Former Liberal treasurer Peter Costello has criticised the federal government's 2 per cent temporary deficit levy on high income earners, arguing it was essentially a political sweetener to secure spending cuts which have not materialised.

And he has proposed his own radical formula to break the tax reform stalemate, suggesting the 10 per cent goods and services tax be lifted to 15 per cent in exchange for lower income tax brackets and a drop in the company tax rate from to 25 per cent.

In unusually frank comments exposing divisions on the conservative side of politics, he said the deficit levy announced in the first Hockey budget appeared to have failed.

"It was designed to help get the expenditure reductions through and will we get them through?" he asked.

"If it hasn't bought expenditure reductions, it won't have achieved its purpose.

"The argument was, if we have to cut expenditures, to show we're fair, we have to increase tax, so we increase tax, the expenditures have not been cut, now, if it has not delivered that outcome, it has failed in its purpose."

His proposal for reducing the direct tax take on earners by switching a greater burden to consumption would see the top tax bracket of 45 cents, lowered to 40 - a bracket that only cuts in currently on earnings over $180,000 per year.

Mr Costello was speaking at a property event in Sydney during which he sounded a warning of a property price readjustment of "enormous" proportions as prices came off and purchasing power declined as wages fell.

He said Australia's luck was "beginning to run out" and the country had big questions to grapple with in the near future.

"We've got anxious consumers who are saving money, with real wages falling in a country where incomes have peaked.

"And they're distrustful of the political class where consensus is breaking down. We need to work out how to put things back together."

Mr Costello's comments come after Treasurer Joe Hockey earlier this week again dismissed the idea that Australia was facing a housing bubble, citing a supply shortage as the key price driver.

Mr Hockey's comments were made in response to a warning sounded by the Bank for International Settlements that labelled Australia's residential property market as one of the world's most overvalued.

The global bank's assessment aligns with comments made at the September board meeting of the Reserve Bank of Australia, where board members explicitly highlighted that they are now on high alert for a potential bubble.

But Mr Costello stopped short of calling Australia's booming property markets a bubble, instead saying housing prices were growing so quickly because of a limited supply of land.

Australia's limited supply of housing is being increasingly snapped up by foreign buyers, who in theory need to apply to the Foreign Investment Review Board to buy established homes rather than new developments.

But Coalition MP Kelly O'Dwyer this week revealed these restrictions are not being adequately enforced.

Mr Costello said the global investment community was watching short-term economic management strategies in United States closely, as changes to these would be the "biggest thing that will affect all asset classes in the next year".

He said the "music" of low, short-term interest rates and considerable money printing had to stop, which would cause markets either to tank or to return to more normal growth rates.

"It could still be a good time for property if things revert to normal. But there could be a fair bit of hardship before we get there," Mr Costello said.

"Between now and then, there will be enormous adjustment in our society. Those that are nimble and those that are quick will take advantage, but it's being ahead of the curve is what matters."

Mr Costello, who is also chairman of Australia's Future Fund, said property would be an increasingly important investment class as the population ages.

Mr Costello also appeared to criticise the government by observing that the political class had damaged voter trust with some decisions.

Responding to that, Treasurer Joe Hockey denied his budget had breached the goodwill of Australians by introducing unheralded measures such as the deficit levy, the proposed GP payment, university cuts, and the fuel-tax hike.

"Well no, because governments never stand still," he told the ABC's 7.30 program.

"We said we'd fix the budget, now unquestionably, Labor did not tell the full story about the budget that they left behind."

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