Mr Morrison announced a "modest" two-year drug-testing trial of 5000 new recipients of Newstart and Youth Allowance in his budget speech on Tuesday night.

He said JobSeeker recipients who tested positive to using drugs would receive their welfare payments in the form of a Cashless Debit Card and would have to undergo further drug testing, which may lead to a referral for medical treatment.

"This is about trying to create some responsibility in the system," he said in a briefing before his speech. "If it works, we'll keep doing it. If it doesn't work, we will stop doing it."

The trial will run in three locations from January 2018. Social Services Minister Christian Porter said the trial would "ensure taxpayers' money is not being used to fund drug addictions for dangerous substances such as ice and that people in these situations are given every assistance to improve their lives".

Welfare recipients also face stricter penalties for failing to meet a list of new "mutual obligations", with repeat offenders risking the cancellation of their welfare payments.

"We will no longer accept as an excuse from repeate offenders that the reason they could not meet their mutual obligation requirements was because they were drunk or drug-affected," Mr Morrison told Parliament.

"We want to support job seekers affected by drug and alcohol abuse, but to protect taxpayers, it has to be a two-way street."

In a joint statement, Mr Porter, Minister for Employment Michaelia Cash, and Minister for Human Services Alan Tudge, said the government had identified about 100,000 welfare recipients who continually failed to meet their obligations.

"Of these, around 40,000 people appear to be wilfully and systematically gaming the welfare system with no intention of working, but at present avoid any financial penalties," the said.

The government will introduce a "demerit point" sytem, where job seekers will accrue demerit points for any "mutual obligation failure".

Once they have accrued four demerit points over six months, they risk being subjected to financial penalties - a loss of 50 per cent of a fortnightly payment for their first strike; 100 per cent of their fortnightly payment for a second strike, and cancellation of their payment for a third strike, with a four-week exclusion from reapplying.

Events leading to demerit points include failure to look for a job, attend an interview, or accept suitable work.

Under the "mutual obligation rules", job seekers aged 30-49 will have to partake in 50 hours a fortnight of "activity", up from 30 hours.  Activitiy requirements include part-time work, work experience, study and government programs.  Job seekers aged 50-55 will no longer be able to meet their "activity hours" through volunteer activities alone, and job seekers aged 60 to pension age will have to spend at least 10 hours a fortnight engaged in activity, which they can satisfy through volunteer work.

In other reforms, from March 2020 seven different types of welfare payments will be consolidated into one new payment called a JobSeeker Payment but the government said less than 1 per cent of recipients will see their payment rate change as a result of the reform.

Mr Morrison also announced the ParentsNet program would be expanded to support 68,000 young parents in more than 20 location, especially those with high indigenous populations, at a cost of $263 million over four years. He said the program supported young parents, mainly mothers, with childcare, education and training, and financial literacy and numeracy skills.

The use of the Cashless Debit Card in lieu of welfare payments will be expanded to two new locations facing high levels of disadvantage, welfare dependence and social harm caused by alcohol drugs and gambling. Income management will also be extended for a further two years.