A new report from a former Treasury official, Stephen Anthony, warns that despite concerns from federal Treasurer Joe Hockey about the precarious state of the federal budget, the government is seriously underestimating the extent of its own budgetary problems.

It says that, as well as tightening the budget by reining in spending, the government needs to focus on reforms that target productivity because the economy desperately needs a domestic driver of growth.

But it also blasts former Treasury secretary Ken Henry for contributing to the government’s structural deficit woes – now 4 per cent of gross domestic product – by arguing in 2003 for income tax cuts rather than a wealth fund that could have been used to save mining boom revenues estimated to be $307 billion by now.

It comes as Mr Hockey foreshadows the possibility of real wage declines in Australia, warning on Sunday that wages have been growing faster than inflation in recent years, but that this might not always be the case.

The report from economic consultancy Macroeconomics has been released less than a month before the budget.

It warns that, without remedial action, the federal budget deficit could be worse than the government is forecasting by 2019-20.

But it predicts that the federal budget could remain in “double-digit” deficit until at least 2027-28 – which is four years longer than the government expects – after taking account of all federal policy changes since the Mid-Year Fiscal and Economic Outlook.

It says the government must use the opportunity of its first budget to “cut early and cut hard” because the budget will not return to surplus over the period of the forward estimates “without discretionary tightening of at least 1 per cent of GDP or around $16 billion each year”.

But it also suggests the government pursue a radical microeconomic reform agenda to help boost growth and revitalise the budget, and that this should include going after the grocery and banking giants.

“[It should subject] the grocery retail industry (the Woolworths and Coles juggernaut) and retail banking industry (the four major banks) to market share restrictions [to prevent] these oligopolies from further branching out into non-core activities, subsidised by their core businesses,” the report recommends.

Mr Anthony then lashes Mr Henry for putting the “kybosh” on a proposal by Labor MP Simon Crean in 2003 to tie the government’s fiscal strategy to a wealth fund.

Had this reform been implemented, it would have helped the federal government squirrel away about $307 billion in windfall mining boom revenues, the report says.

“However, former Treasury secretary Ken Heny thought that lowering personal income taxes was a better pro growth-quarantining strategy,” the report says.

“The Howard government then frittered away windfall surpluses with wasteful spending and tax cuts without offering structural reform of the tax system.”

Mr Henry could not be reached for comment.