The downgraded surplus forecasts contained in this week's mid-year budget update have made it highly unlikely the government will bring forward the second stage of the income tax cuts in next year's federal budget, sources say.

Unless there is a large and prolonged increase in the iron ore price, the budget, based on the latest outlook, will not be able to afford bringing forward the income tax cuts as well as paying for the already flagged business investment allowance, without going back into deficit.