But Treasurer Josh Frydenberg has warned an expected economic contraction and support payments associated with current lockdowns in the nation’s two largest states will prove another hit for this year’s budget bottom line.

The treasurer and Finance Minister Simon Birmingham handed down the final budget outcome for 2020/21 on Thursday, posting an underlying deficit of $134.2 billion.

This compares with a forecast $161 billion deficit made at the time of the May budget, but comes after an $85.3 billion shortfall in 2019/20 and a small negative balance of just $690 million in 2018/19.

“What is driving this improvement to the budget bottom line is more people in work and less people on welfare,” Frydenberg told reporters in Canberra on Thursday via video link.

Since the May budget, the unemployment rate has fallen below five per cent for the first time in a decade.

“We recognise that since this final budget outcome, the economy has been hit by the Delta variant,” the treasurer said.

“But with the vaccination rates fast approaching the 70 and 80 per cent targets, restrictions will be eased, and what these numbers confirm is that when restrictions are eased, the Australian economy bounces back.”

The improvement in the budget position consisted of $20.1 billion in higher receipts and $6.7 billion in lower payments.

Frydenberg said the improvement in receipts was driven by higher tax receipts on the back of a stronger labour market, increased consumer spending and higher commodity prices.

“Our effective fiscal management has been endorsed recently by comments by the IMF and the OECD and Australia retaining its AAA credit rating from the three leading credit rating agencies,” he said.

But he said the government has already doled out $13 billion in COVID disaster and the business support payments, and by the time these programs have ended, the bill will be more than $20 billion.

On top of that, economic activity has been reduced by about $2 billion per week from the lockdowns in NSW and Victoria.

“It is a significant hit to the budget,” Frydenberg said.

He expects the September quarter will suffer an economic contraction of at least two per cent.

“You also probably see it in future jobs data as the unemployment numbers come out,” he said.

At the time of the May budget, the deficit for 2021/22 was expected to $106.6 billion.

Senator Birmingham said forecasts for the budget and the economy will updated in December’s mid-year economic and fiscal outlook (MYEFO).

“By the time we get to MYEFO, the nation should well and truly have pushed past those 70 and 80 per cent double vaccination rates and will provide an appropriate time for us to update all the relevant forecasts and projections at that stage,” Birmingham said.

“There is no doubt that the payments we’ve made and the lockdowns have come at a cost to the economy, a cost to businesses and households, but also a cost to the budget bottom line.”