State economy rebounds, shakes off Coronavirus

Sydney’s booming property market and a stunning turnaround in unemployment rates have put NSW on a recovery trajectory from the pandemic.

Shoppers at the Farmers market at Carriageworks in Sydney. Picture: NCA NewsWire/Joel Carrett.

Sydney’s booming property market and a stunning turnaround in unemployment rates have put NSW on a recovery trajectory from the Covid-19 pandemic, but Treasury officials warn that the state’s success remains dependant on the reopening of international borders and no further restrictions being imposed across the business sector.

Seven months after delivering a budget that warned of surging unemployment rates and unprecedented levels of debt, Treasurer Dominic Perrottet said on Tuesday that economic activity had ­revived to its pre-pandemic levels and appeared to be exceeding ­expectations in some areas.

Household spending had rebounded by 15 per cent since the height of the pandemic, while housing investments were up 18 per cent, he said. The state was tracking towards full employment by 2024-25, and business confidence had reached record levels, surpassing that of all other states and territories.

Pointing to the state’s far more robust financial position, Mr Perrottet said not only had every job lost during the pandemic been restored, but an additional 36,000 positions had been created.

“We are back to growth, and back on track – and it is no accident,” Mr Perrottet said, crediting the government’s stimulus measures and its health system with ­accelerating the recovery and keeping the state open.

“Today, other governments are raising taxes and cutting wages, sacrificing growth to save their budgets,” he said.

“In NSW we do not have to make that choice.”

The optimistic forecasts, which predict the state returning to surplus by 2025, have been predicated on several uncertain economic assumptions. These ­include relative stability in the housing market, a reopening of international borders, and further expansion in the labour market via the pandemic trend of remote working arrangements.

Mr Perrottet sold the budget as one that would benefit families but critics attacked its extensive reliance on road tolls, fines and taxes, all of which have been ­earmarked to increase over the coming years.

Fine revenue will rise from $645m to $883m over the next 12 months, delivering $3.5bn over the forward estimates. Road tolls will rake in about $677m over the same period, according to the budget papers.

NSW Labor leader Chris Minns, who will deliver a budget reply speech on Thursday, said: “Fines are up, tolls are up, taxes are up, and housing affordability is down – there’s barely anything in this budget to ease the cost of living for working families.”

Assuming international borders reopen by mid-2022, and any further Covid outbreaks do not require punitive economic restrictions, then the state’s fortunes appear to be headed for a spectacular recovery.

Unemployment had previously been forecast to reach 5.24 per cent by 2023-24 but this has been revised down to 4.75 per cent and is expected to decrease further to 4.5 per cent – or full employment – by 2025.

As recently as November, debt levels were earmarked to reach $104bn by 2023-24 but this, too, has been rewritten — it will now fall shy to $94.3bn.

Ratings agency S & P Global said the serviceability of this debt remained strong due to low interest rates and the Reserve Bank of Australia’s ongoing bond purchase program. It did not announce any change on Tuesday to the state’s credit rating, which was downgraded to “AA+” in December, but said the path back to a surplus will “likely be faster than we previously anticipated”.

But much depends on the reopening of Australia’s borders. The budget papers say that a one-year delay to current targets would cause a 0.9 per cent contraction to the NSW economy. It would also push unemployment rates up by roughly the same amount. Mr Perrottet said the closures were already costing the state $300m every month.

“The primary factor preventing the economy’s return to its pre-Covid growth path is the ongoing closure of Australia’s international border,” Treasury officials said.

Mr Perrottet said the budget deficit – predicted to reach $16bn in 2020-21 – had since halved to $7.8bn. He said this number would have to rise slightly over the next 12 months – to $8.6bn – in order to accommodate further stimulus and spending measures that would “protect the safety of our citizens”. A $466m surplus is forecast by 2025.

The treasurer said he could have curtailed spending and pulled the state out of deficit sooner but both he and the premier wanted to remove a wage freeze on public sector workers to further promote economic activity. The measure, which will allow wages to increase by up to 2.5 per cent, will cost the government $2.7bn.

It has been roundly criticised by union officials who say the percentage increase is still too small to make a substantial difference to the lives of these workers.

GST receipts and stamp duty payments rose substantially over the past year thanks to higher levels of domestic tourists – who would otherwise have travelled abroad – and a surge in Sydney’s property market, which has seen house prices rise by 20 per cent over the past year.

These factors, and others, enabled the government to increase its spending by 8.2 per cent during the pandemic. This spending is expected to continue over the coming year, largely insulating the economy from the pandemic, before contracting substantially ahead of the 2023 state election.