Peter Costello has warned Treasurer Josh Frydenberg that record federal government spending cannot continue and there needs to be structural reform to both grow the economy and repair the budget.

The former treasurer’s advice at the traditional post-budget Higgins 200 breakfast in Melbourne on Friday follows the forecasting of a $106.6 billion deficit in 2021-22 after a record $161 billion shortfall this financial year.

Josh Frydenberg (left) has enlisted Peter Costello, who ran surpluses for a decade, to take part in several promotional photo shoots at Melbourne coffee shops since becoming Treasurer.Credit:Tash Sorensen

The 2021-22 budget outcome is in stark contrast to the federal government’s pre-coronavirus view that deficits were unsustainable and the budget would be “back in the black” by now. It has instead unveiled a $74.6 billion spending plan aimed at getting the nation’s economy surging post-pandemic, on top of the huge outlays it made during the crisis to save jobs. By 2024-25, the deficit is expected to be about $57 billion.

But with low interest rates keeping down the cost of servicing the debt, the government thinks the current deficit is appropriate. Many economists agree the spending has been necessary to provide enough stimulus to offset the damage of the pandemic.

Multiple sources who attended the event, which has been running for 27 years, said Mr Costello welcomed major programs introduced during the pandemic such as the $90 billion JobKeeper wage subsidy scheme but said some policies did not work and further spending was not required.

Mr Frydenberg, a former Howard government adviser, has listed Mr Costello among his role models and mentors. He has enlisted the man who ran surpluses for a decade and paid off the Commonwealth government’s debt to take part in several promotional photo shoots at Melbourne coffee shops since becoming Treasurer.

Mr Costello, who is the chairman of Nine Entertainment Co (owner of The Sydney Morning Herald and The Age) and the Future Fund, also suggested the Treasurer should reconsider the legislated superannuation guarantee increase to 12 per cent by 2025. The first increase to 10 per cent, from 9.5 per cent now, is set to kick in from July despite a backbencher push to scrap the rises completely. The full 2.5 percentage point rise equates to an extra $20 billion a year flowing into super accounts.

Mr Costello criticised the super increases, arguing they would not help boost wages growth, which was sluggish even before the pandemic, and likened the super industry to a crocodile that would eventually bite back, said the sources, who declined to be named as the event was held under the Chatham House Rule. The breakfast featured a panel with the University of Melbourne’s Judith Sloan, who is a columnist for The Australian, member for Higgins Katie Allen, Mr Costello and Mr Frydenberg. The Treasurer responded to the comments in a “demure” way, one source said.

Last year, the federal government said it would re-evaluate the super guarantee rise with the state of the economy in mind nearer the time of the first increase. The Reserve Bank, Grattan Institute and a range of economists have warned there is a trade-off between higher super contributions and wages growth, but Labor, the unions, the super industry and former prime ministers Paul Keating, Malcolm Turnbull and Kevin Rudd have backed the increases, saying they’re necessary for a comfortable retirement.

The sources said Mr Costello was “diplomatic and polite” and further told the 800-strong audience, including politicians, students and business representatives, that home ownership should be a priority.

Liberal MP Tim Wilson has been campaigning for months for home ownership to be promoted above superannuation, saying first-time buyers should be able to dip into their retirement savings for a deposit. The federal government has instead expanded an initiative letting first-home buyers tip extra money into their super, take advantage of tax breaks and then withdraw the funds for a deposit.

The sources said the great Australian dream of the quarter-acre block was “championed” by Mr Costello, who joked the pandemic was another argument for lower-density living.

Students in attendance at the event asked about university funding and when international students could be brought back into the country. Mr Frydenberg said health was the priority while multiple members of the panel said it was an opportunity to re-focus on improving the quality of education for domestic students.

Mr Costello has been contacted for comment. A spokesman for Mr Frydenberg referred to his comment earlier this week that the expectation was for GDP growth to outpace interest rates, ensuring the cost of servicing the debt would be manageable.

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