Economic outlook
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.
Fiscal outlook
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.
