By Matt Wade and Nigel Gladstone
Daniel Mookhey’s second budget begins on a downbeat note. “The people of NSW are doing it tough,” says the opening line.
But it’s not all gloom. The budget goes on to outline welcome new spending on social housing. There’s additional funding for domestic violence prevention and GPs will be given an incentive to bulk-bill with the offer of payroll tax relief. The state economy is also forecast to regain momentum in the year ahead after a period of high inflation and subdued growth.
These five charts show key aspects of the budget.
Economy to improve
As the budget’s first line acknowledges, households in NSW have been grappling with a lingering cost-of-living crunch which has, in turn, affected spending.
The budget says economic growth in NSW slowed to just 1.5 per cent during this financial year, well below the state’s long-term trend. Unemployment has edged higher as a result.
But economic activity is predicted to strengthen in 2024-25 as cost-of-living pressures ease.
“Overall, the outlook is consistent with a soft landing for the economy,” the budget says, meaning a severe slump should be avoided despite the spate of interest rate rises in 2022 and 2023.
Economic growth in NSW is now forecast to pick up to 2 per cent next financial year, well above the 1.25 per cent growth expected only six months ago. The budget anticipates the annual output of the NSW economy will rise to almost $1 trillion by June 2028.
NSW and the incredible expanding deficits
Despite the growth pick-up, NSW is forecast to remain in deficit for the next three years. That’s a striking turnaround from the last budget update in December, which tipped a return to surplus in 2024-25 and in subsequent years.
NSW has already had five deficits in row and that will now extend to nine – the state’s longest stint in the red for decades.
There’s been a worrying trend recently for initial NSW budget balance forecasts to become much worse over time. Take the 2023-24 budget year (which finishes this month) as an example; early last year the former Perrottet government predicted a shortfall of $6.5 billion for that financial year. In September, that deficit was increased to $7.85 billion, and then to $9.55 billion in December. The shortfall has now reached $9.7 billion, nearly 50 per cent higher than what was expected in February 2023.
Every budget balance forecast since 2020-21 has followed a similar pattern; the final result has been a far, far bigger shortfall than first predicted.
The string of deficits in NSW is a legacy of the severe economic disruption caused by the COVID pandemic. Should the economy pick up as forecast, big budget deficits will no longer be justified.
Where the money goes
The NSW government has budgeted to spend $122 billion on its core activities in 2024-25, almost $1.7 billion more than the previous year.
The largest expense is the health system, which includes the state’s public hospitals – that is expected to cost $31 billion in the coming financial year.
Next highest is education, including public schools ($23.7 billion), followed by servicing and maintaining the state’s transport system, such as trains, buses, ferries, light rail and roads ($18 billion).
Spending on wages and superannuation for the state’s public sector workforce will reach $55 billion in 2024-25.
Debt and interest rising
The disruptions of the COVID pandemic along with big investments in infrastructure have triggered a sharp increase in state borrowings during the last five years.
The 2024 budget shows NSW debt continues to climb, although the trajectory is similar to recent forecasts.
The state’s gross borrowing will top $150 billion later this month and reach $200 billion by June 2028.
Increasing debt and higher global interest rates mean the cost of servicing the state’s borrowing has risen rapidly.
NSW’s interest expenses were $4.2 billion in 2022-23, but that is projected to reach $8.6 billion in 2027-28.
The deteriorating debt profile is expected to cost NSW its coveted triple-A credit rating with international rating agencies.
Mookhey blamed a federal government decision to reduce NSW’s share of GST – at a cost of $11.9 billion over four years – for putting the state’s premium credit rating in jeopardy.
“I do expect that to lead to a downgrade for NSW with its remaining credit ratings,” he said on Tuesday.
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