Small businesses have been rewarded with $5bn in tax relief and working families given $3.5bn in extra childcare handouts in a giveaway budget from the Abbott government that abandons many of last year’s controversial cuts and shows the deficit increasing by $12.5bn higher than previously forecast over the next four years.

Delivering a second budget that appears to be primarily targeted at political survival after last year’s disaster, Joe Hockey offered small businesses an immediate 100% deduction of $20,000 per item – available from the time he rose to deliver his budget speech and for the next two years, and with no cap on the amount the government is prepared to spend.

The deduction comes on top of the already scheduled 1.5% tax cut for incorporated small businesses. The government also extended tax deductions to drought-ravaged farmers for fencing and water facilities, also uncapped.

“This is about getting on with it … getting people to have a go,” the treasurer said, urging business not to “look on the dark side of life”.

“If there is an exceptional response to it, I say, fantastic,” he said, predicting that businesses had cash ready and just “needed that trigger” to go out and buy things.

“If you run a cafe it might be new kitchen equipment, or new tables and chairs. If you’re a tradie, it might be new tools or a computer … cars and vans, kitchens or machinery … anything under $20,000 is immediately 100% tax deductible from tonight,” he said. Some 96% of Australia’s businesses would be eligible for a tax cut, he said.

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Hockey said the budget showed that “Australia’s budget position is getting stronger each and every year.”

The budget papers show the deficit is gradually reducing, but by less than forecast for each of the next four years just last December, and this is not only due to lower commodity prices. Explicit government decisions taken since then have left the budget $3.6bn deeper in the red.

This year’s deficit is now forecast to be $41.1bn, compared with $40.4m last December. Next year’s deficit is forecast to be $35.1bn – compared with $31.2bn in December; 2016-17’s deficit is now $25.8bn instead of $20.8bn and 2017-2018’s is now due to be $14.4bn compared with $11.5. Those figures add up to a cumulative increase in the deficit of $12.5bn.

Hockey said the extra $4.4bn to be spent on childcare subsidies for all families, regardless of income – and the extra money for preschool programs – would also help families who wanted to work more.

But despite its emphasis on spending to boost investment and job creation, the budget forecasts show unemployment edging higher than predicted six months ago and flatter jobs growth. And economic growth is forecast to be slightly slower – 2.75% in 2015-16 instead of 3% and 3.25% in 2016-17 instead of 3.5%.

In total the reversal of decisions taken in last year’s budget but rejected by the Senate have cost this budget more than $5bn – with the controversial plan to cut dole payments for under 30-year-olds for six months of the year joining the GP co-payment in the pile of abandoned measures, at a cost of $1.8bn over five years. Under 25-year-olds will now have to wait four weeks for unemployment payments. The government is also spending $780m on car industry subsidies it had previously said were abandoned.

It has not reinstated any of the $80bn in future projected spending on health and education that was cut last year, raising the hackles of state premiers, who say it leaves a black hole in future funding for schools and hospitals and will raise the issue at a special retreat with the prime minister, Tony Abbott, in July.

“That $80bn was bonus payments to the states by Labor that were never funded,” Hockey said.

The government remains determined to return its controversial higher education plans to the Senate – making them a possible trigger for a double dissolution election.

As already flagged, the plan to reduce the value of all aged pensions over time by changing the way they are indexed has been replaced by a scheme to save $2.4bn by withdrawing the pension for wealthier retirees with substantial assets.

The budget introduces a new system of subsidies to encourage small business to employ older workers and to help long-term unemployed young people back into the workforce.

While Hockey said the budget was “the next step” in the Coalition’s economic plan – which was once to deliver lower deficits, smaller government and to pay down debt – the budget shows government spending rising to 25.9% of GDP and remaining at over 25% for four years – around its peak level when the Rudd government was bringing down stimulus packages during the global financial crisis.

Hockey pointed to constrained spending growth, year on year, and said higher spending in future years was in part because of the cost of introducing the national disability insurance scheme. But he conceded the budget repair task had a way to go.

“We’ve still got more work to do. This is not the end of the process, it is a step along the way … we know we have to reduce the size of government … but we also have to encourage growth.”

The government is also spending $800m on northern Australia infrastructure, $1.5bn on new drug listings under the Pharmaceutical Benefits Scheme, $500m on special infrastructure grants to Western Australia to make up for its reduced share of payments under the GST, $1.2bn extra on national security, and $750m extra on military operations, including $383m on sending troops to Iraq.

Hockey has also handed $22.5m in grants to be shared between every federal electorate for favoured infrastructure projects over the next two years, giving local MPs the power to decide with local communities how to spend up to $150,000 a year each on high-priority projects.

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The budget does contain some new savings, including $1.7bn from a welfare crackdown, $1.5bn from re-banking the money promised to the East West Link road which the new Victorian government has abandoned, almost $1bn from ending so-called “double dipping” where the government pays paid parental leave on top of an employer-provided scheme and $960m in various cuts to health programs.

With the government still well behind in the opinion polls, Hockey and the entire ministry will now embark on a sales blitz and the opposition leader, Bill Shorten, will prepare for his budget speech in reply on Thursday.