Initially, the tax changes will apply only to new commercial ventures begun after the budget is delivered at 7.30pm on Tuesday. However, it is understood the government aims to make the changes retrospective. It will apply the tax changes to existing businesses over time and, a source said, will ''consult on transitional arrangements''. The changes will not affect simple activities such as cake stalls or lamington drives, nor such ventures as op-shops or church hall hire, where the profits are put back into the charity. But not-for-profit entities will have to pay income tax on profits that are not directed towards their altruistic purpose and they will not be able to use input tax concessions, such as fringe benefits tax and GST, for the unrelated commercial activities. The measure has the support of mainstream charity and welfare groups such as Mission Australia, UnitingCare, Anglicare and World Vision. It is likely to cause discontent among other groups which will be hit with taxes. The government will also establish a new commission to drive the changes and determine the legal status of groups seeking charitable status.

The Treasurer, Wayne Swan, has been warning of a tough budget. He was given further reason to swing the axe yesterday when the Reserve Bank warned inflation was about to blow out beyond its target zone of 2 to 3 per cent. The Reserve signalled it intends to raise interest rates more aggressively than markets had expected in response to the inflation change. The implication is that the federal government should contribute to helping restrain demand by delivering a contractionary budget. The bank's quarterly statement on monetary policy said that even though official interest rates were already ''mildly restrictive'' at 4.75 per cent, this was not likely to be restrictive enough to keep inflation in check. ''Inflationary pressures are expected to build gradually over the forecast period as spare capacity is absorbed and the labour market continues to tighten,'' the bank said. In an interview with the Herald yesterday, Mr Swan said cutting spending and returning the budget in surplus by 2012-13 would ensure the government would not add to those inflationary pressures as the economy hit full capacity thanks to the new mining boom.

''We are determined to come back into surplus in 2012-13 and we will, because we come out of this softness with strong growth in the medium term and we don't want to be adding to any of the capacity and inflation pressures,'' he said. Mr Swan said it was not a political objective but ''an economic imperative''. Loading He conceded the revenue hits caused by natural disasters and a ''hangover'' from the global financial crisis would see this year's forecast budget deficit blow out, and did not dispute estimates of about $50 billion. Next year's deficit is also expected to blow out to about $20 billion, meaning a return to surplus in 2012-13 would require the fastest positive budget turnaround in more than 40 years.