Social Democrat Prime Minister Stefan Lofven wants to increase taxes and raise spending on welfare and jobs.
But he has failed to reach a deal with the centre-right opposition, and the far-right Sweden Democrats have said they will block the budget.
The Sweden Democrats emerged as power broker after September’s elections.
They became the country’s third largest party with 13% of the vote and are demanding a reversal in Sweden’s liberal immigration laws, which party spokesman Mattias Karlsson has condemned as an “extreme immigration policy”.
Sweden has offered permanent residence to all Syrians fleeing the conflict and has the highest rate of asylum applications per capita of any EU country.
Sweden’s Migration Board said this year that as many as 2,000 people were applying every week. Most were from Syria, although there had also been an increase from Eritrea.
Parliament began debating the 2015 budget on Wednesday with a vote expected later. But expectation that the government would collapse was so great that Sweden’s election authority was reported to have ordered the printing of six million ballot envelopes.
Mr Lofven’s Social Democrats formed a minority government with the Greens but between them have only 138 seats in the 349-seat parliament.
He spent hours late on Tuesday trying to reach a budget deal with the centre-right opposition but the talks fell apart without a compromise.
The opposition is pushing its own budget but the prime minister has already said he will resign rather than accept its terms. “It’s out of the question,” he told Swedish paper Dagens Nyheter.
Mr Lofven told reporters late on Tuesday: “We may call snap elections later, when the constitution allows. We could also resign and there are other alternatives.”
An election would have to take place within three months of being called.