

Immigration

Mr Costello, who is widely tipped to succeed Prime Minister John Howard, also fulfilled the ruling Liberal Party's election pledge to crack down on illegal immigrants.

The budget contained funds to build three new offshore patrol vessels for the navy.

To pay for these measures, the government proposed to raise tax on prescription drugs, cut drug subsidies and tighten access to disability pensions.

Return to surplus?

It will also get a financial boost from the sale of its 50.1% controlling share in phone firm Telstra.

Medical insurer Medibank Private may also be sold off.

Mr Costello predicted the budget would return to surplus in the March 2002/2003 fiscal year with the aid of strong economic growth, increased tax revenue and falling joblessness.

"We are still running a very, very strong fiscal policy and if ever there is a time to allow fiscal policy to take some slack, it's probably during a global economic slowdown when you've got substantial defence commitments," he said.

The budget caused little reaction - or interest - in financial markets, due in part to extensive leaks.

On the Sydney stock market, the All Ordinaries Index closed up nearly 11 points at 3,263.1 ahead of the budget announcement.