Treasurer Josh Frydenberg says Australia has rebounded faster than expected from the coronavirus pandemic, with unemployment levels set to return to pre-COVID levels in four years.
Unveiling the mid-year budget update on Thursday, Mr Frydenberg said there had been significant improvements to Australia's bottom line since the October budget.
Unemployment was now expected to peak at 7.5 per cent in March, down from the 8 per cent forecast at budget time and Treasury's initial predictions of 15 per cent without JobKeeper.
The number of people expected to be supported by JobKeeper in December has been revised from 2.24 million in the budget, to 1.6 million.
Mr Frydenberg said JobKeeper would still wind up at the end of March.
Jobless levels are also predicted to return to pre-COVID levels in four years.
It took six years to recover after the 1980s recession and 10 years after the 1990s recession.
The budget deficit had narrowed by $15.9 billion to $197 billion this year.
Net debt is expected to be $691 billion, down from the $703 billion forecast at budget time.
However Mr Frydenberg warned the road ahead was "very challenging".
"We've not yet defeated the virus. It still is with us. Our recovery is very much dependent upon our continued success in containing COVID-19," Mr Frydenberg said.
The government is still basing its forecasts on a vaccine becoming available in March 2021 and being rolled out nationally by the end of next year.
Around $1.6 billion has been invested in Australia's vaccine strategy, with $500 million set aside to roll a vaccine out across the nation.
It also assumes there will be localised outbreaks of COVID-19 next year but domestic borders will remain open.
It comes as a coronavirus cluster on Sydney's northern beaches prompts concerns over whether Western Australia will again close its border to NSW.
Queensland will not shut its border at this stage, but will monitor the situation over the next 48 hours.
A key threat to Australia's recovery are trade tensions with China, Mr Frydenberg said.
"These are very serious issues that are currently occurring with China and around trade. They are our most significant trading partner," he said.
International travel is also expected to remain low throughout 2021, although will gradually recover after that.
Meanwhile, the government is spending $6.3 billion in new policy measures in the two months since the October budget.
Among the new spending includes $13.8 million towards the Commonwealth's response to the bushfires royal commission.
Around $12.9 million of that will go towards setting up Climate and Resilience Services Australia, which will combine data and expertise from across government agencies including CSIRO, the Bureau of Meteorology and Geoscience Australia, to improve resilience to natural disasters.
Another $900,000 will be used to create a taskforce within the Department of the Prime Minister and Cabinet, to oversee the creation of the National Resilience, Relief and Recovery Agency.
The Office of the Special Investigator, set up in response to the Brereton Report on alleged war crimes in Afghanistan, will be allocated $116.6 million.