Treasurer Josh Frydenberg is forecasting a slightly smaller budget deficit for the 2021/22 financial year, while predicting strong growth and a sharp fall in the unemployment rate.
The budget update also revealing the Morrison government will take a $16 billion war-chest into the upcoming federal election campaign.
The government's deficit for 2021/22 is now forecast at $99.2 billion in 2021/22 in the mid-year economic and fiscal outlook compared to the $106.6 billion prediction made in the May budget.
Mr Frydenberg has also predicted in his mid-year budget review wages growth of three per cent in 2023/24, a rate not seen since the coalition came to power in 2013.
He used the economic update - potentially the last before the 2022 federal election - to spruik Australia's economic position amid a falling unemployment rate and the projection of one million extra jobs.
"The rapid recovery from the Delta lockdowns is expected to see the creation of around 1 million new jobs around 150,000 more jobs than was forecast at budget," Mr Frydenberg told reporters.
The review shows the unemployment rate is now expected to fall to 4.5 per cent in the June quarter next year and 4.25 per cent 12 months after that.
Economic growth is forecast at 3.75 per cent for 2021/22, a downgrade from a previous estimate of 4.25 per cent, but is now expected to grow by 3.5 per cent in 2022/23 rather than by 2.5 per cent.
For the calendar year, growth is seen at 4.5 per cent in 2021 and 4.25 per cent in 2022.
While forecasting wages growth of three per cent in 2023/24, in the immediate future, earnings are expected to lag the rate of inflation.
Wages growth is forecast at 2.25 per cent in 2021/22, while the consumer price index is put at 2.75 per cent.
Mr Frydenberg conceded the global pandemic would continue to pose headwinds for the domestic and global recovery for some time to come.
Treasurer flags $16bn election warchest
The $16 billion in funds were allocated through the "decisions taken but not yet announced" category, including almost $5.6 billion in the next financial year alone.
It puts the Liberal-National coalition government in the position to roll out big ticket election promises.
Mr Frydenberg has defended the measures as a necessary "contingency reserve".
"There are decisions taken but not yet announced," Mr Frydenberg said.
"And that has been consistent with previous budgets by both sides of the political divide."
Finance Minister Simon Birmingham said COVID-19 pandemic showed the need for prudently setting aside money to deal with unforeseen circumstances.
Shadow treasurer Jim Chalmers labelled the allocation a "secret slush fund" that would go towards "more rorts and waste" in the lead-up to the election.
Dr Chalmers also said the coalition had a predisposition to over-promise and under-deliver on wage growth, falling short of 52 out of 55 wage projections while in office.
"It's not a recovery if people are still getting absolutely smashed by the rising costs of living combined with falling real wages," he said.
