The International Monetary Fund says Australians will need to pay more tax, whatever the mix of taxes adopted by the government.
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Explicitly rejecting the notion that Australia has a spending problem, not a revenue problem - as claimed by new Treasurer Scott Morrison - it says while spending cuts can and should play a role in reducing the deficit, "there may be limited scope for this avenue since expenditure is already relatively low compared to other advanced economies". It says Australia will be under pressure to spend more as health costs increase.
Last week Mr Morrison said his emphasis for now would be on cutting government spending to fix the deficit, not raising taxes.
"I think we've got a spending problem not a revenue problem," Mr Morrison said, "and only when we've made further progress at a Commonwealth level and at a state, then and only then do you get to open up those other questions about revenue."
The report of the Fund's executive board on its consultations with Australia also predicts a further cut in interest rates, forecasting an average cash rate for 2015 of 1.7 per cent. The rate is presently 2 per cent and the average so far this year is 2.13 per cent, implying more than one cut in the coming months.
The executive board says while the two cuts in the cash rate to date have boosted housing investment, business confidence and investment expectations remain "muted". Growth in consumer spending growth has been "moderate" reflecting weak income growth.
House prices are moderately overvalued, probably by around 10 per cent.
"The problem is concentrated in Sydney and is fuelled by investor credit and interest only loans. Current rates of house price inflation imply rising overvaluation," it says.
The Fund expects much weaker economic growth than either the Reserve Bank or the Treasury, forecasting growth of just 2.5 per cent this year, 3 per cent next year, and a peak of 3.1 per cent in 2017 before growth slips to 2.8 per cent by 2020.
It expects the unemployment rate to peak at 6.2 per cent this year before sliding to 5.5 per cent by 2020.
The Fund models a number of tax reform proposals for Australia including abolishing negative gearing, reducing the tax discount for capital gains, abolishing stamp duty on conveyancing, boosting land tax to compensate for the loss of stamp duty and capping the capital gains tax exemption applying to the family home.
It also examines proposals to wind back superannuation tax concessions, to remove the capital gains tax exemption for inherited family homes and to remove exemptions from Australia's goods and services tax and lift the rate of 15 per cent.
The Fund says Australia should aim for a small budget surplus over the longer-term.
While many directors supported the present pace of deficit reduction outlined in the budget, some directors believed the deficit could be wound back more slowly "given ample fiscal space".
