The Australian government’s projected deficit will shrink to $197.7bn this year, as better jobs numbers, higher tax receipts and decreased spending on wage subsidies boost government coffers.

On Thursday the treasurer, Josh Frydenberg, and finance minister, Simon Birmingham, released the mid-year economic and fiscal update showing the effects of Australia’s return to growth in September at the tipping point of the Covid-19 recession.

Frydenberg told reporters in Canberra that unemployment is set to reach the pre-pandemic level of 5.25% in four years, after peaking at 7.5% in March 2021.

Despite the faster-than-expected labour market recovery, Frydenberg announced the jobseeker coronavirus supplement will be extended to March.

He also signalled the government will not aim to pay back debt until unemployment is “comfortably below” 6%, which he suggested was back in the range of 5.25% to 5.5%.

1. Jobseeker supplement among $7.7bn of new spending

The Myefo contains $3.2bn to extend the $150 fortnightly jobseeker coronavirus supplement to 31 March.

Frydenberg said the government will “continue to monitor” the labour market, declining to say whether the supplement could be further extended to prevent jobseeker returning to the old rate of $40 a day.

Other new spending in Myefo included:

• $1.6bn for Covid-19 vaccines and the national vaccination program, and $500m for vaccines for countries in Australia’s region

• $1bn for aged care, including 10,000 home care packages

• $683m for new pharmaceutical benefits scheme listings

• $506m in new infrastructure investments including the Narrabri to Turrawan rail upgrade between the Hunter Valley coal network and inland rail, the Southern Highlands rail duplication, and the Murray Basin Freight Rail Project in Victoria

• $241m to extend the HomeBuilder program to 31 March.

2. Jobs up but wages stagnant

On Thursday the Australian Bureau of Statistics revealed that unemployment fell by 0.2% to 6.8% in November.

In November 90,000 jobs were added in seasonally adjusted terms, most of which (84,200) were full-time rather than part-time (5,800). The rebound was led by Victoria, with the number of employed persons up 2.2%.

The Myefo stated that 85% of the 1.3m people who lost their job or were stood down to zero hours in April are now back at work. It projected that unemployment will rise to 7.5% in March 2021 then fall to 6.25% in June 2022.

Youth unemployment remains a dark spot, with the employment rate of those aged 15 to 34 still 3.1% below its March level.

The Myefo projects wage growth will remain stuck at 1.25% for two years, before recovering to 2% in 2022-23.

3. More tax income shrinks the deficit

The October budget’s projected deficit of $213.7bn in 2020-21 has shrunk to $197.7bn, or 9.9% of GDP.

The government took $9.4bn more out of the economy in 2020-21 than expected in the budget, including $3.4bn of company tax and $3.2bn of GST, due to higher iron ore prices and domestic consumption.

Over four years, the government will take $16bn more out than projected, including $6bn in non-taxation receipts, such as the $1.3bn civil penalty from Westpac and higher dividends from the Reserve Bank.

Since the 2020-21 budget, total cash payments have decreased by $6.5bn in 2020-21 and by $3.6bn over the four years to 2023-24. This was driven primarily by an $11.2bn saving on jobkeeper wage subsidies.

4. GDP growth to help cut debt

The Myefo projected that GDP will grow by 4.5% in 2021, up from the budget forecast of 4.25%, following a reduction of 2.5% in 2020, up from the budget forecast of a 3.75% fall.

Net debt is expected to grow from $692bn in 2020-21 to $952bn in 2023-24. As a proportion of GDP, debt will rise from 34.5% of GDP in June 2021 to a peak of 43% in June 2024. Due to the growth of the Australian economy it is then expected to shrink to 38.3% in June 2031.

Frydenberg said the “peak of the debt is very similar to where it was at budget time” and conceded it would take “a long time” to repay.

5. Assumptions include vaccines for all by late 2021

The Myefo assumes a Covid-19 vaccine will be available in Australia by March 2021, with a population-wide vaccination program fully in place by late 2021.

It assumes there are no state border restrictions in place throughout 2021, and that temporary and permanent migration gradually returns from late 2021.

Frydenberg noted that the Myefo assumptions mirror those in the October budget, with the exception that Western Australia is now assumed to be open through all of 2021 not just from April.