NSW state coffers have taken a battering from COVID-19, natural disasters and rising interest rates – and that has big implications for how much cash the major parties will be able to splash ahead of the March state election.
Here are three charts from the NSW government’s half-yearly budget review, released on Tuesday, that show why this shouldn’t be a big-spending election campaign.
The NSW budget plunged deep into the red after COVID-19 hit in 2020 and has been in deficit ever since.
The half-yearly budget review forecasts the deficits for this financial year and the next to be bigger than expected in June last year, not smaller.
The government blames this on the lasting effects of the pandemic, extra spending due to last year’s “unprecedented flooding” and a “faster than anticipated” rise in global interest rates.
There was also a downward revision in expected stamp duty revenue thanks to the recent slump in the Sydney property market.
The forecast budget shortfall for next financial year (2023-24) has more than doubled to $6.5 billion – it will be the NSW government’s fifth consecutive deficit.
A wafer-thin surplus has been tipped for 2024-25, but a lot will have to go right for that forecast to be met.
As a result, any big-spending election promises will push the budget further into the red unless they are offset by savings.
Higher state debt is one of the lasting legacies of COVID-19.
Back in 2018-19 NSW had no net debt, but the ravages of the pandemic rapidly changed the state’s borrowing profile.
The half-yearly review forecasts net debt to be $78.4 billion this financial year, rising to $116.5 billion in 2025-26, a little higher than the budget forecast in June.
By mid-decade, the NSW net debt will be equivalent to 14 per cent of the state’s annual economic output – far higher than at any time in the past three decades. The sharp rise in global interest rates during the past year means the cost of servicing future borrowings will be much higher.
Treasurer Matt Kean claims the state’s net debt will begin to fall as a share of the state’s annual economic output from around 2026. But that will only happen if politicians resist the temptation to make expensive new promises ahead of the election that are not offset by savings or higher revenue.
Slower growth and rising uncertainty
The NSW economy has recovered strongly from the pandemic’s disruptions. But the half-yearly budget review has scaled back forecasts for the state’s economic growth in coming years and warned the outlook is “highly uncertain”.
The NSW economy is forecast to expand by 3.75 per cent this financial year (down from the 4.25 per cent expected in June), before slowing to just 1.5 per cent in 2023-24 as the effects of high inflation and rising interest rates take a toll.
The state’s unemployment rate, which has recently been at historic lows around 3 per cent, is forecast to rise to 4.5 per cent next financial year.
The review warns of multiple economic “headwinds” including a challenging global landscape.
That uncertainty is another good reason for the state’s politicians to resist big-spending election promises.
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