The IMF's annual review of Australia has issued a sharp warning for the first time that the high and rising levels of household debt and net foreign debt make it vulnerable to a sudden collapse in the confidence of global investors.

''Australia's persistent current account deficit, sizeable short-term external debt, and the worsening households' balance sheets were seen as vulnerabilities,'' the IMF's board concluded.

A similar warning was delivered by IMF staff who visited Australia in June to meet Treasurer Wayne Swan, Reserve Bank governor Glenn Stevens and senior officials.

''In the past, Australia has readily financed its current account deficit, but global capital markets and the availability of capital have become more challenging,'' the staff report said.

''Staff projects an increase in net foreign liabilities to 70 per cent of GDP by 2014, assuming current account deficits of about 4 per cent of GDP are sustainable.''

If markets decide they are not, the report warns, a capital shortage could reduce future growth.

Neither the staff nor the board proposed ways to reduce Australia's dependence on debt, other than to urge the authorities to lean on the banks to reduce their short-term foreign debt - which banks are already doing.

The IMF's concern matches the views put by Mr Stevens last month, when he warned that Australia and the world would have to get used to working with less debt and ''scarcer and more expensive credit'' in future.

The IMF praised the Rudd Government for its fiscal stimulus, calling it a ''timely policy response, which has effectively cushioned the impact of the global financial crisis on the Australian economy''.

It estimates that, while the discretionary fiscal easing will amount to more than $100 billion or 8 per cent of GDP by 2012, the benefit the economy derives from it will be close to 10 per cent of GDP over that time.

But it forecasts that Australia's recovery will be slower than Treasury and the Reserve Bank predict, with growth of minus 0.5 per cent this year, 1.5 per cent in 2010 and 2.8 per cent in 2011.

If so, it says, the Government's debt will take longer to repay than Treasury forecasts, with net debt in 2019 likely to be 10 per cent of GDP rather than the 4 per cent officially predicted.