Treasurer Josh Frydenberg says the Australian economy is rebounding strongly from the economic havoc of the coronavirus recession but insists the road ahead remains challenging.
Mr Frydenberg released his mid-year budget update on Thursday, revealing the record budget deficit will come in at below $200 billion, rather than the $214 billion forecast in October.
The jobless rate is also now expected to peak at below 8 per cent.
The improved numbers have been helped by savings on the cost of JobKeeper wage subsidies and a windfall from iron ore prices.
"The Australian economy is rebounding strongly following the biggest economic shock since the Great Depression," Mr Frydenberg said.
"Australians are back spending and they are back working, and they are back moving freely across the nation."
The number of Australians reliant on the JobKeeper wage subsidies has been reduced from 2.2 million in the October budget to 1.6 million people.
The budget update also revealed that 85 per cent of the 1.3 million people who lost work or were stood down on zero-hours at the height of the pandemic are back at work.
The unemployment rate is forecast to peak at 7.5 per cent in the first quarter of 2021, down from an expected peak of 8 per cent forecast in October.
Mr Frydenberg said parts of the economy continued to be impacted by the impacts of COVID-19.
"The road ahead is challenging - very challenging. We've not yet defeated the virus. It still is with us," he said.
"Our recovery is very much dependent upon our continued success in containing COVID-19."
Labor's treasury spokesperson Jim Chalmers said he believed the government's big-spending budget in October had failed to deliver enough return for Australians out of work.
"They've racked up a trillion dollars in debt and they don't have enough jobs to show for it," he told reporters.
"The economy is recovering but it isn't rebounding strongly enough or quickly enough."
The budget update said the global outlook remains challenging as COVID-19 outbreaks and containment measures continue, and trade tensions impact Australia's exports.
Australian exports of cotton, timber, rock lobster, beef, wine and barley have been caught up in trade disruptions this year imposed by China.
Mr Frydenberg said recent trade disputes with major trading partner China were "very serious issues".
"These are no doubt serious issues. The government is continuing to work very hard to identify new markets for our exports," he said.
Finance and Trade Minister Simon Birmingham said the government didn't "underestimate" the impacts of those decisions by China on individual businesses, sectors and the Australian economy.
"This budget update reflects the fact there are disruptions, it acknowledges the risk that is there," he said.
"But, of course, we also seek to minimise that risk by seizing the other opportunities available to exporters and farmers."
The budget update included $3.2 billion to extend the coronavirus supplement to boost welfare payments by $150 per fortnight until March.
The supplement has been wound back from $550 since it was initially put in place in response to an escalation in the number of Australians out of work.
The government is also spending $1.5 billion over two years to secure a further 61 million doses of potential vaccines against the coronavirus.
It is also directing a further $1 billion towards the aged care sector, including for home care packages.
Another $128 million is going towards supporting the heavily impacted travel agency sector.
The deficit is expected to improve over forward estimates to $66 billion in 2023/24.
"There is a light at the end of the tunnel, but there is still a very long way to go in Australia's economic recovery," Mr Frydenberg said.