But it will not be enough to stop the Budget sliding further into the red, with a collapse in iron ore prices and low wages blowing a $21.7 billion hole in revenue this year alone.

Treasurer Joe Hockey will refuse to hack into spending to make up for a worsening bottom line, declaring the Budget needs to act as a “shock absorber” for falling export prices.

However, he will slash foreign aid and axe 175 agencies and boards in a bid to scrape together funds to pay for counter-terrorism laws and the war in Iraq.

HOCKEY: ‘We’ll be in the red until 2018’

Dramatic new cuts of $3.7 billion over four years will take spending on foreign aid back to about the same levels as seven years ago before Labor was in power.

Mr Hockey (pictured) will blame Labor for forcing him to make cuts because the Opposition is blocking billions in savings measures.

A total of 175 government agencies will reportedly be scrapped in a bid to make budget savings.

“We don’t like having to do this on foreign aid, but we have to offset all of our new spending,” he said. “That includes funding critical national security to keep Australians safe.”

The cuts come on top of a $7.6 billion hit in the last Budget when the Government abandoned a pledge to increase foreign aid in real terms.

Mr Hockey will argue the Government cannot afford to increase spending on our poorest neighbours while the Budget deficit is growing.

The Government has already dipped into foreign aid to pay for spending on asylum seekers and a $200 million contribution to a global fund to fight climate change.

The new cuts will be used to offset new spending including $630 million on counter-terrorism measures and the $500 million-a-year bill for the war in Iraq that have added to an ­already worsening Budget position.

When he releases his Mid-Year Economic and Fiscal Outlook today, Mr Hockey will reveal tax revenue has collapsed from $401.2 billion forecast for this year in Labor’s last Budget to $379.5 billion – punching a $21.7 billion hole in the Budget.

Treasurer Joe Hockey has confirmed the government's budget update will have a larger deficit than forecast.

A collapse in the iron ore price from $92 a tonne to $60 has driven a slump in Australia’s export prices to the lowest levels since records began in 1959, pushing down company tax.

Lower wage rises and rising unemployment – now just above Budget forecasts at 6.3 per cent a year – has seen a decline in income tax and a $5.6 billion blowout in spending on family tax benefits and childcare rebates over the next four years.

The combined impact of the hits to revenue and extra spending will see the Budget deficit blow out from $29.8 billion to close to $40 billion this financial year.