Former Treasury boss Ken Henry says "something is desperately wrong" with Australia's economy, which is beset by "structural deficiencies" that cannot be fixed by interest rate cuts or government largesse.

Key points: Ken Henry conducted the last major tax review in 2008-09; he went on to be NAB chairman but resigned in the wake of the banking royal commission

Ken Henry conducted the last major tax review in 2008-09; he went on to be NAB chairman but resigned in the wake of the banking royal commission Dr Henry says Australia's economy appears to face structural problems that can only be addressed through major reforms

Dr Henry says Australia's economy appears to face structural problems that can only be addressed through major reforms He says key reforms include a carbon price, company tax cut and changes to negative gearing and capital gains tax

The latest official economic growth figures, released by the ABS earlier this week, show Australia's economy continues to languish at some of its slowest growth rates since it narrowly avoided recession in the wake of the global financial crisis a decade ago.

However, in an exclusive interview with ABC TV's The Business program, Dr Henry said the nation's current economic weakness was potentially far more concerning because it appears to be driven by long-term "secular" problems, not a one-off shock.

"We're not in the situation that we were in in the global financial crisis when there was a big negative shock hitting the Australian economy, I think it's time to start asking ourselves the question whether this is a mere cyclical slowdown, or whether there's not a secular problem," he said.

"I fear that it's more than cyclical, that we need to find a way of getting ourselves out of this hole."

A key long-term problem, according to Dr Henry, is a slowdown, and now decline, in productivity.

This economic figure measures how much output Australia produces for the amount of inputs used in the production process.

Labour productivity — the amount of output produced per hour worked — fell 0.2 per cent last financial year, the first annual decline since the ABS began measuring it in the mid-1990s.

When labour productivity is falling, it not only hurts economic growth, but also tends to put downward pressure on wages, a phenomenon that has been apparent in Australia for several years.

But not only are Australians working less efficiently, we are also not working harder, despite a record proportion of the population being in work or looking for it.

"The decline in average hours of work — increased part-time and underemployment — fully offsets the increase in workforce participation," Dr Henry said.

"In fact it's stark — if you calculate how many hours are worked in a week by the average person of working age, across males and females, it's no different today than it was 40 years ago, despite the fact that female workforce participation has increased by 45 per cent."

Rate cuts and tax cuts 'cannot overcome' problems

The man who guided the Australian Government's economic policies for about a decade after the turn of the century said current policymakers needed to question whether their present course of interest rate cuts and tax reductions could do anything to boost the economy given these more fundamental problems.

"Whether what we're seeing in terms of workforce productivity and workforce participation — particularly if you look at hours of work — whether this isn't pointing to some structural deficiencies in the Australian economy and something that cannot be overcome or be addressed by either monetary policy or fiscal policy," he said.

Dr Henry argued the main reason productivity was declining was a lack of business investment in new technology and equipment that increased the efficiency of their workforce.

"Business investment today as a proportion of gross domestic product is almost as low as it was in the depths of the early-90s recession," he said.

"The reason why Australia celebrates a current account surplus today is because business investment is so weak, we should not be celebrating this, this is sending us a signal that there is something desperately wrong in Australia."

However, he added that the nation's economic problems were not terminal.

"The longer term prospects are extraordinarily bright," he said.

"There is a need to construct an optimistic narrative for all Australians about Australia's long-term future, and then to back that narrative up with serious policy action."

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume. Watch Duration: 35 minutes 29 seconds 35 m Extended interview with Ken Henry ( Michael Janda )

Dr Henry said policy action needed to include major tax reforms on several fronts.

A key move would be the introduction of an emissions trading scheme to put a price on carbon dioxide and to give energy and high-emitting companies the certainty to make new investments in low-carbon technologies.

Another would be a reduction in company tax for all firms, not just small and medium-sized businesses — a move the current Federal Government attempted, but that was blocked by the Senate.

A third would be changes to the taxation of investments, largely to reduce the bias towards residential real estate. While Dr Henry suggested a different change in his tax review a decade ago, he said Labor's policies to restrict negative gearing and reduce the capital gains tax discount, taken to the last federal election, were "better than the present system".

Dr Henry also said that, while the federal and state governments had increased infrastructure spending, it could be boosted further, particularly in regional areas.

"If you look at publicly funded construction activity in Australia today, as a proportion of GDP, it's not above historical averages," he said.