A stronger than expected recovery from the COVID-19 recession has helped to wipe billions of dollars off the federal budget deficit.

The mid-year review released on Thursday shows the deficit for the 2020/21 financial year is now forecast to be $197.7 billion, rather than the $213.7 billion announced in October’s delayed budget.

However, the shortfall still remains the largest on record as a result of the pandemic.

Handing down the Mid-Year Economic and Fiscal Outlook on Thursday, Treasurer Josh Frydenberg also upgraded his economic forecasts.

The economy is now expected to grow by 0.75 per cent in 2020/21, rather than contracting by 1.5 per cent as previously feared, while the jobless rate is expected to peak at 7.5 per cent in the March quarter, down from eight per cent forecast in the budget.

“Today’s budget update confirms that the Australian economy is rebounding strongly,” Mr Frydenberg told reporters in Canberra.

The unemployment rate for November, also released on Thursday, unexpectedly fell to 6.8 per cent from seven per cent in October.

But shadow treasurer Jim Chalmers said despite some slightly better figures, the defining features of the budget update were still record deficit, a record trillion dollars in debt and weaker wages growth.

“The economy is recovering but it isn’t rebounding strongly enough or quickly enough for the 2.2 million Australians who still don’t have a job or can’t find the hours that they need to support their loved ones,” Dr Chalmers told reporters in Canberra.

An ongoing recovery in consumption and investment is expected to be underpinned by continued improvements in confidence and a further easing of social distancing restrictions.

Stronger economic growth, resulting in higher tax receipts and a lower number of people receiving the JobKeeper wage subsidy, has helped to absorb additional policy decisions to support the recovery and $1.6 billion to secure access to COVID-19 vaccines.

These supports includes $3.2 billion to extend the temporary JobSeeker coronanvrius supplement, $1 billion for aged care and $241 million to extend the HomeBuilder program.

Despite a spike in the iron ore price to over $US150 per tonne in recent weeks, budget assumptions still anticipate the price falling to $US55 per tonne next year, albeit three months later than predicted in the budget.

“Underpinning the MYEFO forecasts today are our continued prudent commodity price assumptions,” Mr Frydenberg said.

Business Council of Australia chief executive Jennifer Westacott says the government has softened the blow of the worst of the pandemic but now it is time for the private sector to take over the heavy lifting.

“To do this we have to drive new investment across the country with the right tax incentives, stop the antiquated industrial relations system working against job creation, wind back unnecessary red tape, get big infrastructure projects happening quickly and fix the skills system,” she said in a statement.