Lower unemployment and a slightly smaller deficit are predicted when Treasurer Josh Frydenberg hands down his mid-year budget update.

The jobless rate is now expected to peak at below eight per cent and the record budget deficit will come in at below $200 billion, rather than the $214 billion forecast in October.

The improved numbers are driven by savings on the cost of JobKeeper wage subsidies and a windfall from iron ore prices.

New figures from Treasury in Thursday’s Mid-Year Economic and Fiscal Outlook are expected to show the total cost of JobKeeper will be revised down, saving the budget roughly $11 billion.

The number of Australians reliant on the wage subsidies has been reduced from 2.24 million in the October budget to 1.6 million in the mid-year update.

“It is encouraging to see the strength in the recovery in the Australian economy,” Finance Minister Simon Birmingham told the Nine Network.

“There is still a long way to go but we have seen more than 650,000 jobs created across Australia in recent months. More Australians back in work, fewer Australians out of work, fewer Australians on JobKeeper.”

Shadow assistant treasurer Stephen Jones said he hopes the economy is coming back because there are still one million unemployed.

“This is no time for the government to be patting themselves on the back and saying job done,” Mr Jones told Sky News.

Another key factor in an improved budget bottom line will be the impact of a strong iron ore price at around $US150 per tonne compared to the $US55 per tonne that was assumed in the budget.

The treasurer believes there is still a degree of uncertainty around how long Chinese stimulus will persist and when Brazil will resume its normal production volumes of iron ore.

“The government continues to take a prudent approach to its commodity price assumptions in the budget as the global economic outlook remains uncertain,” he said.

If the iron ore price remained elevated for longer than assumed, before falling immediately to $US55 a tonne, nominal GDP could be around $22.9 billion higher than forecast in 2020/21 and $2.9 billion higher in 2021/22.

This would have a flow-on impact to company tax receipts estimated at around $1.3 billion in 2020/21 and $4.8 billion in 2021/22.

The government’s most recent monthly financial statement for October showed the budget position was $3.6 billion smaller than expected after the first four months of the financial year.

Such developments will help absorb new spending initiatives since October.

In the past week alone there has been a wide spread of initiatives, from additional funding for the Inland Rail ($5.5 billion) and university research ($3 billion) to aged care ($1 billion).

MYEFO is also expected to see upgrades to economic forecasts after growth rebounded by a stronger 3.3 per cent in the September quarter.