The Treasury has signalled little optimism in a rebound in key commodity prices any time soon, which, along with its forecast of a continued slowing in China's economy, will prolong the budget pain for the federal government.
In its Mid-Year Economic and Fiscal Outlook, the government slashed to 6.75 per cent its forecast for China's economic growth for 2015, falling below 7 per cent for the first time in memory and well short of its earlier forecast of 7.25 per cent.
And China's economy will continue to slow, with growth dropping in 2016 to 6.5 per cent, as India's growth picks up to 6 per cent.
Central to the forecast budget weakness is the expectation of no pick-up in the prices of key exports such as iron ore and coal over the forward estimates period. Not only will this weigh on export revenues, but also government revenues from company taxes.
The slump in iron ore prices has cut company tax receipts by $2.3 billion in 2014-15 and $14.4 billion over the next two years, the report noted, with each $US10 a tonne decline in the iron ore price resulting in a 2 per cent fall in the terms of trade while reducing tax revenue by $800 million in 2014-15 and $2.8 billion in 2015-16.
Since the May budget, the export price of steaming coal, which is used mostly to generate electricity, has declined by 15 per cent to about $US63 a tonne, with the price of coking coal, which is used to make steel, also "subdued" at about $US110 a tonne, the budget update noted.
"Without a sustained price recovery, some high-cost operations may close," the report noted. "However, productivity gains and a lower Australian dollar are expected to alleviate some of the pressure of weak prices on the resources sector."
A significant threat to projected revenues has come from the slump in the price of oil on the value of gas exports. Gas is set to emerge as Australia's second most valuable export after iron ore with the completion of a series of export projects in Queensland over the next 18 months.
As well, the slump in export prices means Australia will need to export more goods to pay for its imports, with the slide in the Australian dollar also set to make imports more expensive.
The fall in export prices has resulted in the terms of trade falling at the highest annual rate since at least 1960, the report noted.
The terms of trade is expected to fall by 13.5 per cent in 2014-15 and a further 3.75 per cent in 2015-16, the budget update said.
The fall in the terms of trade points to further weakness in the Australian dollar.
"We are now 25 per cent off the peak level for the terms of trade, which occurred in the September quarter 2011.
"The forecast decline in the terms of trade would be the largest fall in the terms of trade in a financial year since the Australian Bureau of Statistic's annual national accounts started in 1959-60."
