The federal government has revealed the budget deficit was $27 billion lower than forecast in the May budget.

But current lockdowns are likely to wipe out the gains, with the government spending tens of billions on support payments in recent months.

The 2020-21 budget estimated there would be a $161 billion deficit by the end of the financial year, but Treasurer Josh Frydenberg today revealed the actual figure was $134.2 billion, $26.8 billion lower than anticipated.

"What these numbers confirm is that when restrictions are eased, the Australian economy bounces back," he said.

Mr Frydenberg said a drop in the unemployment rate was the "key driver" behind the improved figures.

"With more people in work and less people on welfare, the improvement in the labour market has been the key driver of the improved budget position," he said.

The unemployment rate dipped from 4.6 to 4.5 per cent in August, but the figures were partly due to many people giving up on looking for work completely amid ongoing COVID lockdowns.

Finance Minister Simon Birmingham echoed Mr Frydenberg, saying the government underestimated potential growth.

"Wages grew faster than forecast and the economy grew faster than forecast," he said.

"As a result, we saw tax receipts stronger than had been forecast and payments lower than had been forecast."

Good news short lived

But the good news from the end of the past financial year now sits in stark contrast to the first three months of the current one, which has seen Australia's two biggest cities in extended lockdowns.

According to Mr Frydenberg, the gains made in the 2020-21 financial year were likely to be wiped out by the economic impact of the current Delta outbreaks.

"By the time the COVID disaster payment has ended and the business support payments have ended, we will be up for a bill of more than $20 billion," he said.

The Treasurer also said there was also an estimated $2 billion decline in economic activity each week because of the lockdowns in Victoria and NSW.

Senator Birmingham also acknowledged the lockdown support would hit the budget bottom line, but argued the government had no alternative option.

"There is no doubt that the payments we've made and lockdowns have come at a cost, as Josh said, to the economy," he said.

"Those costs are defensible and appropriate in terms of the bottom line costs, insofar as they are necessary to help ensure that businesses and households don't fail while restrictions are necessary."

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