Iron ore prices will not return to boom levels, Treasury believes, but they could be supported by efforts to boost the China economy and the emergence of India.

Federal Treasury has struck its 2015-16 Budget on a forecast for WA's biggest export at a spot price of $US53 and an FOB price of $US48 a tonne.

If the price falls to an after-freight price of $US38 a tonne the Budget will be $2.1 billion worse off this year. A $US58 after-freight price would lift it by $2.1 billion.

Treasury believes the days of iron ore at about $US180 a tonne are over.

But it believes the country is in a strong position as a low-cost producer to capitalise on events in China and India.

It is pinning its hopes on sharp cuts in interest rates in China to maintain strong demand for Australian iron ore.

"Macroeconomic policy easing, such as the recent 100 basis point cut to the reserve ratio requirement, could help support demand for steel in other parts of the Chinese economy, such as for infrastructure, as could other potential measures targeted at supporting the steel industry," it said.

Another potential market for Australia and one largely untapped at this stage is India.

"As its economy continues to industrialise, India has the potential to become a major destination for Australian iron ore and coal exports," it said.

While relatively upbeat, Treasury is also concerned about what is occurring in China.

An oversupply of housing is tipped to weigh on Chinese demand for iron ore while there continues to be plans in Australia and Brazil for greater supply of the mineral.

Eighty per cent of Australia's iron ore is sold to China.

Treasury said mining firms had been able to cut wages, letting many keep staff. If demand increased, these companies would be well placed to lift supply.

However, they would be battling against several entrenched low-cost producers while another 50 million tonnes was tipped to come out of Australia on to the world market this year. Brazil is tipped to bring on 90 million extra tonnes by the end of next year.

Treasurer Joe Hockey said iron ore prices had fallen dramatically, contributing largely to the increase in deficits over the forward estimates.