The economist Ross Garnaut has criticised official budget forecasts, warned of looming economic time bombs in the Australian economy and described the recent election as a reminder that policies need to be equitable.

Garnaut, who will open a forum, the Economic Challenge for the 45th Parliament, in Melbourne on Tuesday, says that attempts by big business not to share the costs of economic adjustment were built on “an illusion”.

In a frank assessment of the Australian economic and political landscape, the former Hawke government adviser and China ambassador says politicians of the 45th parliament face the most challenging economic environment in a quarter of a century.

“The official budget forecasts are built on unlikely export prices, growth and inflation rates and count as savings measures that have been rejected repeatedly by the parliament, yet still point to continuing deficits,” Garnaut writes in the Australian Financial Review.

Although Garnaut says the political culture had become more vulnerable to pressure from private interests, he argues the election result was a reminder that policies needed to be fair.



“The election result brings a timely reminder that open and productivity raising policies are viable only in the context of programs that are widely recognised as equitably sharing the costs of adjustment and the benefits of success,” Garnaut says.

“This was always the reality and big business ambitions for policy adjustments that place costs of adjustment on ordinary households while allocating benefits to itself were always built on illusion.”

Malcolm Turnbull’s government took a $50bn business tax cut package, announced in the May budget, to the 2 July election. Under the plan the government would gradually increase the number of companies paying the small business tax rate, which from July 2016 would be 27.5%. By 2026-27, the corporate tax rate would be cut to 25%.

But the close result left the Turnbull government with a bare majority of 76 in the lower house, with counting still continuing in the seat of Herbert as well as in the Senate. While many commentators have suggested the parliament will be difficult to negotiate, Garnaut suggests the new make up could provide policies in the public interest.

“The membership of the new parliament embodies the Australian reaction to the dog days of recent times,” he says. “The objectives and values of members of the House and the Senate provides natural majorities for policies in the public interest.

“Such policies will correct budget weakness before an external shock hits us in conditions of great vulnerability. They will do as much as contemporary global conditions allow to gradually correct the stagnation in Australian productivity.”

Garnaut predicts the economic “time bombs” will continue over the next year.

“Time bombs set in the boom are exploding now or will be detonated over the next year – including the closure of the car assembly industry forced by the high real exchange rate of 2013-14 and the collapse of gas-based manufacturing and the huge increase in peak electricity prices from wasteful over investment in LNG processing for export from Queensland,” he says.

Garnaut predicts the policies would need to prioritise equitable distribution with policies that strengthen the budget and productivity.

“Turning natural majorities into majority support for legislation in the national interest is the test of political leadership in the 45th parliament,” Garnaut says.