'We have to fix the budget,' says treasurer Joe Hockey in announcing once-in-a-decade commission of audit

The Abbott government is seeking advice about how it can cut spending, charge more for government services and shrink the size of the federal bureaucracy by handing responsibilities to the states and charities, in a sweeping brief to its new commission of audit.

“We have to fix the budget,” the treasurer, Joe Hockey, said as he also revealed a decision to increase Australia’s debt limit by $200bn to $500bn after advice that peak debt would be higher than predicted during the election campaign.

The commission of audit – the first since the Howard government’s in 1996 – will be chaired by the president of the Business Council of Australia, Tony Shepherd, and run by a secretariat in the Finance Department headed by the BCA chief economist and former adviser to John Howard, Peter Crone.

The commissioners are Dr Peter Boxall, who was the former treasurer Peter Costello’s chief of staff when spending was slashed in the 1996 budget and secretary of the Department of Finance from 1997 to 2002, the former Treasury secretary Tony Cole, who last year called for an extension of the goods and services tax, the former Howard government minister Amanda Vanstone and the former senior state bureaucrat Robert Fisher.

As he sought to hose down voter concerns in the lead-up to the September election, Abbott insisted the audit would not consider spending cuts on health, education or pensions and pledged the government would not accept any changes to the rate or scope of the goods and services tax. He also promised to quarantine defence from budget cuts, in order to meet a longer term goal to restore defence spending to 2 per cent of gross domestic product.

But announcing the audit’s very wide-ranging brief, Hockey was clear that nothing was off limits.

The terms of reference ask the commissioners to consider “options to manage expenditure growth, including through reviewing existing policy settings, programmes and discretionary spending (such as grants); savings and appropriate price signals – such as the use of co-payments, user-charging or incentive payments – where such signals will help to ensure optimal targeting of programmes and expenditure (including to those most in need), while addressing the rising cost of social and other spending and … other savings or matters that the commission considers should be brought to the government’s attention”.

The brief says the audit should be guided by the principles that “government should do for people what they cannot do, or cannot do efficiently, for themselves, but no more” and that the government should “live within its means”.

And it asks the commissioners to consider every programme and activity undertaken by the commonwealth to decide “whether there remains a compelling case for the activity to continue to be undertaken; and if so, whether there is a strong case for continued direct involvement of government, or whether the activity could be undertaken more efficiently by the private sector, the not-for-profit sector, the states, or local government”.

Cormann said the government “will not implement recommendations inconsistent with the promises we took to the last election”.

The shadow finance spokesman, Tony Burke, said the “commission of cuts” was a complete contradiction of what the Coalition had said before the election.

“The Liberals are doing what Liberals always do; they have a commission of cuts across every area … areas we were told were immune are now not immune,” Burke said.

And he criticised the Coalition for claiming before the election that debt was a huge problem and then moving to increase the debt ceiling to half a trillion dollars.

The audit – billed as a once-in-a-decade review of what the federal government spends, what it does and what it owns – will be a critical test of the new government’s political resolve.

It will also consider what public assets can be sold – including Medibank Private, which the government has promised to sell, and Australia Post, which it has said it will not privatise.

The new government is under intense pressure to return the budget to a sustainable surplus, with government revenue remaining soft and spending on health and pensions projected to grow exponentially as the population ages.

The government coupled the announcement of the audit with the revelation that Australia’s debt will peak not at $370bn but at more than $400bn, meaning it will seek to raise the legislated debt ceiling from $300bn to $500bn to allow a “buffer” of between $40bn and $60bn on top of the predicted peak debt.

“This is a legacy of bad Labor government,” Hockey said.

The audit will provide two reports. The first will be be about government spending cuts and the appropriate role for the federal government and is due by the end of January so it can feed into next year’s May budget. The second is about the performance and accountability of the public sector and is due by the end of March.

The outgoing treasury secretary Martin Parkinson is among those who have warned of looming structural problems for the budget as revenue fails to keep pace with spending.

“We have a big gap between what the community demands of government and what it is prepared to pay,” he told a conference in May. “We have to think about savings or new sources of revenue.”

“I am not saying we have to find extra sources of tax. I have never said that. But we cannot just keep promising to spend more and more.”

The audit will provide two reports – the first due within three months so that its recommendations can be considered as the government drafts the May budget – and a second broader report due next year considering the functions and financing of state, federal and local governments.

Speaking before the election on radio 3AW, Abbott said: "What we aren't going to do is we're not going to cut health spending, we're not going to cut education spending … We're not going to reduce pensions, we're not going to change the GST – all of the scares that Kevin Rudd has been hyper­ventilating over, over the last few weeks, is simple nonsense."

The Howard government had a commission of audit after it gained power in 1996. Headed by Professor Bob Officer, it suggested a plethora of savings and spending cuts. Some were adopted but many of its most politically-contentious recommendations were ignored, including a plan for less generous indexation arrangements for the aged pension.