NSW Budget’s housing focus welcome despite surplus slipping out of view

Higher spending on the housing crisis, infrastructure and public sector wages, coupled with lower goods and services tax (GST) allocation and weaker payroll tax, have wiped out the NSW Minns Government’s forecast return to surplus next year.

Instead, it will now deliver a $3.6 billion budget deficit in 2024-25.

The 2024-25 Budget aims to stabilise the trajectory of government debt and return NSW to a sustainable operating position. However, successive – albeit progressively smaller – deficits are projected over the each of the next four years, totalling $10 billion to 2027-‑28.

Compounded by high borrowing and depreciation costs, this will see government debt grow by more than $44 billion to reach $199.9 billion in 2027-28, or 20.3 per cent of projected gross state product (GSP). Without substantial cuts to future spending or the cost of borrowing, the NSW Government is unlikely to be able to stabilise its debt and put the Budget on a sustainable pathway.

Weak growth in GSP is expected for 2023-24 as cost-of-living pressures keep household spending subdued. These pressures are expected to ease in 2024-25 as Sydney inflation falls to the top of the Reserve Bank of Australia’s (RBA) target range of two to three per cent, slightly below the national inflation expectations set out in the 2024-25 Federal Budget. This is expected to help to boost NSW GSP growth to 2 per cent in 2024-25, despite ongoing caution by consumers.

The labour market has been stronger than expected, but the combination of cautious spending, high wage growth and falling inflation is expected to see unemployment rise to 4.5 per cent in 2024-25, which is still relatively low by historical standards.

Total revenue is expected to be $10.7 billion higher over the four years to 2027-28 than forecast in the 2023-24 mid-cycle budget review. Of this, $9.6 billion is from higher tax revenue, reflecting higher stamp duty and land tax revenue, due to the strength of the state’s property market. This is partially offset by the downward revision to NSW GST revenue of $11.9 billion over the four years to 2027-‑28, reflecting the Commonwealth Grants Commission’s revised GST state relative allocations.

New policy measures will add an additional $19.9 billion to spending over the forward estimates, which is only partially mitigated by $7.8 billion in saving and offsets. The major new measures include (over four years, unless specified):

• $4.5 billion for wage increases for public sector workers;
• $527.6 million dedicated to expanding homelessness programs;
• $480.7 million for the Emergency Department Relief Package to ease pressure on emergency department, reduce wait times and improved patient outcomes;
• $253.7 million to improve state planning, including more assessments on development applications and rezonings; and
• $245.6 million to support victims of domestic, family and sexual violence.

Overall, the higher spending risks stoking further inflation, as the public-sector wage rise is likely to stimulate increased spending by these households. In addition, while it includes measures introduced in the 2023-24 Budget, this Budget does little to target new spending measures to cost-of-living relief, beyond welcome measures to address the critical housing shortage issues in NSW.

Housing

Housing is central to this Budget. With a total of $5.1 billion dedicated to its Building Homes for NSW package, the Government is aiming to build up to 30,000 new homes and repair 33,500 existing homes.

The package includes the state’s biggest single social housing investment in history, priority homes for victims of domestic and family violence, and subsidising rent for essential workers. It also includes funding to build supporting and enabling infrastructure.

The 2024-25 Budget builds on existing measures, providing additional funding to target support to essential and at-risk groups, as well as expediting approvals and rezoning. This is critical to addressing the severe shortage of affordable homes in the state. However, the measures could go further.

Modular housing and prefabricated designs would offer further streamlining of approvals and improve construction times, while reducing costs.

Similarly, addressing the disincentive created by stamp duty for households looking to downsize or move to other suburbs and regions would ensure greater mobility in the housing market and alleviate some of the pressure of limited supply.

While recognising that stamp duty contributes more than a quarter of the state’s total tax revenue, it is unfortunate the Government hasn’t done more to reform this policy area. 

Overhauling this tax is a critical piece of the puzzle to solving our multifaceted housing crisis. The Minns Government dumped the previous Government’s plan to phase out stamp duties and replace them with a land tax. It should revisit this decision. 

Infrastructure 

With a large focus on Western Sydney and regional NSW, the Budget builds on its already substantial investment in the state’s critical infrastructure, including transport, hospitals and schools.

Government investment in roads and transportation in congested areas of Sydney is welcomed. Continued investment in the network is required to manage congestion and keep costs down for commuters, particularly in the current cost-of-living crisis. Fostering a growing inexpensive and efficient public transport network is critical to achieving this. The $2.1 billion investment in the Stage 2 Parramatta light rail work is a good example.

Cost-of-living relief

While continuing measures from last year’s Budget, this Budget has failed to substantially build on the $8.7 billion investment to alleviate the cost-of-living pressures felt by many. Instead, it notes that these pressures are forecast to ease. It does, however, increase wages for public sector employees, which will put upward pressure on inflation going forward.

The government could consider further cost-of-living relief targeted at the lowest income households, such as through energy rebates or subsidised public transport.  It is disappointing that the Budget notes that the people of NSW are doing it tough but seems to take the approach that the challenge is already defeated.

Energy transition

The NSW Climate Change Act legislates ambitious targets to achieve net zero by 2050. To date, however, little progress appears to have been made and this Budget does little to further the ambition.

NSW is not on track to meet its legislated 2035 target, which means more action is required now. Simplifying environmental approvals and greater use of price signals to deter some heavy emitting activities would be a good start.