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.
He is also predicting 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.
But the treasurer has warned state governments not to cave into concern over the Omicron variant of the coronavirus.
"We must continue to learn to live with the virus," Mr Frydenberg told reporters in Canberra on Thursday.
The budget 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.
"The improved budget position is being driven by the stronger than expected recovery in our labour market," Mr Frydenberg said as new figures showed the jobless rate shrank to 4.6 per cent from 5.2 per cent.
"The MYEFO shows an improvement in the fiscal outlook since the 2021/22 budget, even accounting for the impacts of the Delta imposed lockdowns."
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.
"Consistent with the strong economic recovery, the unemployment rate is forecast to reach 4.25 per cent in the June quarter of 2023," Mr Frydenberg said.
"The rapid recovery from the Delta imposed lockdowns is expected to see the addition of around one million jobs between October 2021 and the end of the forecast period, which is around 150,000 more jobs than forecast in the 2021/22 budget."
Australian Chamber of Commerce and Industry chief executive Andrew McKellar said the budget update far exceeded expectations for Australia's economic rebound.
"However, these improvements could still be derailed if governments choose to overreact in the face of the Omicron variant," he said.
"With the economic comeback from the pandemic gathering momentum, businesses and the community cannot afford a return to the disparate stop-start measures of lockdowns and restrictions."
But shadow treasurer Jim Chalmers was unimpressed, saying the review doesn't deal with any of the key challenges facing Australia at present.
"This is a mid-year budget update which has got lots of complacency, lots of self-congratulation but nothing in terms of a plan for wages or job insecurity or skills shortages" Dr Chalmers told reporters.
"The economy is recovering despite the Morrison government and not because of it."
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.
Even then, wages growth has not reached three per cent under the coalition since 2013, despite having repeatedly forecast such a pace under previous Liberal treasurers Joe Hockey and Scott Morrison.
"This is a government which is notorious for over-promising and under-delivering on wages in particular," Dr Chalmers said.
© AAP 2021