The Federal Budget last week revealed a shortfall in GST payments of $1 billion but a looming collapse in taxation and other State- sourced revenue threatens to blow out the shortfall by an extra $600 million or $700 million over four years.

Treasurer Michael Aird was asked yesterday if the Government was faced with the prospect of a wholesale redundancy scheme. He failed to rule it out.

The last major scheme occurred in the early 1990s and involved 2000 redundancies.

"The Government is doing all it can to save jobs. We are continuing to hold discussions with the unions to see whether we can achieve a vital level of wage restraint, but the Government has made it very clear that if this is unable to be achieved it will have to consider other savings options," Mr Aird said.

Tasmanian Chamber of Commerce and Industry chief economist Richard Dowling said the State was vulnerable to a drop in traditional revenue.

"A broad-based redundancy program is inevitable. We have to cut the (public sector) workforce and it is likely to be a voluntary redundancy initially, but it won't be a disaster because with the skill shortage there will be many public servants taken up by the private sector," Mr Dowling said.

He said the public payroll had grown by 50 per cent to about $2 billion a year over the past five years, and this had soaked up a skilled workforce, which the private sector badly needed.

In developments, in the countdown to the June 11 State Budget:

The TCCI is working with the Government on an infrastructure stimulus package.

In the federal Henry review into taxation, the State Government is believed to be backing a national plan to replace State "nuisance" revenue such as payroll tax, land tax and stamp duty with a special income tax surcharge, collected by the Commonwealth for the States.

The Government would not confirm media speculation that its preferred plan to build a new $1 billion Royal Hobart Hospital on the Hobart waterfront would be formally scrapped this week.