Drought and international trade tensions are to blame for a smaller than expected budget surplus, the federal treasurer says.

The government has slashed its forecast $7.1 billion budget surplus to $5 billion in the mid-year budget update.

“What these numbers do show is that we do face challenging economic times,” Treasurer Josh Frydenberg told the Nine Network on Tuesday.

“There’s always work we continue to do to continue to strengthen the Australian economy.”

Expanding on his comments on ABC Radio, the Treasurer said the government would continue responding to emergencies like the drought, which meant potentially meant cutting deeper into the surplus.

“We need to create the buffers, we need to create the flexibility so that Australia can respond to future economic shocks,” Mr Frydenberg said.

But shadow treasurer Jim Chalmers says the government should be spending the surplus now.

He pointed to budget figures revealing rising unemployment, stagnant wages and poor business investment.

Dr Chalmers said it was counterproductive for the Treasurer to hold out on business investment incentives until next year’s budget.

“So butter fingers, the Treasurer, has even got something like this wrong,” Dr Chalmers told reporters in Canberra.

“We think it’s possible to do something responsible and proportionate and measured to boost the economy without jeopardising the surplus.”

Mr Frydenberg also waved away concerns over consumer spending, after personal income tax cuts failed to deliver an expected boost.

He said people were choosing to pay off their debt now which would free up money later.

He compared this pattern to the Coalition government’s pursuit of a surplus and debt repayment.

“The lower the debt levels the lower your interest payments and that means that the government is living within its means and that’s critically important,” he said.

The budget update was a fizzer for many stakeholders, with Australian Council of Social Service chief executive Cassandra Goldie saying it was a missed opportunity.

“We have made no progress in reducing unemployment for the past year,” Dr Goldie said.

She said Newstart welfare payments needed a boost and the government needed to do more to help struggling Australian families.

Australia’s economy was forecast to grow by only 2.25 per cent, a reduction from a forecast growth of 2.75.

Mr Frydenberg also cut his wage growth forecasts, now predicting it won’t reach three per cent until 2022/23.

-AAP