AUSTRALIA'S black economy is robbing government coffers of at least $5 billion a year, with more than half a million workers involved in cash-in-hand payments.

A report by the Australia Institute think tank says the cash economy is stripping $2.7 billion, or more, from state governments each year by reducing the pool of GST. The federal government is also being deprived of billions in income tax revenue.

Pressure on state government finances are forcing Barry O'Farrell to raise the possibility of lifting the base of the GST. Credit:James Alcock

The institute calculated the black economy will cost the NSW government at least $829 million this financial year - more than the entire budget deficit of $824 million it forecast for 2012-13. That loss to the black economy is also more than four times the amount the O'Farrell government cut from education funding in 2012-13 amid a storm of controversy last month.

The NSW Premier, Barry O'Farrell, says lifting the rate and/or the base of the GST should be considered given the pressure on state government finances.