By Paul Rickard

Labelling a budget that forecasts a surplus of $2.7bn and an average of $2.0bn over each of the next four years as “B Grade” is a tough call. But once the hype about the extra spending on infrastructure fades, the NSW Budget handed down on Tuesday will go down as a missed opportunity.

A little like the last term of the Howard/Costello government from 2004 to 2007, which is now judged by many to be both “wasted” and “wasteful” and led to middle class spending initiatives such as the baby bonus, the Berejiklian Government is following the same playbook. More than six years into office and facing an election in March 2019, Gladys and her team are putting electoral cycle considerations ahead of planning for the long-term challenges that NSW faces. The introduction of an ’active kids rebate’, which pays families $100 for each child who enrolls in sport or swimming lessons, is the classic example of mindless, short-term populism. 

NSW Premier Gladys Berejiklian. Source: AAP

This is not to say that the Liberal Government hasn’t already done a lot of heavy lifting. It has, and through the combined efforts of O’Farrell/Baird/Berejiklian, has run the most fiscally responsible strategy of any of the states. But NSW’s ongoing good fortune depends very much on the housing boom and employment growth, and it can’t afford to rest on its laurels.

As the biggest state and accounting for more than a third of the nation’s economic output, the health of the NSW economy is vital to the nation’s well-being. Moreover, because the states play follow the leader, where NSW goes, others will follow. 

So, missed opportunities need to be called out, risks highlighted, and Governments encouraged to focus on the long-term challenges.

A river of gold from stamp duty drives budget surpluses

The NSW budget forecasts a surplus of $2.7bn in FY17/18, down from the expected $4.47bn projected for the current year ending next Friday, but up $1.37bn from the estimate in last year’s budget. And this comes despite an increase in expenses of 5.0%, as the Government hires more front-line staff such as nurses and allied health professionals, cuts stamp duty for first home owners and implements new programs such as the active kids rebate.

NSW Budget - Key Outcomes

Headline revenue growth of 2.4% in 17/18 masks a largely unchanged GST and Commonwealth grants revenue, and is underpinned by taxation revenue, chiefly stamp duty and payroll tax, increasing by 3.7%. In fact, over the forward estimates, GST revenue is expected to fall in nominal terms to be only $31.6bn in 2020/21.

To make up this slack, taxation revenue grows at a compound rate of 4.0% pa over this period. Payroll tax increases at a compound rate of 4.8% pa, land tax at 7.6% pa and transfer duty on properties and land (stamp duty) by 2.8%. And this is despite the new stamp duty concessions for first-home buyers, a slowing home market and a record take in 2016/17 of $9.6bn (projected), up some 10.6% on the amount collected in 2015/16.

In fact, NSW’s surplus for 16/17 of $4.47bn, which compares to the original budget forecast of $3.71bn, is largely due to higher stamp duty receipts - the river of gold from a booming property market.     

NSW - Revenue Sources

Not only has NSW been enjoying a booming property market, economic output (as measured by real gross state product) has been rising at a faster rate than the rest of the nation. This has been supported by population growth of 1.5% pa and the nation’s lowest unemployment rate of just 4.8% (May, seasonally adjusted).

The good news, according to the Budget, is that the good times are set to continue. As shown in the table below, real gross state product is expected to increase by around 2.75% to 3.0% pa over the forecast period, the unemployment rate is forecast to stay at, or below, 5.0%, wages growth should start to pick up and drive an increase in payroll tax and immigration will continue to lead to population growth of 1.5% pa.

NSW - Key Economic Forecasts 

Risks

Expecting the rosy economic outlook to continue and potentially improve, and the river of gold to keep flowing, are interesting assumptions. Not without foundation, but also not without considerable risk.

The NSW Budget statement summarises the risks as follows: 

“While the risks to the economic outlook appear broadly balanced, uncertainties remain, particularly around the housing market and wages growth. The largest risk to the forecasts, both to the upside and the downside, is the outlook for the housing market given its highly cyclical nature and large flow-on effects. A significant slowdown in dwelling approvals could see the pipeline exhausted and activity decline by more than expected in 2018-19. Higher than expected interest rates or a sharp decline in dwelling prices could also bring an end to the cycle. On the upside, strong population growth or supportive government policies could boost demand and drive higher-than-expected activity.”

What NSW should be doing

Many observers would suggest that the risk of a slowing housing market, including dwelling approvals, is real and very likely. Further, if interest rates in Australia rise, which is probable in the medium term given the move by the US Federal Reserve Bank to raise US rates, mortgage stress could cause a sharp decline in dwelling prices. Further, unemployment could well be on the rise.

A prudent “A” grade Government would be planning for this very real scenario. Rather than waste money on non-mean tested middle-class welfare like the active kids rebate, or however well intentioned, hire an additional 4,500 health professionals, 1,000 teachers and other recurrent spending initiatives, the Government should be far more focused on supporting an environment for businesses to invest, prosper, and employ. The obvious thing to address is payroll tax - that insidious tax on jobs. 

Ensuring that NSW has the lowest rate of payroll tax, and potentially even abolishing it altogether, would be a strategy to deliver NSW a competitive advantage over the other states, promote employment growth and investment, and in an economic downturn, assist business. That’s what the river of gold should be applied to.  

This budget is a missed opportunity. A bare pass with a “B”.