NSW Budget deficit a record $36.5bn or 5.8% of GSP in 20/21, & 4.1% in 21/22
Reflecting the impact of COVID, the NSW State Budget total Non-Financial Public Sector (NFPS) fiscal balance has deteriorated very sharply, since the last update in the HYR. The cumulative deficits over the 5 years to 2023/24 increased by a material $64bn, to $120bn. Specifically, the deficit was in 19/20 was revised to $25.9bn (4.2% of GSP), and increases to a record $36.5bn (5.8% of GSP) in 20/21, but remains large at $27.1bn (4.1%) in 21/22. The main driver over 19/20 and 20/21 is actually ~record high (since at least the 1990’s) growth in expenses of 9%+ y/y; whereas revenues were marked down sharply, but are still ~flat. Even with the ‘cap’ on wages growth reduced to 1.5% y/y (was 2.5%), the total public wage bill is still forecast to average ~3% over the profile, reaching $47bn in 23/24. Meanwhile, public capex (i.e. purchases of nonfinancial assets) boomed 24% y/y in 20/21, but then only edges up 3% y/y to $28bn in 21/22, and is then projected to fall very sharply. UBS estimate of the Australian and State Government Budgets (so far) imply that total public capex for 20/21 will grow by ~13% y/y, but then slump to ~flat in 21/22; albeit we continue to expect that further material fiscal stimulus will be required to underpin the overall (capex) growth outlook. NSW debt lifts to record $191bn in 23/24 (27.0% of GSP); up $78bn since HYR NSW total NFPS gross borrowing already lifted from $62.4bn (or 10.0% of GSP) in 18/19, to $94.9bn (15.3%) in 19/20, reflecting the initial impact of COVID. However, debt continues to rise very sharply over coming years, to $128.3bn (20.4%) in 20/21, and then a record high of $190.8bn (27.0%) in 23/34. This peak is a very large increase of $77.6bn since the HYR, which was projected to top out at $113.2bn (15.4%).
Budget flags asset sales & stamp duty/land tax reform (but not in the numbers)
The Budget flagged significant asset sales and reform of property tax; but weren’t included in the numbers. There will be a review until March into allowing property buyers – residential and commercial – a choice to replace both stamp duty and land tax, with an annual property tax. The rates differ for owner-occupiers, investors and commercial property. But, the top 20% of residential property buyers, based on price, would still be required to pay stamp duty. First home buyers could receive grants up to $25k to help cover stamp duty. This change would overall reduce revenue by $11bn in just the first 4 years, but is designed to be eventually revenue neutral (albeit over 50 years). The reform is estimated to increase NSW GSP by 1.7% in the long-run, because stamp duty is such an inefficient tax that removing/replacing it should lead to a material improvement in transaction volumes and labour market mobility, which lifts economic activity. Meanwhile, other policies include raising the payroll tax threshold from $1mn to $1.2mn; scrapping payroll tax for companies that create 30 jobs in NSW, lowering payroll tax for all businesses in 20-21 and 21/22 from 5.45% to 4.85%; $1500 to cover government fees; as well as a $100 rebate for household entertainment.
Total Government deficit of ~$337bn or ~17% of GDP in 20/21 = more RBA QE?
Overall, we still estimate that across all the State & Territories (including our projections for revisions in the upcoming budgets for Victoria and Queensland), that the ‘whole of State’ budget deficit will end up around ~$120bn in 20/21, and stay very high over ~$70bn in 21/22. Also including the Australian Government, the total Government Budget deficit in 20/21 will likely end up around ~$337bn or 17% of GDP in 20/21, and still approach $200bn or 10% of GDP in 21/22. Given this, we reiterate our view that even with positive news of a potential vaccine, we see the RBA expanding and/or extending QE (beyond their current $100bn program) as more likely than expected by the markets and consensus.
Not that it matters any longer but this is the death knell of the S&P AAA sovereign rating.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
