One of Australia's most respected economists has lashed Treasurer Joe Hockey for his criticism of Treasury secretary Martin Parkinson, warned that Australia cannot afford new social policies without tax reform and predicted the GST will have to rise to tackle structural holes in the budget.
A day after Fairfax Media revealed former prime minister John Howard and treasurer Peter Costello both urged Mr Hockey to keep Dr Parkinson in one of the nation's top economic roles - a call ignored by Prime Minister Tony Abbott - former Treasury secretary Ken Henry lashed the present government for its treatment of his Treasury successor.
And he said the exit of Dr Parkinson - which is due mid-year, though speculation is mounting the current Treasury chief could now stay on until the end of the year - was unprecedented.
''It's never happened in the Treasury in 114 years, 113 years. There have only been 16 Treasury secretaries in that time. No government has ever thought it appropriate to remove the head of the Treasury and put in somebody who they think is of the right - let's say of a more comfortable political character,'' said Dr Henry, who is now a director at NAB and the ASX.
''I'm not saying that is what has motivated the Prime Minister on this occasion. It sounds like that though.''
Dr Henry said Dr Parkinson should stay in his current position.
In a blunt warning to Mr Hockey, who is preparing his first federal budget, Dr Henry said Australia simply could not afford expensive new social programs without new sources of revenue.
''If you look at the circumstances that the Commonwealth was in after the last big tax reform package - and I'm really talking about the implementation of the GST now in 2000-01 - at that time, the Commonwealth budget revenue was 26 per cent of gross domestic product. That's how much the Commonwealth raised in revenue. Today, that's down at 23 per cent,'' he told the ABC's 7.30 on Wednesday.
''If you ask me the question do we have the capacity to finance new spending without new sources of revenue, the answer is no.''
Dr Henry pointed the finger at a series of tax cuts delivered by the Howard and Rudd governments for putting the budget under considerable pressure.
Dr Henry also singled out the federal government's direct action scheme, designed to tackle climate change.
Economist Ross Garnaut recently calculated it would cost $4 billion to $5 billion, not the $1.5 billion the government says - and Dr Henry backed Mr Garnaut's estimate.
Shadow treasurer Chris Bowen said he disagreed that an increase was inevitable, saying the current tax to GDP ratio was about right, adding that he supported tax reform without increasing the GST.
''By its very nature it's regressive, and would impact on lower- and middle-income earners more, and if you use money to compensate for that, then you reduce the reason for doing it in the first place,'' he told ABC Radio on Thursday.
He defended the previous Labor governments' decisions to continue Howard government tax cuts, saying they were ''right for the times'' and an important part of keeping consumer spending up during the global financial crisis.
He said tax reform needed to look at small taxes that weren't raising much revenue and distorting taxes such as insurance taxes, which punished good behaviour.