Overview

Since the 2023-24 Budget, Moody's and Fitch ratings agencies have reaffirmed the State's triple-A credit rating, while S&P Global maintains the State’s double-A plus rating. This has reflected the Government's prudent fiscal management. 

The NSW economy has remained resilient, supported by rapid population growth and a strong labor market. Although inflation is easing, it remains at an elevated level, leading the Reserve Bank of Australia to raise the cash rate.

Economic growth, while forecasted to be below trend in the near term, has seen a modest upward revision for 2023-24. This is due to stronger population growth and the economy's overall resilience. 

Spending has been tightly controlled since the Budget. However, external factors including high inflation, high bond yields, reduction in the national GST pool and withdrawal of infrastructure funding from the Australian Government have maintained pressure on the budget result.  

Household budgets have been affected by high inflation and rising interest rates, leading to a forecast $1.9 billion decrease in the State's GST receipts over the four years to 2026-27. State revenues have also been impacted by a reduction in infrastructure funding following the Australian Government’s Infrastructure Investment Program review.

Compared to the 2023-24 Budget, the budget result for 2023-24 has worsened by $1.7 billion. Despite the pressure on the State’s operating position, the Government remains on track to achieve a modest surplus in 2024-25, followed by expected surpluses in 2025-26 and 2026-27.

The Government’s infrastructure program is forecasted to be $117.0 billion over the four years to 2026-27, aligning broadly with the Budget.

Economic Outlook

The NSW economy has remained resilient since the Budget, driven by population growth and a strong job market. This has resulted in a modest increase in economic growth forecast for 2023 24 to 1½ per cent. However, higher inflation and rising interest rates are continuing to affect household budgets. 

Population growth has fuelled housing demand, driving both rents and dwelling prices higher. While near term dwelling prices have been revised upward, the growth pace is expected to ease.

Despite solid employment growth, the unemployment rate has ticked upward in recent months. The labour market, tighter than historical norms, is showing signs of easing. The unemployment rate rose to 3.4 per cent in October, from its trough of 2.9 per cent in June 2023. The unemployment rate is forecasted to peak at around 4½  percent by mid 2025, slightly below the expectations at Budget.

Overall inflation has decreased as expected, influenced by lower goods prices and government rebates. However, underlying inflation remains high due to demand-side pressures and rising wages. This has prompted the Reserve Bank of Australia (RBA) to raise the cash rate by a further 25 basis points to 4.35 per cent in November.

There is a slight upward revision in the inflation forecast in 2024-25, attributed to persistent strength in services inflation. However, signs of an easing in the labour market are expected to see inflation gradually return to around 3 per cent by late 2024-25.

Economic Performance and Outlook^(a)

1. Forecasts are rounded to the nearest quarter point and are annual average per cent change, unless otherwise indicated. 2023-24 Budget forecasts in parenthesis where different.
2. June quarter, per cent.
3. Per cent change through the year to 30 June. 2022-23 figure remains a NSW Treasury forecast and is rounded to the nearest 0.1 percentage point. The assumption for net overseas migration takes into account partial data to the September quarter 2023 and thereafter is assumed to increase in line with assumptions in the 2023-24 Australian Government Budget.

Note: Commodity prices are assumed to follow Consensus Economics forecasts as of October 2023. The RBA’s interest rate path over the course of 2023 and 2024 is assumed to be broadly in line with the assumptions underpinning the RBA Statement on Monetary Policy (November 2023). The Australian dollar trade-weighted index is assumed to average 63.8 across the forecast period.

Source: ABS and NSW Treasury

Fiscal Position and Outlook

The budget result for 2023-24 is estimated to be $9.6 billion in deficit, a $1.7 billion deterioration since the Budget. This is due to increased interest expenses, weaker than expected investment returns and lower Australian Government funding for infrastructure. 

Despite fiscal pressures, the State remains on track to achieve a budget surplus in 2024-25, with an average surplus of $0.7 billion projected over the three years to 2026-27. New spending decisions by the NSW Government have had a minor impact on the budget position. The changes in the budget result primarily stems from increased projections and downward revisions to forecast revenue. This includes lower GST payments, reduced Australian Government grants for infrastructure and the impact of volatile global financial markets on investment fund performance.
  
Since the Budget, net debt is projected to increase to 13.1 per cent of GSP by June 2027 and gross debt is projected to increase by $3.2 billion to $189.9 billion by June 2027. This is mainly due to a reduction in Australian Government grants for infrastructure and an increase in interest expenses over forward estimates.

The State’s triple-A credit ratings have been reaffirmed by Moody’s and Fitch, and S&P Global has maintained the double-A plus rating.