Australia's most populous state on track for surplus

Australia's most populous state is the one most reliant on transfer revenue from housing transactions, making it vulnerable to rising rates as well as recent federal tax changes linked to the property market. 

The state will see a near $2 billion slump in takings to $12.6 billion in 2026/27, and a $5.3 billion fall over the next four years, according to the NSW budget handed down on Tuesday.

"This reflects a weaker outlook for the property market following a material shift in the cash rate since the 2025/26 half-yearly review, driven by stronger than expected inflation," it reads.

"This has dampened sentiment and placed downward pressure on property prices and transaction volumes."

The Reserve Bank of Australia has raised the cash interest rate three times since February to 4.35 per cent, adding hundreds of dollars a year to mortgage payments across the country.

NSW residents have bigger mortgages than borrowers in other jurisdictions, so they were more exposed to rate movements, which in turn affects disposable income.

The government does see some light at the end of the tunnel but not until the second half of calendar 2027, when it believes interest rates will start to ease.

In the meantime, state economic growth will slow to one per cent pace in the new financial year, reflecting the war in the Middle East and its impact on energy prices, as well as the rate impact on household budgets and sentiment.

But Treasurer Daniel Mookhey remained upbeat, saying NSW was still growing and heading toward an improved two per cent growth pace over the next couple of years on the back of heightened investment in data centres and energy projects.

"In fact, private investment is now the leading source of economic growth in NSW," he told NSW parliament in his budget speech.

"No other state can say the same (and) much of that investment is being driven by the renewable energy transition."

However, NSW is still facing a high debt burden with the state's liabilities heading to $193.8 billion in 2026/27, or 20.5 per cent of state gross domestic product, before rising over the next three years to $219.4 billion.

As a consequence, the state's interest bill will increase to $9 billion in the new year, as Treasury warned the state will undergo debt refinancing in the following year to interest rates likely higher than what it initially borrowed at.

Still, NSW remains on track for what it hopes will be its final budget deficit, of $2.3 billion, in 2026/27 ahead of three surpluses out to 2029/30.

The first surplus of $1.1 billion is due to be booked in 2027/28, assuming Labor is returned to government in March 2027.

"We have put the budget in a much stronger position by bringing spending growth under control," Mr Mookhey said.