The Queensland government has forecast a $10.768 billion deficit for this financial year and picked a fight with Canberra over mining royalties.
Treasurer Tim Nicholls has handed down his inaugural budget, forecasting a return to surplus in 2014/15.
He said the state could be in a position to reclaim its AAA credit rating from that time onwards.
But in a move that's set up a major confrontation with the federal Labor government, Queensland has upped coal royalties, joining its conservative counterparts in NSW and Western Australia.
Royalties will jump from 10 to 12.5 per cent for every tonne of coal sold for between $100 and $150.
Coal sold for more than that price will attract a 15 per cent royalty, with the government setting up a third royalties tier aimed at upping revenue from lucrative coking coal.
The royalty increases are forecast to raise $1.6 billion over four years, with the new tax structure to apply for 10 years from October 1.
In his audit of Queensland's finances, former federal treasurer Peter Costello urged the LNP government to exploit a clause in the federal government's mining tax, where Canberra compensates miners for any increase in state royalties.
But federal Treasurer Wayne Swan has threatened to penalise the states with cuts to federal funding if they upped royalties.
Mr Nicholls called his bluff on Tuesday, saying he doubted Mr Swan would follow through.
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"I would certainly be surprised if a treasurer from Queensland in the federal parliament chose to penalise his own state for the failures of his own legislation," Mr Nicholls told reporters.
Queensland is forecast to stay in the red in 2012/13 with a $10.768 billion fiscal deficit forecast, followed by a $3.752 billion deficit in 2013/14.
In its June 2011 budget, the former Labor government forecast an operating deficit of $1.293 billion for 2012/13.
But when the LNP came to power in March, it accused Labor of cooking the books and said the state's financial position was much worse than had been portrayed.
Despite the scale of the problem the LNP says it inherited, Tuesday's budget has forecast a surplus of $652 million for 2014/15.
In 2015/16, the surplus is forecast to grow to $747 million, marking the first run of surpluses since the pre-GFC 2007/08 financial year.
"We said we'd target a fiscal surplus by '14/15 and we would look at getting a AAA credit rating back after that period of time and so we expect after 14/15 that we would be in a position to make a decision about how we want to proceed that way," Mr Nicholls said.
The state's economy is expected to grow by four per cent in 2012/13 before dipping to 3.75 per cent in 2013/14, as LNG construction peaks, before rising to 4.5 per cent in 2014/15.
"While a winding down in LNG construction growth may weigh on growth in 2014/15, the resulting ramp up in exports will bolster growth in 2015/16," the budget papers say.
With 14,000 public service full-time jobs to be shed, Treasury is expecting the sector to "detract marginally" from growth.
But higher jobs growth in the private sector is forecast to help the unemployment rate drop from 6 per cent in 2012/13 to 5.75 per cent in 2013/14, 5.5 per cent in 2014/15 and 5.25 per cent by 2015/16.
"The labour market continues to remain slightly patchy and of concern," Mr Nicholls told reporters.
The LNP promised during the 2012 election campaign to reduce unemployment to 4 per cent within six years.
The budget has also forecast general government debt reaching $83.277 billion by 2015/16, which is significantly less than the $92 billion figure predicted by Mr Costello in his commission of audit released in June.
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