Budget reveals slower growth and smaller surplus for NSW

The Berejiklian government will deliver the smallest NSW budget surplus in seven years as the state’s coffers come under pressure from weaker than expected GST revenue and increased expenditure due to drought and bushfires.

The half-yearly review of the budget, to be released by Treasurer Dominic Perrottet on Thursday, is also expected to cut economic growth forecast for NSW this financial year from the 2.25 per cent predicted in the June state budget to 1.75 per cent.

NSW Treasurer Dominic Perrottet will announce an update of the state budget on Thursday. Credit: AAP

A drought-induced slump in rural exports, especially for cereal crops and textiles such as wool, will reduce the state’s economic growth by around a quarter of a percentage point in 2019-20.

This financial year's budget surplus will be $702 million, more than $300 million lower than the $1.016 billion that was forecast six months ago.

It will be the lowest budget surplus in NSW since 2012-13 when the state registered a deficit of $1.7 billion.

This year's surplus has been scaled down because of lower forecast GST and other revenues, along with increased expenditure commitments including on drought relief.

“The drought and the ongoing bushfire crisis are having an impact on the bottom line and we are forecasting a lower surplus in 2019-20,” Mr Perrottet said.

Since June the government has allocated an additional $208 million over five years to support drought-affected communities. This includes $166 million to help secure water supplies in regional NSW and $36 million to continue drought transport subsidy payments.

The budget review will underscore the economic impact of the drought, which affects 99.9 per cent of the state.

It says a drought-induced drop in rural exports cut 0.2 percentage points, or about $1.3 billion, from the state’s economic output last financial year.

Falling incomes will flow through to lower household consumption growth and lower investment in new farm machinery and equipment as well as livestock. The impact of the drought will also spill over into other industries such as transport and warehousing.

The prolonged dry spell is depleting soil moisture, water storage and herd sizes, meaning a recovery will take time once the drought breaks.

“You don’t need to go far beyond Sydney to see just how dry NSW is and witness the full brunt of the drought, behind these figures are farmers, families and rural communities doing it tough,” Mr Perrottet said.

The budget result was also affected by additional infrastructure spending allocated since the budget in June. However, increased expenditure has been partially offset by higher than expected stamp duty receipts.

The review is expected to forecast NSW's growth rate to climb back to 2.25 per cent in 2020-21.

NSW Treasury is forecasting average surpluses of $1.9 billion over the four years to 2022-23, which is around $200 million per year more than expected in June.

The economy has slowed over the past 18 months amid drought, soft wages growth and weakness in the housing sector. The state’s economic growth rate slowed to 1.9 per cent last financial year, the lowest since 2013-14 and well below the 2.25 per cent forecast by the state government in June.

The unemployment rate in NSW climbed to 4.8 per cent in October, the highest since July last year.