The 2015-16 budget has seen the government lower its iron ore price forecast to an average of $US48 a tonne.
This is down from the $US60 a tonne that Treasury predicted the commodity would fetch when it updated its budget in December 2015.
The price cut is expected to slash around $A20 billion in tax receipts from forward estimates.
Since the last budget, the value of forecast iron ore exports has been downgraded by around $90 billion.
Most of this downgrade is from taxes paid by mining companies but there will also be an impact on taxes paid by other businesses, income tax and other sources of revenue.
The iron ore price has halved over the past year, and traded as low as $US47 a tonne in early April.
Treasury described the price drop as the “the most significant development” since the last budget and said uncertainty around demand and supply meant the iron ore price was subject to “considerable risk”.
It said the expansion of low-cost supply would continue, with 50 million tonnes of new iron ore exports in 2015.
"The continued ramp-up in 2015 will see Australia confirm its position as the single largest supplier globally," budget papers said.
Meanwhile, the government does not expect demand out of China to show a substantial increase.
The world’s biggest importer of iron ore has set a 7 per cent growth target for 2015 and budget papers predict weakness in China’s housing sector is expected to weigh on the country’s continued demand for iron ore.
"This reflects the substantial stock of unsold housing that has built up over recent years, as housing starts have consistently outstripped sale," it said.
However Treasury noted that demand from Japan, Korea and India would help to underpin iron ore’s demand.
"As its economy continues to industrialise, India has the potential to become a major destination for Australian iron ore and coal exports," it said.
During his budget speech last night, Treasurer Joe Hockey said it the government was planning “the difficult transition from a mining investment boom, to one of broader‑based growth across our economy”.
“Even in the face of the largest fall in our terms of trade in half a century, which has contributed to a significant fall in tax receipts, our economic plan has helped Australia to have one of the fastest growing economies in the developed world,” Hockey said.