CHRIS UHLMANN, PRESENTER: It's rare for former Reserve Bank governors to speak out, but Bernie Fraser, always the maverick, has delivered a scathing attack on both major political parties. He's a mate of Labor luminary Paul Keating who made him head of Treasury and then the Reserve Bank. But he's told 7.30 that Labor's now lost its way. He spoke to Stephen Long for this report.

BERNIE FRASER, FORMER RESERVE BANK GOVERNOR: For a long time I've thought Australia could become something of a special country, a demonstration of a country that was competitive, fair and compassionate. And I'm afraid those hopes have been dashed a bit over the years.

We've had 20 years of uninterrupted growth, solid, sustained growth for 20 years, and yet we've got more homelessness, distribution of income and wealth is more unequal now than it was 20 years ago, we've got infrastructure, social and economic, that is breaking down and creaking.

STEPHEN LONG, REPORTER: Bernie Fraser is a doyen of economic policy, a former head of Australia's two key economic agencies, serving as Treasury secretary then Reserve Bank governor during Labor's reign in the '80s and '90s.

But now Bernie Fraser is dismayed, disillusioned and scathing about both sides of politics.

BERNIE FRASER: In terms of my benchmark of competence, fairness and compassion, they've both failed, and they're both failing still, and the more distressing thing is I don't see a way out from either side.

STEPHEN LONG: So do you think Labor's lost its way?

BERNIE FRASER: Yes.

WAYNE SWAN, TREASURER: I have a vision for this country where there is very broad middle class, where people who work hard get fairly rewarded, where there is an optimism that comes with social mobility.

STEPHEN LONG: He says the budget surplus Wayne Swan will announce next week makes no economic sense.

BERNIE FRASER: This is another attempt to try to rationalise what is really a pretty poor political commitment to deliver a budget surplus next year irrespective of the economic circumstances. I think that's a dud policy.

STEPHEN LONG: With large parts of the economy in the doldrums, sub par growth and hardly any expansion of employment over the past year, Bernie Fraser says now is not the time to be forcing the budget into the black.

BERNIE FRASER: It just doesn't make sense because on 1st May the Reserve Bank could well reduce interest rates by 25, maybe even 50 points. On 8th May we've got the prospect of the Treasurer introducing a policy that's going to tighten fiscal policy quite significantly.

STEPHEN LONG: Though he says if the Government hadn't botched the mining tax, it might be a different story.

BERNIE FRASER: They had an opportunity to take a stance in the budget that would be more defensible with delivering a surplus and that was to impose a reasonable super profits tax on mining companies and unfortunately that's one of those things that wasn't achieved very well and it's a pretty poor substitute for a decent tax on the super profits of mining companies that we've got.

STEPHEN LONG: The former Treasury boss and central bank governor says the Government's response to the GFC has given government spending a bad name.

BERNIE FRASER: The education building program, the insulation programs, unfortunately they were pretty disastrous and the implications of those sort of failures have rebounded adversely on all government spending. It's really given the Coalition some free kicks, that here's a government spending money and wasting money and therefore governments shouldn't spend, they shouldn't run deficits, they shouldn't have debt.

STEPHEN LONG: Now he fears Labor's failings could pave the way for a long era dominated by an extreme ideology of small government.

BERNIE FRASER: To listen to the Coalition spokespeople, I hear echoes of the Republicans and the more extreme Tea Party Republicans. All this folksy nonsense about governments have to live within their means, governments have to behave like households and like businesses, that government spending is bad, deficits are bad, debt's bad - all this to me is nonsense really because governments are not like households, they're not like businesses, they have responsibilities that go beyond.

STEPHEN LONG: He's less critical of the Reserve Bank, praising those who followed him for their handling of monetary policy. Though he disagrees with a key decision of his successor Ian Macfarlane to sign a formal agreement with the Government pledging to maintain and inflation rate of two to three per cent.

BERNIE FRASER: Ian asked what I thought of it and I said I wouldn't sign a letter like that. Orthodox central bankers don't need any encouragement to give priority to inflation, that's in their DNA.

STEPHEN LONG: The former governor has some advice for the Reserve Bank board ahead of meeting tomorrow when it's universally expected to cut rates.

BERNIE FRASER: You have to get ahead of the game occasionally and trump those expectations.

STEPHEN LONG: So you think they should go 50 basis points, half a percentage point?

BERNIE FRASER: Yeah, yeah. I think the economic circumstances, signs of weakening in large parts of the economy and going with that, the weakness of the - the lack of worry about the inflation problems provide an opportunity to do that.

STEPHEN LONG: Bernie Fraser says he's always been an optimist. But now, in his 70s, he fears he won't see his vision realised.

BERNIE FRASER: You know, for me, that's pretty disappointing because my time's running out I can't see that competent, fair, compassionate society coming around in my lifetime.

CHRIS UHLMANN: Well we'll find out whether or not the cash rate goes down tomorrow and the big question is: will the retail banks pass it on? Stephen Long reporting.