Plunging commodity prices are weighing heavily on Australia's government revenue, Treasurer Joe Hockey warned Sunday, but said a mid-year budget update next week would serve as a "shock absorber" for the resources-driven economy.
Australia is struggling to transition away from mining-led growth amid an expected fall-off in resources investment after an unprecedented boom.
Weakening demand from the country's largest trading partner China is also weighing on growth.
Meanwhile, sharp declines in commodity prices have had a huge impact on government revenue in a country where iron ore is the country's largest export.
"We budgeted US$92 a tonne (for iron ore prices). It's currently US$63 and we are forecasting that it will remain around US$60 a tonne for the foreseeable future," Hockey told reporters.
"That more than 30 percent fall in iron ore prices has had a big impact on the budget, as has a 15 percent fall in thermal coal and a 20 percent fall in wheat prices since the (May) budget.
"As a result, the forecast decline in the terms of trade this year is the largest since records were first kept in 1959."
Hockey is expected to unveil a further blowout in the government's federal deficit in his mid-year economic and fiscal outlook Monday, with some estimates of a Aus$5 billion (US$4.1 billion) increase to Aus$35 billion.
Th Treasurer said the budget would be used as a "shock absorber for the biggest fall in our export prices in many years", implying that deep cuts to reduce the deficit are not likely.
"If we don't use the budget as a shock absorber for this extraordinary fall in the terms of trade, then Australians will lose jobs and we will lose our prosperity," he added.
Some measures designed to narrow the deficit remain stalled in the upper house Senate due to community disquiet about spending cutbacks by the conservative government, which was elected to power last year.
Revenue-generating measures such as carbon and mining taxes have also been scrapped following election promises by the government.
But Finance Minister Mathias Cormann is expected to announce at the Monday budget update the axing of 175 government agencies to save more than half a billion dollars in spending over four years, local media reported.
Despite the challenges, Hockey said Australia's economic growth remained on track even as the unemployment rate -- which is currently at a 12-year high of 6.3 percent -- is forecast to edge up further.
"As my budget statement will say tomorrow, we expect growth to remain around 2.5 percent but strengthen to 3.0 percent over the next few years," he said.