"It's when you have that next recession, when unemployment is not 6.5 per cent but 8 or 9 or 10 per cent, where you'll really concentrate minds." Mr Lawson, who was in Sydney on Tuesday to address an investment seminar, said the Abbott government's "strategy in opposition was much stronger than its strategy for government". Although subscribing to the principle of a balanced federal budget, he said there was no current urgency for a return to surplus. In any case, the deeply unpopular cuts unveiled in last May's now-notorious budget were in large part misplaced, he said. "In a way, I think the government's decided to tackle the wrong problems," Mr Lawson said.

"It's invested a lot of capital in some unpopular things that actually aren't going to be the critical determinants of whether Australia's potential growth rate and productivity growth ends up being lifted. "The whole obsession with quickly getting back to a surplus is really counter-productive." Among his recommendations are more government spending on infrastructure, incremental increases in the GST towards a pre-set target, a change to negative gearing rules and the gradual devolution of revenue-raising powers to the states. In a way, I think the government's decided to tackle the wrong problems. Jeremy Lawson On the first count, his comments chime with former Liberal leader John Hewson, who told a Committee for Economic Development (CEDA) conference in Brisbane on Tuesday that Australia needed an infrastructure "revolution", and had to "stop looking at all debt as bad".

Mr Lawson, who in the middle of last year forecast a difficult 2015 for the Australian economy, said the sharp drop in commodity prices and slowdown in China had caught policymakers and economic pundits by surprise. "If you think back to last year, the big uncertainty was how the relative tensions would play out between the declining commodity prices and the fall in the terms of trade, the reduction in mining investment and domestic demand," he said. "And that was then going to shape the policy outlook. "Obviously, since then I think the commodities side of the equation has ended up being more severe, not so much the oil price but the correlated decline in iron ore and steel prices. "And so the terms of trade shock has proved to be larger.

"At the same time, outside the housing market, the rebalancing process has been very very slow." Mr Lawson said the Reserve Bank of Australia's recent cut to the cash rate, the first in 18 months, would be followed by a second, and possibly a third. The minutes of the RBA's February policy meeting, released on Tuesday, confirmed the bank's concerns about softness in the economy, and also revealed it was torn between making the cut this month and making it in March. Mr Lawson said the effectiveness of looser monetary policy would diminish with each cut, except in the housing market, which risked overheating without macroprudential controls. According to another economist, residential property prices could spike by 15 per cent if the RBA were forced to cut rates to below 1.25 per cent in response to any move by the US to defer raising interest rates.

"The RBA would have to offset that and cut rates quickly – to 1.25 per cent for a quarter before raising it to 1.5 per cent – but cannot hold them there for very long due to the extreme impact it would have on the housing market," QIC chief economist Matthew Peter said. Barring that scenario, however, Mr Lawson said monetary easing was close to running its course. "I really am a strong believer that monetary policy is close to having done all it can do in Australia," he said. "Policy has its most powerful impact on the housing market and has been relatively successful in boosting that. "But structural impediments to growth have to be addressed by government policy – and it's just not occurring."