The government has two remaining policy priorities for the year, once Parliament returns for the last time in 2011 next week. One is the mining tax which, like it has been since June 2010, remains under negotiation. The other is MYEFO and the package of spending cuts Wayne Swan will unveil as part of the government’s “surplus or bust” fiscal strategy.

It’s very bad timing to be making decisions that will reduce demand in the economy, possibly significantly. The situation in the Eurozone continues to deteriorate. Earlier this week, the Bank of England warned that UK banks were already struggling to raise funding as it lowered its forecasts for British growth to 1%. Many say that’s still too optimistic. Yesterday the European Central Bank was forced to intervene as Spanish bond yields reached 7%. Italian bonds remain over 7%. There’s now a clear split between France and Germany over the role of the ECB. And the Germans are at loggerheads with the British over EU reform.

There are growing comparisons between the dire European response to the financial crisis and the drift to war in 1914, when few politicians wanted war but nationalism and inflexible policies led to conflagration.

The only good news at the moment is some meagre positive — or not as negative as expected — data out of the United States.

Flat or even negative European growth will already be factored into global growth forecasts at the RBA and at Treasury, where MYEFO is being prepared. The risks are of a substantial deterioration in growth forecasts, with most of the Eurozone going into deep recession that doesn’t just reduce demand for those Chinese exports we’re so dependent on, but sends a confidence shock throughout the rest of the world; or a financial meltdown that escalates from European banks finding their lending costs rising to being unable to source funding.

That would have serious repercussions in the US, where banks like Bank of America and Citicorp are already being described as “zombie banks”, and snuff out whatever faint recovery is under way in the US.

The risk of financial meltdown isn’t one that can be accommodated within fiscal forecasting. If it happens, it happens, all hell breaks loose and the government will have to start considering its stimulus options. The risk of a substantial deterioration is more problematic, because it feeds through into revenue forecasts and MYEFO this year is all about just how much in the way of savings the government needs to achieve its 2012-13 surplus in the face of lower revenue forecasts.

There’s nothing but downside risk for Treasury’s call on global growth. By May, it could look absurdly optimistic as the Eurozone lies in tatters, leaving the government staring at the deficit it swore it would avoid. It’s unlikely to prove too pessimistic.

The only insurance Wayne Swan can take out is to cut harder and deeper than strictly necessary in order to provide a buffer against lower growth, which would exacerbate the cut in domestic growth from an already contractionary fiscal policy but provide more scope for the RBA to cut interest rates and give the government some justification for claiming credit for them.

It’s a tricky time to be framing the mini-budget. But then Swan has had nothing but tricky budgets to frame, so at least he’s used to it.