The Bank of America Merrill Lynch chief economist said the government faced a formidable long-term challenge in narrowing the gaps in economic performance and living standards between Tasmania and the rest of Australia.

But he was confident Premier Will Hodgman and co had made a good start.

"I am certainly not critical of the government for being careful in its first budget - especially since the economy is in the very early stages of recovery," Mr Eslake said.

"We're not in recession, unemployment is falling, retail sales and housing are up.

"However, I do think that what they've done is well short of what will ultimately be needed to meet the fiscal challenges that face Tasmania."

Mr Eslake examined the Tasmanian economy and public finances yesterday during a Launceston Chamber of Commerce presentation at Country Club Tasmania.

He said increasing school retention rates to year 12 and improving the work and life skills of those who have already passed through the education system were the key challenges to improving Tasmania's financial parity with the rest of the country.

Mr Eslake also predicted that Tasmania would pay dearly for its above-average public sector costs, and below average tax rates, should the GST formula be changed.

"There are four Coalition government states (NSW, Qld, WA and Victoria) that feel they are hard done by - states with a lot more votes than Tasmania," he said.

"(If the GST carve-up does change) it will expose Tasmania to the fact that for decades, governments have spent more per head (on public servants) than the rest of the country, and raised income taxes less than the rest of the country."