The Parliamentary Budget Office (PBO) has warned that the Federal Government will need to practice some serious spending discipline to avoid bad budget figures and economic shock.

The Government’s independent analysts have been looking at how sensitive the bottom line will be to unexpected changes in the economy.

Its report found “the risks to the budget ... appear to be weighted to the downside”, given that there is a clear possibility of “significant negative impacts on tax receipts”.

The report should cause a note of caution to ring through the Federal Government, hampering its run to end budget deficits by 2018-19.

The PBO report says “efforts to enhance productivity and maintain fiscal discipline will be necessary” to get the budget to surplus while also protecting against “unexpected economic shocks and other risks to the budget”.

The PBO took a close look at three key economic indicators; productivity, workforce participation and the terms of trade.

Labour productivity typically increases by about 1.5 per cent a year, and this is the figures the Government has been working with.

But if productivity slipped to 1.0 per cent, the PBO finds that the budget bottom line could deteriorate and miss out on a healthy surplus in 10 years' time.

Over that decade, net debt would increase five-fold.

The PBO paper says that maintaining productivity growth at even 1.5 per cent has historically proven very difficult.

“The risk to labour productivity growth appears to be on the downside,” it said.

Similarly, PBO models on terms of trade showed a decrease of ten per cent “would reduce the underlying cash balance and increase net debt”.

The analysts say most of the Government’s assessment of risk to the budget was “largely on the downside, particularly in the light of recent declining trends in commodity prices”.

But it did find that labour force participation rate projections are “reasonably balanced”.

Finally, the report noted that the sliding participation rate as a result of population aging was counterbalanced by improvements in keeping women and older men in the workforce.