Tax cut call as Oz Govt talks GST hike

AMP Capital chief economist Shane Oliver said tax cuts would need to be introduced alongside any hike in GST to offset the impact on spending. Photo / Thinkstock

Australia's federal government is mulling lifting GST but any rise should be matched by income tax cuts, leading economists say.

The Government is in the process of reviewing funding for the states - trying to fix the problem of not enough revenue and too many spending responsibilities. One issue that is bound to come up is raising the goods and services tax from 10 per cent.

When it was introduced in July 2000, retail spending fell 10.6 per cent in the month, but then bounced back 5 per cent in August.

AMP Capital chief economist Shane Oliver said tax cuts would need to be introduced alongside any hike in GST to offset the impact on spending.

"The experience of 2000 tells us there is no hope of this thing getting up unless there is significant compensation for low income earners and pensioners," he said.

Oliver said any increase in GST would cut into people's spending power, especially lower income earners who spend a higher proportion of their pay.

"It would have a negative impact but as we saw in 2000, there would be little lasting impact because there would be a form of compensation by income tax cuts." .

Oliver said retail spending would probably get a boost in the lead up to any increase in the rate of GST, with people rushing to buy before any prices rise.

That was evident in June 2000, when retail spending shot up 8 per cent, a month before GST's introduction.

Prime Minister Tony Abbott flagged at the weekend that his Government would be ready to work with states on reforms to improve their tax base - including changes to indirect taxes.