By Adam Coleman

The latest State of the Regions report from forecasting group, National Economics, argues that "weak government economic involvement in the economy, financial deregulation and a laissez faire approach to monetary policy" has lead Australia to a major economic crisis.

Approximately ten per-cent of total household consumption is financed by new debt acquisition according to the report, a level and distibuion of debt that has no historic precedent in Australia.

Launching the report at the Local Government Constitutional Summit being held in Melbourne today, co-founder of National Economics’ Dr Peter Brain warned delegates that further mismanagement could see Australia “fall over the precipice of economic meltdown”.

"Falling over the precipice would mean a further major plunge in the exchange rate complemented by a banking crisis and credit freeze of the type currently being experienced in the US and UK, and in turn a reduction in GDP which will take three to four years to recover from," he says.

Dr Brain suggests that Australia abandon its attempts to prolong the economic boom of recent years, instead targeting a controlled decline to subdued levels of economic activity. He advocates a current account deficit of around 4 to 6 per cent.

"Once a degree of short term stability has been established, the task will become one of working out a strategy of kick-starting growth using the public sector balance sheet as a core driver,” he says.

In order to stabilise household debt to income ratios, the report argues that household savings ratios will have to increase by 4 to 8 per cent of GDP, which in turn will require corresponding falls in the public sector savings ratio to compensate.

According to Dr Brain, the public sector borrowing requirement will need to return to 3 to 6 per cent of GDP, a level not seen since the mid 1990s.