Joe Hockey has warned of job losses and an end to Australia’s prosperity ahead of his latest budget update.

The Treasurer will on Monday release the government’s Mid-Year Economic and Fiscal Outlook, which could reveal a deficit for 2014/15 upwards of $35 billion.

Hockey will use the deteriorating budget to argue for reduced government spending, saying the government faces significant headwinds because of plummeting iron ore prices.

Prices have dropped to $60 a tonne – halving in a year – with the resultant fall in the terms of trade the largest since records were first kept in 1959.

“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,” Hockey said on Sunday.

The mid-year statement will show the economy growing at about 2.5 per cent, strengthening to three per cent over the next few years, Hockey said.

However, it will also forecast unemployment to increase further, “to levels that are a tick higher than what we forecast in the budget”.