Australia is in the grip of the biggest fall in the terms of trade since records began in 1959 because of a drastic fall in commodity prices, the treasurer, Joe Hockey, has warned.

Hockey, who will hand down the mid-year economic and financial outlook (Myefo) on Monday, said the budget should be used as a “shock absorber” to cushion the impact of much lower-than-anticipated prices.

“We have had the biggest fall in the terms of trade in more than half a century, but … we’re coping well because we strengthen the budget, because we put in place reforms that have helped to make us a more prosperous nation,” Hockey told reporters in Sydney on Sunday.

“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.”

The biggest “external headwind” in the economy is the 30% fall in iron ore prices from expectations in the May budget, Hockey said. The price of thermal coal has dropped 15% and wheat has fallen 20%.

Hockey acknowledged that unemployment was “a tick higher” than expected in the May budget. Growth would remain sluggish at 2.5%, but would increase to 3% in the coming years.



Labor says Hockey must accept responsibility for the figures.

“The collapse in consumer confidence, the growing unemployment queues, the fall in employment growth have all occurred since Joe Hockey’s budget. This has occurred not only on his watch, but after his budget,” the shadow treasurer, Chris Bowen, said, adding that the “full catastrophe” would be revealed in Myefo on Monday.



Hockey implored Labor and the crossbenchers to adopt the government’s key budget savings measures, issuing this warning: “Without change we are going to weaken ourselves. Therefore, we have to undertake economic reform to strengthen the Australian economy, to make us more robust to meet head-on the challenges of the future.



“It is important that we allow the budget to continue to be a shock absorber, and I say to the Labor party, the Greens and the independents, if you want to see the Australian economy cope better with the challenges that are beyond our control, work with us to strengthen the Australian budget.

“Do not continue to provide mindless opposition to the budget initiatives because ultimately it reduces our capacity as a nation to deal with some of the headwinds that we are facing.”

The economist Chris Richardson, from Deloitte Access Economics, told Guardian Australia that the budget savings measures flagged in May were “chicken feed”.

“The economy is hitting the budget pretty hard rather than the other way around,” Richardson said. “The fall-off in the temporary [resources] boom is accelerating.”

He said that the Coalition has faced a worsening economic situation compared with the previous Labor government, and that the budget measures announced in May would not have pushed the budget back into the black even if they had been adopted in full.

Earlier in the week Hockey abandoned the 2018 deadline for getting the budget back into surplus, but on Sunday he denied he had ever promised such a strict timeframe.

“I never set a target. That was implied by the Labor party,” he said.

As recently as January 2013, Hockey had committed to returning the budget to surplus within the first full year of the Coalition winning office.

Bowen said: “Does he think the Australian people were asleep at the last election campaign when the now prime minister and treasurer went around the country promising a return to surplus? Of course for every other pathetic broken promise Tony Abbott’s excuse is fixing the budget and returning it to surplus. Even that pathetic excuse has now disappeared.”

The nation’s biggest banks are urging the government to get on with implementing its budget policies, telling Fairfax that delays in implementing the policies are adding to uncertainty and poor consumer confidence.



Those statements come after reports that the Coalition will axe a further 175 government agencies on top of the 76 it slashed in the May budget to save money.

The finance minister, Mathias Cormann, admitted there would be job losses as a result of the closures, but said they were necessary.

“We inherited a bloated public service from our predecessors,” Cormann told Sky News on Saturday. “If you reduce the number of government bodies, there will be an impact on jobs across the public service.

“What we will see is that as a result of our reform efforts so far … the size of the public service will be back down to the same level as what it was in 2007, 2008. We think that’s appropriate.

“The goal is to ensure that the government is as big as it needs to be but as small as it can be.”