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imageSYDNEY: Australia's central bank governor Friday called on the nation's politicians to tackle the "real issue" of the country's growing budget deficit, saying action was needed to retain credibility in financial markets.

Treasurer Joe Hockey is expected to unveil a further blowout in the government's federal deficit in his mid-year economic and fiscal outlook Monday, with some estimates of a Aus$5 billion (US$4.1 billion) increase to Aus$35 billion.

Government revenue has been hurt by sharp declines in commodity prices in a resources-driven economy where iron ore is the country's largest export.

Weakening demand from Australia's largest trading partner China has also weighed on growth.

"I think much of the public debate about the fiscal position still is carried on as though that reality isn't actually real," Reserve Bank of Australia chief Glenn Stevens told The Australian Financial Review.

"But it is real, as best we can tell on the best estimates that Treasury and Finance can do. That is a real issue.

"The conversation we need to have is about heading that problem off before we hit it so that we don't ever get into the position of losing credibility in capital markets and then be forced to be much more pro-cyclical with our policies."

Stevens said there has been an "over-simplification" in debates about the government deficit, which saw the Tony Abbott-led administration unveil a tough budget in May that seeks to cut back spending and welfare.

Community disquiet about some spending cutbacks by the conservative government, which was elected to power last year, has seen some measures designed to reduce the budget deficit remain stalled in the upper house Senate.

Some revenue-generated policies such as carbon and mining taxes have been scrapped following election promises by the government.

Copyright AFP (Agence France-Presse), 2014

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