Why seven million people live in a state of despair in NSW

NSW has regressed to be a Euro-style mature state within a rapidly changing federation, after a lost decade.

NSW has regressed to be a Euro-style mature state within a rapidly changing federation, after a lost decade of insipid economic and population growth and spectacular government mismanagement.

The once "premier state" has become a miserable also-ran, no longer the pace-setter in administration or reform. Worse still, business deems NSW hostile to new enterprises.

The pantomime story of the Carr-Iemma-Rees-Keneally years, which began in 1995, is well-known: a tale of gearing up for the 2000 Sydney Olympics, then coasting downhill in the noughties on a big-spending program, political opportunism and low-ball gesture policies.

What is becoming painfully apparent to the state's 7 million citizens, as the nation emerges from the global financial crisis, is how far NSW has fallen behind and the few options left to staunch the economic blood flow.

Access Economics director Chris Richardson says: "NSW is easily the worst-run state in the nation. It has been unable to control recurrent spending. Victoria has shown an understanding of which mix of state taxes works best and which don't. NSW still doesn't get it."

Yet NSW retains its AAA credit rating and managed to avoid recession, growing by 0.2 per cent in 2008-09 thanks to Canberra's stimulus dollars and the Reserve Bank's emergency slashing of official interest rates.

No other state responded as well to the lower interest rates, said Mr Richardson, who calculated that the central bank's aggressive cuts boosted average disposable family incomes in NSW by 7 per cent, and saved the state's retailers as shoppers spent up big.

The three recent monthly rises in interest rates will have a chilling effect on the NSW economy, where house prices had started to kick up over the course of the year.

According to the Commonwealth Grants Commission, which determines the carve-up of federal GST funds on a needs basis, NSW has become a poor relation. It now has the fourth-highest average fiscal capacity in the federation, and the cost of delivering services has accelerated.

In the decade to 2008-09, NSW grew at an anaemic 2.1 per cent a year. Think of those high-tax, plumpy countries in the northern hemisphere, their industries in decline and incomes in peril.

Forget the bolters of Western Australia and Queensland, on the frontier zipping ahead on 4-plus per cent annual growth.

During the long boom of almost two decades of uninterrupted growth, NSW has underperformed the annual national average growth rate by a full percentage point.

The state's share of national population and output has been on the slide since former premier Bob Carr (1995-2005) declared NSW was full.

At the start of the decade, NSW's gross state product accounted for 33.8 per cent of the national total; it is now 32.1 per cent and heading down.

The state's population has grown from 6.4 million to 7.1 million since 1999, or 10.7 per cent.

A state that is a magnet for tourists, exports coal, still manufactures a wide range of goods, has a thriving education, financial services, media and telecommunications hub, and is blessed with a jewel called Sydney, has no excuses for such a woeful record -- bar one: NSW Labor.

Management, particularly financial and service reform, matters. NSW has become the spendthrift state, soft in the face of public-sector pay demands, that makes everyone else look good.

State government own-purpose spending has doubled during the past decade to an expected $55 billion this financial year. Take away inflation and population growth and the increase in the size of government is astounding.

Wages in the public sector have outstripped income growth in the private sector over the decade.

To feed the state's spending monster, the NSW government has pushed hard on taxing its residents and businesses. Taxation per capita is 6 per cent above the weighted national average.

But it is in the area of business tax that NSW's government really bites. According to a benchmarking study by Melbourne think tank the Institute of Public Affairs that compared state business tax liabilities last year, NSW placed an excessive burden on its enterprises.

Looking at taxes on payroll and land, duties on land transfer, insurance and vehicles and vehicle registration fees, NSW was the worst performer. Its business tax burden was 7 per cent above the national average and almost 14 per cent above that of Western Australia, the nation's top-ranked business tax regime.

New Premier Kristina Keneally will have inherited the briefing papers of her predecessors. There is no single inspired policy response to end the NSW malaise. In fact there are two dozen helpful things Labor could do.

For a start, the state has to control spending to a 2 per cent real increase, limit public sector wages growth to the inflation rate, fix the ports, public hospitals and traffic congestion, implement long-term plans for transport and other infrastructure, complete a bold rationalisation of the public service into 13 super-departments -- and there are a dozen other "must-do nows".

But the age is in and the wit is out when it comes to this forlorn Labor crew. The March 2011 election cannot come quickly enough.