The International Monetary Fund has warned of a significant risk that inflation will stop falling due to the strong jobs market and rapidly rising public sector demand, and called for spending restraint across all tiers of government.

Releasing a health check of the Australian economy on Tuesday, the Washington-based IMF said higher-for-longer interest rates and broad-based government spending cuts may be needed if it appeared inflation was no longer on track to hit the RBA’s 2 per cent to 3 per cent inflation target.