Over the past year, the Government has stood with the people of New South Wales as the State has confronted some of the biggest challenges in its history. Together, residents of New South Wales have come out stronger on the other side. This Budget continues to invest in people, not just to overcome great challenges, but to deliver transformational reforms that will build a brighter future for the State.
The NSW economy continues to bounce back strongly from the COVID-19 pandemic and the storms and floods.
High vaccination rates, ongoing economic support measures and the States shift to living with COVID-19 have meant that the impact of the Omicron strain has been lower compared with previous outbreaks.
Growth in the domestic economy (known as State Final Demand) is expected to be 23⁄4 per cent in 2021-22 despite these challenges. In addition, the employment decline recorded during the Delta outbreak has been recovered, with employment more than 130,000 higher than immediately before the onset of COVID-19 in February 2020. The NSW unemployment rate has fallen to a historically low level of 4.0 per cent in May 2022.
Building a brighter future for NSW families
To build a brighter future for families across the State, the NSW Government is investing in what matters. This includes strengthening frontline services, delivering a record infrastructure program, and taking pressure off families and small businesses.
In the medium-to-longer term, the Budget supports sustainable economic growth with a focus on increasing productivity and participation. This will support New South Wales to preserve and strengthen the State's asset base to ensure economic prosperity, while capturing the opportunities associated with the global shift to a low-carbon, environmentally sustainable, resilient and inclusive economy.
The Budget remains on track to return to surplus in 2024-25, which will strengthen the State's capacity to respond to future shocks. This is as forecast in the 2021-22 budget, notwithstanding the challenges of the Delta and Omicron outbreaks, floods and global inflationary pressures. Rebuilding fiscal sustainability for future generations supports ongoing investment in better services and allows the Government to continue delivering its record $112.7 billion infrastructure program across the State.
Maintaining sustainable levels of debt over the next decade is at the forefront of the NSW Government's fiscal strategy. The 2022-23 NSW Budget supports the economy, with growth resulting in higher State revenues and implementation of measures to improve fiscal sustainability. For example, in 2021-22 and 2022-23, $11 billion of debt will be retired through the NSW Generations Fund. This was possible only through the sale of the State's residual stake in WestConnex for $11.1 billion.
The NSW economy has continued to rebound strongly from the Delta outbreak last year, despite the challenges posed by the Omicron strain and floods in early 2022. The economic impact of Omicron has been lower than previous outbreaks due to high vaccination rates, economic support measures and the community adapting to living with COVID-19.
Gross State Product (GSP) growth is forecast to average 2½ per cent over the five years to 2025-26, aided in the near-term by strong momentum in the labour market and the resilient state of aggregate balance sheets. The NSW unemployment rate fell to a historically low level of 4.0 per cent in May 2022. It is expected to remain at or below the level consistent with full employment (assumed to be broadly consistent with an unemployment rate of 4.0 per cent) for the forecast period.
A tight labour market is expected to drive higher wages. For the public sector, the new wages policy provides for higher remuneration increases of 3.0 per cent in 2022-23 and 2023-24. An additional 0.5 per cent is on offer in 2023-24 for employees who make a substantial contribution to productivity-enhancing reforms.
Strong growth in the demand for goods at a time of strained global supply and tight labour markets has driven up inflation across the developed world. The rate of inflation is expected to ease next year but will remain higher than pre-pandemic levels across the forecast period. Monetary policy remains supportive of growth, with the cash rate remaining very low (0.85 per cent in June), though further rate increases are expected.
The outlook is subject to an unusually elevated level of risks. These extend beyond the threat posed by COVID-19 and any potential new variants. Notable other sources of risk include supply-chain pressures arising from the conflict in Ukraine, China's zero-COVID-19 policy, and the reaction of central banks globally to elevated readings for inflation. The NSW Government is investing in sustainable economic growth, supporting increased workforce participation and transitioning towards clean energy.
The State's strong financial position enabled the NSW Government to provide comprehensive support to the economy and the community through the worst of COVID-19 and floods. These measures have protected jobs and businesses.
The rebounding economy underpins revenue improvement of $28.2 billion over the five years to 2025-26, relative to the Half-Yearly Review.
However, the pandemic is continuing to create challenges for the State and its economy. The 2022 flu season and cases of COVID-19 continue to apply pressure to the NSW health system. China's public health responses to COVID-19 and global supply chain issues created by the pandemic have driven higher inflation. These international economic and inflationary pressures are exacerbated by Russia's invasion of Ukraine.
The 2022-23 NSW Budget accelerates investment in the health system, and provides immediate support for cost-of-living pressures and housing to deal with these temporary challenges. Furthermore, the NSW Government is investing to rebuild and support flood-affected communities.
As a result of these measures, a budget deficit of $11.3 billion is projected for 2022-23. Nevertheless, the State remains on track for a return to surplus by 2024-25, as forecast in the 2021-22 Budget, prior to the Delta and Omicron outbreaks and the 2022 floods. The return to surplus will help restore capacity for New South Wales to respond to future shocks.
In addition to responding to these short-term challenges, the Budget also prioritises investment in productivity enhancing reforms that will help drive sustainable economic growth and protect the long-term strength of the State's fiscal position. This includes a $112.7 billion four-year infrastructure program, $1.2 billion over four years to support women's economic participation, $3.8 billion over four years to improve developmental outcomes for children in the years before school and $1.0 billion in investment over 10 years to improve New South Wales's research and development precincts.
Fiscal sustainability for future generations
The NSW Government is committed to maintaining sustainable debt levels over the medium term. The 2022-23 NSW Budget projects a stabilisation of net debt at about 14 per cent of Gross State Product by June 2026, followed by a gradual decline towards the end of the decade.
To manage net debt to sustainable levels, the NSW Government has undertaken the following initiatives:
WestConnex transaction: completing the sale of the Government's residual stake in WestConnex for $11.1 billion.
Debt retirement: using the NSW Generations Fund and the proceeds of the WestConnex sale to retire $11 billion over a two-year period.
Sustainability bonds: the NSW Government is one of the largest semi-government issuers, with $7.0 billion in bonds issued to help diversify the State's investor base and facilitate capital flows towards ESG objectives.
The 2022-23 NSW Budget also includes $2.0 billion in budget improvement measures to support fiscal sustainability and a return to surplus, comprising:
$1.4 billion from revenue measures, including amending the point of consumption and betting tax rates, increasing the foreign investor surcharge land tax rate, a reduction in the discount available for the early payment of land tax, and investment in additional compliance within Revenue NSW.
$645.8 million in savings measures largely through the introduction of a further efficiency dividend from 2023-24 to 2025-26 onwards and lower wages growth for senior executives.