There is a 50 per cent chance Australia will slide into recession in the coming year, according to respected economist and former Reserve Bank board member Warwick McKibbin.
Professor McKibbin told Fairfax Media the political "stalemate" over reform was now damaging the economy and warned the Reserve Bank had "already used up their ammunition" to boost growth.
Labor's opposition to the free trade agreement with China and the government's abandonment of the East West Link project in Melbourne were all risks to growth, he said.
"All those bits and pieces add up to slower economic growth. There aren't too many bright spots out there," McKibbin said.
"If you did absolutely nothing from now on … there is probably about 50 per cent probability over the next 12 months [of recession]."
He called for tax reform to cut income taxes and raise the GST, labour market reform to increase the flexibility of employers to cut wages rather than jobs, and more infrastructure spending to boost growth.
Meanwhile, weaker than expected growth figures have cast doubt on the Abbott government's budget figures.
Independent economist Saul Eslake told Fairfax Media it was "unlikely" the budget would return to surplus in 2019-20 without further policy action.
The budget's assumption of economic growth of 2.75 per cent this financial year was likely to prove too optimistic and projections of 3.5 per cent growth after that were even more unrealistic, Mr Eslake said.
"The budget projections are a bit like my hopes for Tasmania getting its own team in the AFL. It's highly unlikely."
"Growth will be below what we have come to regard as trend. We're stuck in second gear and have been for a long time."
A lower Aussie dollar – which slipped below US70¢ this week – will help buffer the economy.
But Professor McKibbin, who sat on the board of the Reserve Bank for a decade, warned further interest rate cuts would not be as effective in supporting the economy.
"When you cut interest rates it just brings demand from the future to the present. Now we're at the point where we have already taken that demand away. How do you fill the gap now? That's the dilemma.
"At this point I don't think rate cuts will instil the confidence we need."
Mr Eslake said the Abbott government's excessive focus on national security was breeding anxiety and making consumers more risk averse.
"I think it has taken an economic toll," he said. "The Coalition keeps telling people that you ought to be scared. We need to be scared about border security, food security, water security. We keep telling people there's bad stuff out there and no wonder they become risk averse."
"There is an ongoing inability of this government to develop a confidence-enhancing narrative."
Mr Eslake put the risk of a recession at a lower 25 per cent, but warned Australia is more vulnerable than it was going into the GFC. "The economy lacks the momentum to absorb and we have far less policy ammunition."
The chief economist at Laminar Capital, Stephen Roberts, put the chance of recession at between 35 and 40 per cent.
Meagre growth in the June quarter could easily turn into no growth at all. "That's why the risk of falling into a recession is there. It doesn't require too much slippage."
Professor McKibbin said more flexibility in the labour market would help to cushion jobs during the downturn.
"You want to have the capacity for people to take pay cuts rather than just lose their job if we do enter recession."
