Treasurer Josh Frydenberg (left] with Finance Minister Mathias Cormann

Australia’s budget surplus has been slashed by $2.1billion amid fears the drought and falling iron ore prices could spark the first recession in 29 years.

Treasurer Josh Frydenberg promised, in the April budget, a surplus would be delivered for the first time since 2007 – before the global financial crisis hit Australia.

The budget, unveiled a month before the election, forecast a surplus of $7.1billion for this financial year.

But Treasury’s Mid-Year Economic and Fiscal Outlook released on Monday has downgraded that to $5billion, fearing the ‘devastating’ drought and bushfires would hit the already-fragile economy.

The surplus for 2019/20 is $2.1billion or 30 per cent smaller than promised eight months ago.

Treasury also fears iron ore prices will plunge in 2020 – assaulting government revenue even more as wages growth continues to stagnate.

The economic growth forecast for 2019/20 has also been slashed to 2.25 per cent, down from 2.75 per cent, as Australia emerges from the weakest expansion since the GFC a decade ago.

This downgraded level is significantly weaker than the 3.2 per cent average between 1991 and 2017.

Digital Finance Analytics principal Martin North said the drought was already weighing down Australia’s gross domestic product.

He feared this could spark the first technical recession since 1991 – where economic output shrinks for two straight quarters.

‘I’m worried about the impact of the drought,’ the economist told Daily Mail Australia on Monday.

‘If this drought continues, that would be sufficient to actually drop us into recession because farm output’s already dropping.’

Treasury suggested bushfires and the drought would hurt the Australian economy, as global growth stalled.

‘Lower farm production and exports resulting from the drought are expected to continue to detract from growth in 2019/20,’ it said on Monday.

‘Australia’s economy continues to show resilience in the face of weak momentum in the global economy as well as domestic challenges such as the devastating effects of drought and bushfires.’