Drought-stricken towns will be the target of federal stimulus potentially worth hundreds of millions of dollars under a program designed to support regional communities enduring hardship.

Key points: The ABC understands the Government is set to announce a stimulus package for drought-stricken communities

The ABC understands the Government is set to announce a stimulus package for drought-stricken communities It comes after the Treasurer toured affected regions with Drought Minister David Littleproud

It comes after the Treasurer toured affected regions with Drought Minister David Littleproud Cabinet's expenditure review committee will meet next week to consider stimulus options

The ABC understands the stimulus plan is being discussed by Cabinet and could be announced as early as next week, with a focus on ensuring employers retain workers.

Treasury has been instructed to cost various options, and sources insist any regional town support package would not imperil the Coalition's political priority to deliver a budget surplus next year.

Cabinet's expenditure review committee will meet next Wednesday to consider options — and potentially sign off on a final plan.

A source familiar with top-level discussions said while the focus of Government attention of late had been supporting farmers affected by drought, with a series of changes to farm household allowance, there was acknowledgement that rural communities also needed support, especially businesses employing locals.

The Morrison Government would likely use any federal stimulus for regional towns to step up pressure on state governments to consider rate relief for rural and regional small businesses, or adjusting payroll tax.

The Nationals, the Coalition's junior partner, are separately demanding a big spending package for communities damaged by drought.

Documents obtained by the ABC reveal the Nationals wish list amounts to $1.3 billion for an improved Government drought response, potentially split 50-50 with states.

The three-page proposal acknowledges $1.3 billion is "a major expense" but notes "the last substantial drought policy moved by the National Party was interest rate subsidies which cost $800 million per year many years ago, which was a lot harder to step out of than this would be".

The package would see local committees established to divvy up grants, although the federal or state MP would have the power of veto.

"The parochialism of one member on the committee can neither bring about nor quash any proposal apart from the federal or state member," the proposal reads.

Earlier this month, Treasurer Josh Frydenberg went on a drought tour to see the economic and social damage being done by the drought and indicated the Government's attention was shifting towards the towns that underpin farming, agriculture and horticulture.

"Our message to those drought-affected communities is that Australians across our great country hear your pain and can see your pain and they feel your pain because this is the worst drought in living memory," Mr Frydenberg said on a visit to Stanthorpe in south-east Queensland.

"And we need to ensure that these communities are supported through these really tough times, when their backs are up against the wall, because the drought will break and it's just a question of time and then they'll be back on their feet as they were."

The National Farmers' Federation has proposed the Federal Government consider subsidising the payroll expenses of farming businesses to the equivalent of the Newstart Allowance. It has also proposed exit packages for families wanting to leave unviable farms.

Depending on its size, the regional stimulus package could also act to underpin broader weaknesses in consumer activity throughout the economy.

But if it acts on Treasury advice, the Government will not embark on a cash splurge big enough to try to prop up the entire national economy.

Treasury secretary Steven Kennedy told the Senate he was, "cautiously optimistic about the way the economy is going to strengthen through the current cycle".

"My view is the settings are right for the economy to strengthen," he said.

"I don't carry many significant concerns about the near-term or medium-term outlook for the economy."

Asked if he thought the circumstances warranted a loosening of the budget purse strings for a "temporary fiscal response" to economic weaknesses, Dr Kennedy replied that he did not.

Finance Minister Mathias Cormann echoed the secretary's reluctance, telling the Senate: "You can't just look at next week, our decisions have got to be framed around the impact over the medium to long term."