Australia’s first female Governor-General, Quentin Bryce (centre), on Friday hosted Janet Yellen (right), the first woman to head the world’s most influential financial institution, the US Federal Reserve, and Christine Lagarde, the first woman to lead the International Monetary Fund. Dr Yellen and Ms Lagarde will attend the G20 Finance Ministers and Central Bank Governors meetings this weekend. Photo: James Brickwood

Treasurer Joe Hockey has used the world stage to warn that Australia will run out of money for health and education, and must consider unpopular options such as lifting the retirement age to 70, introducing big new taxes, and redesigning the economic system.

''The starting point is, if our health, welfare and education systems stay exactly the same, Australia is going to run out of money to pay for them,'' Mr Hockey said ahead of the G20 forum in Sydney.

''We will either have to have a massive increase in taxes - and that means fewer jobs at the end of the day - or we are going to have to look at ways that we can restructure the system to make it sustainable.''

We must work more and pay more for health, welfare and education, warns Treasurer Joe Hockey ahead of the G20 forum in Sydney. Photo: Bloomberg

Mr Hockey said tough choices could not be avoided after Health Minister Peter Dutton earlier in the week floated the idea of Medicare changes, including a co-payment for GP appointments.

Mr Hockey said Commonwealth outlays on health were growing exponentially, rising from $65 billion at present to a projected $75 billion in three years time.

''That is the equivalent of imposing effectively half the carbon tax to a full carbon tax just to pay for the growth in Medicare,'' he said.

Also on Friday Mr Hockey nodded as the OECD secretary- general, Angel Gurria, outlined what he called a "road map" for Australia, including an increase in the rate and coverage of the goods and services tax.

The deliberately startling comments painted a picture of an economy in decline from serious structural problems, just as leaders of the world's major economies praised Australia's economic achievement.

The Treasurer used the setting to shock voters ahead of what is being billed as a horror budget.

The tough talk threatens to leave voters confused, as the Abbott government issues mixed messages over health funding, having promised to quarantine it from cuts before the election.

Prime Minister Tony Abbott has again said he will honour a pledge of zero cuts to health funding, confirming ''we will absolutely keep our commitments''.

''I want this government to be the best friend that Medicare has ever had,'' he said on Friday.

However the strength of Mr Hockey's language also reflects the politically diabolical choices outlined in the government's Commission of Audit interim report received last week.

Among the issues, he said, was Australia's retirement age, which would need to keep climbing, probably to 70.

"Something I didn't know until today, two other ministers have told me that it was [the 19th century German statesman] Otto von Bismarck who set the pension age at 65," he said. (Although this is a myth - Germany set the retirement age at 70. It was dropped to 65 well after Bismarck died.)

"It was set at that level in Australia in 1908 when life expectancy was 55. Life expectancy is now 85 and yet as of today 65 is still the pension age. The previous government announced plans to increase it to 67, but as the United Kingdom and others are doing we will have to look at ways to continue to increase it as we live longer.

"A lot of countries are facing a challenge of an ageing population and I would challenge everyone in Australia to participate in a mature debate about the quality of life we want in Australia - what is sustainable, what is the quality of healthcare, what is the quality of aged care, how are we going to give Australians the finance to live with dignity."

Mr Gurria, a former Mexican diplomat, said of the OECD's roadmap: "We are all strapped for cash. Consumption taxes are a trend in the whole of the world … We all think that our own country is very original and different. And of course Australia is, but not so much.

"There are certain things that have a common strand. More consumption taxes is one, and closing the loopholes in goods and services taxes. The second is property taxes. They distort economic activity less and are more difficult to avoid. The third is green taxes. I know that you are having a discussion in Australia, but you need a mechanism that will reduce emissions. I think we all agree that we are on a collision course with nature."

Industrial relations is also in the reform frame for the economy. Mr Abbott brushed aside suggestions the government's Productivity Commission inquiry into the Fair Work laws, which is due to begin in March, would quickly lead to cuts in penalty rates.

"I wouldn't want people to get overexcited about any particular commitment. We will keep all of our commitments, including that one,'' he said.

Health, welfare and education: Tough choices loom for Treasurer Joe Hockey