The final budget numbers are in and they're better than expected.

It's a lesson in what can be achieved when the Federal Government uses deficit spending to improve people's lives.

It has surprised senior members of the government.

But it wouldn't have surprised the father of the Liberal Party, former prime minister Robert Menzies.

I'll explain why.

What does a 'deficit' really mean?

On Thursday, Treasury officials published the "final budget outcome" for the 2020-21 Commonwealth Budget.

Last year's 2020-21 budget estimated that, by the end of the financial year on June 30, the size of the budget deficit would be $161 billion.

But the deficit has turned out to be $134.2 billion to $26.8 billion smaller than anticipated.

How could that be? 

Well, remember what a budget deficit is.

A budget "deficit" is simply an accounting term that describes a situation where the Federal Government is spending more money into the community than it's collecting in revenue (from taxes and other receipts) in a particular period.

Budget deficits are extremely important tools of macroeconomic management.

They stimulate the economy by boosting the wealth of households and private sector businesses, and they can keep economic activity afloat during downturns.

In the 2020-21 financial year, the budget deficit was used to support billions of dollars of stimulus payments, which allowed people to survive and businesses to remain trading.

'More people in work, less on welfare'

But why did the size of the deficit end up being $26.8 billion smaller than anticipated for the financial year?

It's because when the original lockdowns ended, and Australians returned to a relatively normal life with practically zero COVID in the community, there was so much extra money in the economy that activity surged.

And that extra activity meant tax revenue started pouring into government coffers again, at higher levels than anticipated, which helped the "deficit" to shrink.

Here's how the Treasurer and Finance Minister explained it.

According to Treasurer Josh Frydenberg, the "key driver" behind the improved budget bottom line was the strength of the recovery in the labour market.

"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.

And Finance Minister Simon Birmingham explained the strong bounce-back in economic activity had seen tax receipts recover faster than expected.

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

It's pretty simple.

'The budget will look after itself'

In 1933, the British economist John Maynard Keynes wrote: "Look after the unemployment, and the budget will look after itself."

It was a lesson taken to heart by numerous Australian prime ministers in the post-war years (from 1945 onwards).

One of those PMs was Robert Menzies, whose record second stint as prime minister lasted from 1949 to 1966.

Mr Menzies wasn't afraid of budget deficits. For his last nine budgets he delivered deficits.

Here he is in 1962, telling parliament why he would be handing down a large budget deficit that year:

"Too few people realise that a cash deficit of 120 million [pounds] … will of itself have a most expansionary effect.

"So, far from being timorous — I think that was another of the words used by the deputy leader of the opposition — this is adventurous finance.

"The real task of any government today, as well as of the business community and all sensible citizens, is to get that purchasing power exercised."

Mr Menzies' budget deficits helped to keep the national unemployment rate exceptionally low.

COVID-induced Liberal metamorphosis

Last year, the federal government underwent an extreme metamorphosis.

For years, under Tony Abbott's leadership, and Malcolm Turnbull's, and Scott Morrison's, it was obsessed with "returning the budget to surplus".

That followed more than a decade under the leadership of John Howard and his treasurer Peter Costello who prided themselves on delivering budget surpluses.

Mr Abbott repeatedly argued that "you can't fix the economy until you fix the budget."

But in the last year Treasurer Frydenberg has rejected that slogan by inverting it, arguing "you can't fix the budget until you fix the economy."

He had no choice, given the amount of government spending needed to keep people alive during lockdowns.

And by doing so, he pointed the Liberal Party back towards its economic roots, where the "father" of the party accepted the logic of deficit spending as commonsensical.

Will it last?

Importantly, Mr Frydenberg is standing at a crossroads now.

Since June, the delta outbreak has laid waste to the economies of New South Wales and Victoria.

Today, the Treasurer admitted the gains made in the 2020-21 budget numbers will probably be wiped out by the economic impact of shutdowns in recent months.

"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.

But he's keen for state governments to open up their economies in the coming weeks, even with the Delta variant circulating in fairly large numbers in the community.

He's also set on withdrawing stimulus from the economy shortly, so he can start to "improve" the budget bottom line.

Has he (already) forgotten some of the lessons about deficit spending?

Richard Denniss, chief economist at the Australia Institute, fears so.

"Since May 2021, the number of hours worked has decreased 5.6 per cent and the total number of people in employment has fallen by almost 1 per cent. In the last month hours worked fell 3.7 per cent," he noted.

"Now is the time for the Government to be ramping up income support, small-scale local spending projects and targeted assistance to the hardest hit sectors like the tourism, arts and entertainment, and higher education sectors.