Mortgages and war have combined to slash NSW Treasury’s economic growth prospects by 1.5% for 2026-27.
State Treasurer Daniel Mookhey delivered the news in an address to the McKell Institute in Sydney on Wednesday.
“The NSW Budget is 33 days away but in the 152 days since I delivered the half-year review in December, a lot has changed,” he says.
“In June we will lower our forecast for economic growth significantly. Instead of the NSW economy expanding by 2.5% in real terms next year, as we expected in December: the Treasury expects real growth of just 1%.”
But he says a growth in renewable energy projects helped NSW to avoid a recession as it works toward a Net Zero emissions target.
Mookhey says that since his review, fuel prices rose by 50% due to the war in the Middle East and interest rate rises have added up to an extra $415 to monthly mortgage payments.
He says Treasury did not expect to witness the greatest oil shock since the 1970s when, in February, the US and Israel attacked Iran which sparked global oil price shocks leading to higher inflation and causing higher interest rates.
Given the global uncertainty, rising inflation and cost-of-living pressures, Mookhey says he decided to release their main economic forecasts one month early.
“You should see what the NSW Treasury is seeing in real time especially when our
half-year forecast has been eclipsed because the times are so volatile.”
MORTGAGES PAIN CUTS DEEPER IN NSW
Mookhey also points out that interest rates rises have hit NSW harder than other states due to higher mortgages.
“Higher inflation led to higher interest rates which is lowering consumption spending, the point of the RBA’s increased interest rates,” he says.
“Higher interest rates hurt every state but they hurt Australians more in this state.
“We are different from other states (and) it is to do with the size of our mortgages.”
He says a typical home loan in NSW stands at $873,000 but in Victoria, it is $677,000 or 28% less than in NSW.
“That is why NSW fares better when interest rates fall; the cost paid to service a mortgage drops more than elsewhere.
“The corollary is: that those same mortgages cost more to service than when interest rates rise.”
TAX REVENUE SHORTFALL
Higher interest rates will also hit the property market with a corresponding hit to the state’s tax revenue, the Treasurer says.
“Our state taxation revenues correlate heavily with the property cycle which, in turn, is heavily correlated with interest rates”.
Mookhey expects to announce on June 23 a substantial drop in forecast tax revenue as stamp duty and land tax revenue fall; NSW Treasury expects stamp duty to fall by another $5 billion over their forward estimates with land tax revenue expected to drop by around $3bn.
Other taxes, like payroll, are expected to be less affected by rate rises but NSW’s share of GST funding from Canberra has been reduced to a record low.
Mookhey says private investment in the state is rising due largely to the growth of renewable energy projects with some support for AI projects like new data-centres.
He says the scale of renewable energy projects now under way, which is why NSW is poised to avoid a recession and that reaching Net Zero is a sound economic strategy.
POLITICAL CLAIMS DEBUNKED
He also took a swipe at the Federal Liberal Party and One Nation for their stance on Net Zero.
“Personally, I am not willing to risk a fall in private investment … because there is little doubt that to campaign against NSW’s Net Zero targets is to campaign for a recession Budget challenge.”
“Debt is not going to hit $187 billion on June 30 this year like our predecessors intended; it is likely to be about billions lower than that,” he says.
He says NSW Treasury records show that expenses grew just 1.8% in the last financial year and compared it to the average 6.5% per annum posted by the state Liberals during their three terms in office and 25% spent in their election-eve budget.
He put the lower spending down to reforms and cost-cutting: “1.8% is the lowest level of expense growth of any mainland state.
“It is lower than the Federal Government’s expense growth; it is substantially lower than the NSW long-term average.”
He says “hard” reforms also played their part such as the workers compensation system, the police death and disability insurance scheme, cutting senior public service executives and cutting $13 billion in spending in 2023.
