The meeting ended without an agreement on changing the tax system but Prime Minister Malcolm Turnbull said the "aim is to take action" when the COAG meets again in March. Prime Minister Malcolm Turnbull and the premiers of NSW, Victoria and Western Australia at this month's COAG meeting. Credit:Alex Ellinghausen Economist Ross Garnaut has urged Mr Turnbull to be honest with Australians about the deteriorating public finances and says the budget outlook is likely to be a shocking reality check for most voters. "Two prime ministers and treasurers were damaged greatly by the Treasury's and their own failure to come to grips with a deteriorating budget outlook after the resources boom passed its peak," he told a business audience in Melbourne. "It is important for Australia that Prime Minister Turnbull and Treasurer Morrison avoid a similar fate."

Mr Turnbull's former employer, investment bank Goldman Sachs, said on Friday the Prime Minister had an incentive to call an early election because of predicted difficult economic conditions ahead. Although Mr Turnbull seemed to take steam out of speculation he will call an early election by announcing a crunch reform meeting with the states and territories in March next year. Westpac economist Andrew Hanlan predicts the government's mid-year economic and fiscal outlook (MYEFO) will slash its iron ore price assumption to $US35 a tonne from $US48 a tonne in the May budget. Economist Saul Eslake said the government would also have to revise downwards its short-term assumption for revenue from income tax, warning that could hit the budget harder than downward revisions in the terms of trade or iron ore prices. It means that a return to a federal surplus – projected in 2019-20 – may once again be delayed. "I just can't see how you could project a return to surplus over the timetable previously envisaged in the absence of dramatic policy change," Mr Eslake said.

Chris Richardson, the director of Deloitte Access Economics, said he would like Treasurer Scott Morrison to provide a "Garnaut-like dose of realism" into MYEFO next week. Deloitte's recent Budget Monitor predicted the combined deficits over the next four years will be about $38 billion more than previously forecast. This week Commonwealth Bank chief economist Michael Blythe told clients he thinks the deterioration in the budget deficit will be about $33 billion over the next four years, "mainly on the revenue side". He said the key assumptions driving budget projections – such as iron ore and coal prices, the terms of trade, nominal GDP and real GDP – were all likely to be revised downwards. However, he said news about the economy was slightly better than expected. State and Commonwealth governments have set an ambitious March deadline for nailing down tax reforms aimed at the unlikely outcome of reducing the take overall, while increasing revenue flows to the states for burgeoning health services. The plan means controversial suggestions, such as an increased GST and a dedicated share of income tax for the states, remain alive and could yet emerge. One Commonwealth source said the bigger GST option was still very much in the frame, despite political risks in the approaching election.

Leaders from the six states, two territories and the Commonwealth met in Sydney on Friday to thrash out the options and agreed to move towards an actual reform arrangement in March – a meeting that will occur within the shadow of the first Turnbull-Morrison budget. Premiers emerged from the talks buoyed by the consultative style of Mr Turnbull, and while disagreement continued over whether an increase to the GST was necessary, all pledged to work towards an outcome in March with Mr Turnbull himself declaring decisions would be made because he had "never been one to make the perfect the enemy of the good". While disagreement reigned over tax and revenue models, all states agreed health funding – threatened by the Abbott-Hockey 2014 budget, which ripped $80 billion from projected Commonwealth funding over the next decade – was at the heart of the problem and could no longer be ducked. Outside the tax debate there was agreement on the effort to address the scourge of domestic violence, and on tough uniform anti-terror laws to allow for pre-charge and post-sentence preventative detention, where authorised by a supreme court. Follow us on Twitter