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The Minns Government’s expected budget deficits have blown out for this financial year and next due to increased insurance expenses, larger natural disaster payments and higher depreciation costs thanks to growing infrastructure investment.
The 2024-25 deficit has grown to $5.7 billion and is then expected to shrink to $3.4 billion in 2025-26.
The Government expects to return its first surplus since the COVID-19 pandemic in 2027-28, of $1.1 billion. This is largely predicated on growing tax receipts, particularly for transfer duty, land tax, GST distribution and payroll tax. Much of this relies on favourable economic conditions.
It will likely be more out of good fortune than good management if the surplus is achieved in this timeframe, given the many global uncertainties around tariffs and supply chain disruptions.
The ongoing focus on infrastructure spending to support NSW’s growing population continues to put pressure on the Budget. An additional $4.5 billion in capital expenditure for education is budgeted over the forward estimates, largely for school infrastructure.
The Government has flagged debt stabilisation as a priority. Gross debt as a proportion of gross state product (GSP) is projected to peak in 2026-27, at 20.4 per cent, before easing slightly to 19.6 per cent. In nominal terms, gross debt is projected to keep growing through the forward estimates to reach $199.7 billion in 2028-29, driven largely by continued investment in infrastructure.
Both spending and revenue are expected to grow over the forward estimates. Revenue is expected to increase on the back of a strong labour market, with unemployment lower than previously expected, rebounding consumer spending and recovering private investment. Economic growth is expected to remain flat in 2025-26, growing by 1.75 per cent in real terms.
Revenue over the four years to 2028-29 is expected to be $11.3 billion higher than forecast in the Half-Yearly Review. This is mainly driven by higher GST distribution, accounting for $6.8 billion of the upward revision, an uplift in Commonwealth payments to NSW under existing funding arrangements, and higher transfer duty revenue reflecting strong residential property prices.
This higher revenue will be spent on new commitments on schools, out-of-home care for youth and children, victims of domestic violence, investment in TAFE and spending on health infrastructure. We welcome these investments as they address significant community needs.
NSW will need to keep a sharp eye on expenses if it is to achieve its surplus and put itself on a sustainable trajectory to manage government debt.
In total, these new measures total $12.9 billion in additional spending over the forward estimates. The biggest expenditure on new measures in portfolios are:
- $4.8 billion for capital upgrades to schools and TAFEs, support for ongoing skills development, school funding and expansion of early childhood education.
- $2.3 billion for funding to Communities and Justice, primarily to support young people in out of home care, and victims and survivors of violence and abuse.
- $2.1 billion for transport and infrastructure upgrades.
Productivity
The establishment of the Investment Delivery Authority is intended to spur business investment across all industries and lift productivity through fast-tracking planning proposals over $1.0 billion.
This is a welcome initiative, however the Budget contains few other tangible measures for lifting productivity.
Noting the importance of productivity, the Budget points to the role of the private sector and where governments can support it at the margin. It outlines that productivity growth is expected to pick up in two to three years, but not to the extent previously expected.
While infrastructure spending and building skills contributes to productivity, more needs to be done by governments to directly support the productivity agenda. Meaningful tax reform, greater incentives for innovation and commercialisation and reducing regulatory burden should also be firmly on the agenda.
Housing
Housing is again central to the 2025-26 Budget. According to the Budget, housing completions are expected to outpace underlying demand for housing, but there are still substantial concerns for affordability.
Measures to support housing include a pre-sale finance guarantee to support accelerated commencement and completion of up to $1 billion in residential development projects. It also includes provision for developers to build infrastructure, rather than paying the contribution directly to the NSW Government.
The $1.2 billion set aside to train more tradespeople through fee-free apprenticeships and traineeships is positive, but ensuring these trades are applied to the housing sector will remain a challenge, particularly given the increasing competition for building infrastructure in other sectors.
As part of its $5.1 billion Building Homes for NSW package, the Budget includes concessions to land tax for build-to-rent and investment of $83.4 million to accelerate approvals. These are welcome, but more needs to be done.
Modular housing and prefabricated designs would offer further streamlining of approvals and improve construction times, while also 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.
Recognising the substantial contribution stamp duty makes to NSW 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 is investing $118.3 billion over the four years to 2028-29 in infrastructure. The main priorities are transport projects at $55.6 billion, schools at $9.0 billion and hospitals at $12.4 billion to 2028-29.
Ongoing workforce shortages, particularly in construction and similar sectors, jeopardise these ambitious infrastructure plans. In that context, the increasing investment in trade skills will be particularly important.
Given the challenges presented by the sprawling metropolis of Sydney, greater investment in long-term planning for housing and infrastructure is sorely needed. This extends to other cities in NSW, such as Newcastle and Wollongong.
Energy transition
The NSW Climate Change Act legislates ambitious targets to achieve net zero by 2050. To date, however, not much progress appears to have been made and this Budget does little to further this 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.
The 2025-26 Budget instead points to improving conditions for business investment, with little detail on how to effectively encourage these activities.