The federal government expects the national economy to add a million jobs in the next three years, with projections that gross domestic product will grow more than 4 per cent annually and unemployment will drop well below 5 per cent.

But Treasurer Josh Frydenberg’s economic update is based on the rosy assumption that COVID’s Omicron variant – currently forcing the reimposition of heavy restrictions across Europe – will not “significantly alter” Australia’s reopening plan, and that even baseline levels of local health interventions will cease by winter 2022.

Potential future lockdowns to deal with Omicron or other variants could slug the economy with another $20 billion in lost economic activity and another 1 per cent higher unemployment, as well as again pushing back the reopening of Australia’s international border by another six months.

“The Australian economy is poised for strong growth underpinned by Australia’s high vaccination rate and unprecedented economic support to households and small businesses,” Mr Frydenberg and finance minister Simon Birmingham said.

The government’s Mid-Year Economic and Fiscal Outlook (MYEFO) was released on Thursday, updating projections and indicators from May’s federal budget. Mr Frydenberg and Senator Birmingham said Australia’s real GDP was expected to grow 4.5 per cent in 2021, and 4.25 per cent in 2022, which they ascribed to “strong momentum” in the economy.

Ahead of an election where the Coalition is expected to campaign strongly on economic recovery and jobs creation, the government claims a million jobs will be added to the economy and unemployment will drop to 4.25 per cent by mid-2023. On Thursday, Mr Frydenberg announced unemployment had hit 4.6 per cent, which he called “incredible”

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The MYEFO also includes a whopping $16 billion in decisions taken “but not yet announced” – essentially, election promises the government has signed off on, but decided not yet to publicise. Including $5.579 billion in the 2021-22 year alone, these decisions would likely be announced in the lead-up to the 2022 election.

Despite a stronger-than-expected recovery from the Delta lockdowns across the eastern states in mid-2021, the Coalition still expects Australia to have a budget deficit of nearly $100 billion this financial year. That’s $7.4 billion better than predicted at this year’s budget, and MYEFO sets out positive trends for net debt and gross debt in coming years.

“The improvement in the forecast budget balance in 2021-22, together with the much stronger fiscal outcome in 2020-21, flows through to an improved outlook for debt,” Mr Frydenberg and Senator Birmingham said.

However, unsurprisingly, the positive trends in MYEFO are predicated largely on a very optimistic prediction of how the Omicron variant or other future COVID strains could affect Australia’s recovery.

Across the northern hemisphere winter, countries such as Britain, Canada and Ireland and the Scandinavian region are reimposing mask rules, tightening isolation and density rules, and considering lockdowns as the more virulent but milder Omicron threatens to become the dominant strain – replacing the more deadly Delta.

Australia’s summer months represent a lower risk of COVID transmission, and the nation’s vaccination rate is higher than many European nations currently in a panic. That means Australia starts from a stronger position and has more time to roll out a nationwide booster program.

“The expectations in the papers today, in MYEFO, is that we’re not going to see Omicron derail the recovery,” Mr Frydenberg said at a press conference.

“We don’t need to panic. We don’t need to overreact,” he later told Sky News.

Cases are rising in Sydney and Melbourne, but have not yet fed through to corresponding spikes in hospitalisations or deaths. However, latest data from Omicron outbreaks in South Africa and Britain has indicated concern about rising hospitalisation rates, due to alarming explosions in case numbers.

MYEFO notes that new COVID variants are “the primary downside risk” to Australia’s economic recovery, and specifically notes key assumptions that Omicron and future strains will not have a material effect on the reopening or recovery timeline.

“It is assumed that lockdowns are no longer required to manage COVID-19 transmission in the community,” the document said, of its major assumption.

“The Omicron variant is not assumed to significantly alter current reopening plans or require a reimposition of widespread health and activity restrictions.”

The assumptions include the possibility of a “temporary strengthening of activity restrictions” for “localised outbreaks in areas of lower vaccination coverage”. However, that also assumes such restrictions would not “materially affect the economic outlook”.

MYEFO also assumes that only baseline levels of physical distancing and density rules would continue to only “the first half of 2022”. That indicates an assumption those rules would end in the second half of the year – just as Australia reaches winter, the COVID danger period.

On current rates, all Australians should be eligible for – or have received – vaccine booster shots by then, significantly increasing virus protection.

Aside from its main forecast, MYEFO sets out two other potential scenarios for future COVID variants – one that requires a “significant response” such as lockdowns and other rules, and another where variants are less serious and business rebounds even faster than predicted.

Under the “significant response” scenario, the reopening of Australia’s international border would be delayed again by six months. It also assumes that physical distancing, density limits and “targeted lockdowns” would be needed through the first half of 2022.

That “downside” scenario would mean economic activity was about $20 billion lower in 2021-22 alone. It would also raise unemployment by another percentage point.