Any moves by the federal government to lift the GST 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 its current level of 10 per cent.
The GST increases prices on most items by 10 per cent, with the revenue distributed among the states and territories.
When it was introduced in July 2000, retail spending fell 10.6 per cent in the month, but then bounced back five per cent in August.
AMP Capital chief economist Shane Oliver said income tax cuts would need to be introduced alongside any hike in the GST to offset the impact on spending.
"The experience of 2000 tells us there is no hope of this thing thing getting up unless there is significant compensation for low income earners and pensioners," he said.
Dr Oliver said any increase in the 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," he said.
Dr 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 June 2000, when retail spending shot up eight per cent, a month before the GST's introduction.
"It does create some volatility, boosting spending prior to the GST, subduing it in the month or the quarter that it's increased and then we eventually get back to normal," Dr Oliver said.
Prime Minister Tony Abbott flagged in a speech 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.
Market Economics managing director Stephen Koukoulas said the economic impact of a higher GST would depends on what the government did with the extra money raised.
If all or part of the money goes to reducing the deficit then it would weigh on economic growth because of reduced spending by governments, he said.
A rise in the GST would also have an initial psychological impact on consumers, but if there were offsets like income tax cuts there would be little lasting damage to retail spending and confidence levels.
"These broad-based consumption taxes are not a bad idea as long as they are implemented with fairness and equity for the low income receivers," he said.
HOW AUSTRALIA'S GST SITS WITH OTHER CONSUMPTION TAXES
* UK - 20 pct standard rate
* France - 20 pct
* Germany - 19 pct
* China -17 pct
* Japan - eight pct
* Canada - 5-15 pct, depending on the province
* US - nil to 7 pct, depending on the state
(Includes: value added tax, goods and services, US state sales tax and Canada's harmonised sales tax)
Source: VATlive.com
