Next NSW premier to inherit savage economic contraction and balooning debt

NSW’s incoming premier and likely new treasurer will take charge of a state in the midst of a savage economic contraction.

NSW treasurer Dominic Perrottet is widely tipped to become premier this week, and economists hope he will take his zeal for eocnomic reform to the top job. Picture: NCA NewsWire/Bianca De Marchi

NSW’s incoming premier and likely new treasurer will take charge of a state in the midst of a savage economic contraction, and inherit a ballooning debt burden Moody’s says is not due to stabilise until mid-decade.

Analysts also said despite “some billions” of extra borrowing to pay for Delta response measures, the new leadership team was unlikely to come under pressure to move swiftly to shore up the state’s finances, after Moody’s in a recent report gave no indication it planned to downgrade locked-down states.

Treasurer Dominic Perrottet is tipped to become premier this week, and economists hope he will take his zeal for economic reform to the top job.

Economist Saul Eslake said the instalment of Mr Perrottet as premier could lift the chance of meaningful structural changes, including a mooted replacement of stamp duty on property transactions with a less distortionary residential land tax.

“Berejiklian left the burden of making the case for tax reform to Perrottet, and economic reform is much more likely to happen when the premier and treasurer are both on board,” he said.

There will be more pressing concerns. With greater Sydney on Sunday reaching the milestone of 100 days in lockdown, Mr Eslake said “whoever becomes premier will inherit a state that is in recession”.

During the more than three months of severe restrictions, hundreds of thousands of workers in NSW have been stood down. The total number of hours worked plunged 12 per cent from a pre-Delta peak and employment fell by 210,000 in August.

With NSW residents unable to hit the shops, go to gym or get a haircut, retail spending has collapsed by 14 per cent.

Before greater Sydney was locked down on June 26, the state budget had been heading for a spectacular recovery.

Only four days before the reimposition of restrictions, Mr Perrottet had trumpeted a return to an operating surplus by 2024-25 as the state’s economy and labour market led the V-shaped national recovery.

PwC chief economist Jeremy Thorpe said it was “hard to rely on those numbers now”.

“NSW will come out of this with higher levels of spending, particularly in the health space, and a higher debt interest ser­vicing requirement,” he said.

“All the support the states have been providing through these lockdowns will be a drain on the budget but they will spring back faster as a result.”

In a report issued on the same day as Gladys Berejiklian’s resignation, Moody’s said “despite the underlying momentum of the broader Australian economy, we do not expect NSW’s or Victoria’s debt burdens to stabilise ­before the end of fiscal 2025”.

“Pandemic-related expenditure and infrastructure spending remain key elements of the long-term policy responses to Covid-19, and will drive sustained fiscal deficits over the forward estimates,” it said in a recent research note.

S&P Global Ratings analyst Anthony Walker said he expected continuity in NSW’s fiscal management. “We expect the overall direction of the government will continue broadly in line with its most recent budget – after accounting for the current lockdown policies.”