A Liberal MP has claimed she could live on $40 a day “knowing the government is supporting me” as debate grows about the rate of welfare payments in Australia.

With leading economist Chris Richardson on Wednesday arguing an increase in Newstart was more crucial for the economy than a return to a budget surplus, Julia Banks was asked if she believed she could live on current unemployment benefits.

“I could live on 40 bucks a day knowing the government is supporting me with Newstart to look for employment,” Ms Banks replied in an interview on ABC Radio.

Interviewer Rafael Epstein asked Ms Banks, who holds a marginal seat in Melbourne’s south-eastern suburbs, whether the payment was too low.

“No, I don’t think it is,” she said.

Asked where she would live on $40 a day, Ms Banks declined to say, but argued the payment “was not a supplement for a wage”.

“We can’t just keep throwing billions of dollars at Newstart. Then the economy just flags,” she replied.

Ms Banks said she did not support Mr Richardson’s $3 billion a year proposal to lift the payment by $50, saying it would be too costly to the budget.

“I was speaking to a constituent the other day who was on Newstart and who now has a job, and that is what Newstart is designed to do,” Ms Banks said.

Her comments come as welfare groups push for an increase in the rate of Newstart, which has not risen in real terms since 1994.

The maximum fortnightly payment for a person on Newstart is $545.80 for someone who is single, and $590.40 for someone with a child. The payments are increased to CPI.

Mr Richardson called for Newstart and Youth Allowance to be increased by $50 a week and tied to wages.

Opposition Leader Bill Shorten on Wednesday committed Labor to a “root and branch” review of welfare payments, saying they were insufficient.

“I do think there’s a real problem for the government payments for the people at the very bottom of our society,” he said.

“That is why Labor has proposed having a root and branch review of our government’s payment system on Newstart and like-minded allowances and payments.

“Who on earth amongst the government or anyone in the Parliament could live on the Newstart allowance?”

Asked if Newstart’s $40 a day rate was “cruel”, Jobs Minister Michaelia Cash said the government was focused on “getting people off welfare and into work”.

“The best form of welfare is a job,” she said.

“It is there to provide a basic safety net for those who are looking for work who are on welfare.”

Greens senator Rachel Siewert said the payments should be increased by $75, describing the current situation for welfare recipients as “unconscionable”.

South Australian independent senator Tim Storer has also backed a real terms increase in welfare payments, saying it could be funded by extending the GST to financial services.

An Anglicare report released on Monday found that of the 67,000 rental listings surveyed across Australia, only three were affordable for a single person on Newstart.