Australia will end up in the same economic position as Europe if the government doesn't start to curb spending, says former Liberal treasurer Peter Costello.
"Europe at the moment is suffering under a mountain of debt that it can't service," he told Macquarie Radio on Tuesday.
Australia's longest-serving treasurer warned Labor to heed the lessons implicit in Europe's demise, saying the government could only spend money it doesn't have "for a while" before it will end up using all of its income to service its debt.
"This is what I have been warning about here in Australia for some time," he said.
"If the journey keeps continuing at the rate in the years ahead that it did in the last three or four years it won't be too long before we start experiencing European-type problems.
"This is a realisation that I don't think Julia Gillard has yet to come to grips with and I don't think the government has come to grips with."
Mr Costello said Australia's post-war manufacturing boom was built on cheap energy supplies such as coal.
"If Australia wants to say that it is no longer going to be the home of cheap electricity and cheap power, which is what the carbon tax is all about... then the whole premise for the manufacturing industry changes."
Mr Costello also warned the mining boom would come to an end.
"If all we have got is government debt then we would have completely wasted this," he added.
Manufacturing Minister Kim Carr rubbished Mr Costello's prediction that the carbon tax put the sector under threat.
"That's complete nonsense, absolute nonsense," he told reporters in Canberra.
"We're providing very much more substantial support to the various manufacturers than in fact the carbon arrangements would bring."
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