New analysis by KPMG Economics has found cutting government expenditure is more likely to reduce the budget deficit and debt rather than increasing taxes.
Under several different scenarios it found the impact of fiscal consolidation on the Australian economy over five years was minimised when cuts to government spending was the sole mechanism used.
The benefit becomes even more positive over 12 years.
The second least distorting option was where government spending cuts contributed 85 per cent of the budget repair and tax increases totalled 15 per cent in the reduction program.
The most negative scenario was when household and company taxes were increased with no corresponding reduction in expenditure, cutting economic growth by 0.25 per cent over five years.
News that makes sense
Your trusted source for staying up-to-date with the world around you. Get free daily news updates and analysis, straight to your inbox.
KPMG chief economist Brendan Rynne warns that while Australia enjoys a below average debt-to-GDP ratio relative to other AAA-rating countries, it is heading towards an above-average position by 2018.
If the rating was cut to AA as global rating agencies are warning over the next couple of years, interest payments on the increased debt would rise by just over $1 billion a year.
"So we need to get on top of our debts, and the earlier the better," he says.
