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NSW Budget analysis: Heavy building work begins

NSW Budget: Heavy building begins

Philip Brown, Adam Donaldson, Belinda Allen and Vivek Dhar  ●   20 June 2018

Image source: Getty Images. NSW Premier Gladys Berejiklian and Treasurer Dominic Perrottet

The 2018 NSW Budget points the way to next year's state election.

NSW Treasurer Dominic Perrottet’s second Budget is unapologetic about reaping the rewards of recent balance sheet restructuring.

The Budget contains sweeteners aimed at easing cost‑of‑living pressures and yet more capex; it also stores funds away for the future investments, in a newly created "Generations Fund".

Budget highlights include:

  • A $1.4 billion surplus is forecast in 2018-19, with a small average surplus of $1.5 billion across the forward estimates to 2021-22.
  • Ongoing large infrastructure spending (transport and social) may result in very large fiscal deficits.  
  • Revenue growth is forecast to be 2.5 per cent over the forecast period, well below expenses growth at 3.4 per cent.
  • Flow of funds from assets sales is slowing, but still defraying large amounts of the borrowing task, which is $6.6 billion in 2018‑19.
  • The AAA (neg) rating remains unchanged, however a rating upgrade may be likely if the federal government’s rating is upgraded.
  • Economic forecasts may be affected if wages growth disappoints and transfer duty (stamp duty) revenue continues to be a risk.

The 2018-19 Budget continues with the spending feast that kicked off in earnest last year.

Headlines regarding a large (but not record) $3.9 billion 2017-18 surplus gave way to downgraded operating surpluses over the forward estimates (averaging $1.45 billion in the next three years, down from $1.7 billion in the mid-year review).

Downgrades to stamp duty due to the slowing housing market were the story for the general government accounts although coal royalties surged during the year.

The main news revolved around capex and asset recycling. Capex plans continued to mount and the state wide spend is forecast to average $22.7 billion over the next three years versus $19.5 billion previously forecast for the same period.  

Importantly, this spending does not apply to the 2018-19 financial year (revised down $780 million) or the 2017-18 financial year (revised down $3.2 billion) due to delays in turning plans into bulldozers.

The lower capex spend, combined with $4.2 billion proceeds from the sale of the Snowy Hydro Scheme, means net debt has been revised materially lower – by $8 billion for June 2018 and $7.5 billion for June 2019.  This impact fades over time due to the later increase in capex (though $3 billion is being tucked away into a "Generations Fund", as will proceeds from WestConnex once it is sold).

The end result is that the profile, and rebuild of gross debt, is little changed beyond 2018-19.

Economic outlook

The NSW Budget forecast NSW to grow at an above‑trend pace of 2.75 per cent over the next two years before reverting to trend growth of 2.5 per cent thereafter.

Growth is moving away from dwelling construction and household consumption and towards business investment and export growth. Business investment is expected to record the fastest growth since 2008‑09, contributing around twice its long‑run average to growth.

Much of the growth continues to come from record levels of public investment.

However, there are some concerns around capacity constraints and cost pressures, given this work will be done at a time where both the federal government and other state governments are also undertaking large pipelines of work.

Things you should know

This information was first made available to CBA clients on 19th June 2018 in Fixed Income & Rates: Aussie Debt Strategy, a Global Markets Research publication.

This information has been prepared solely for information purposes and is intended to provide a summary of the subject matter covered. It is not to be construed as a solicitation, an offer or a recommendation by the Commonwealth Bank of Australia. As this information has been prepared without considering your objectives, financial situation or needs, you should, before acting on this information, consider its appropriateness to your circumstances and if necessary, seek the appropriate professional advice. It must not be relied upon as financial product advice or investment advice. We believe that this information is correct and any opinions, conclusions or recommendations are reasonably held based on the information available at the time of its compilation but no representation or warranty, either expressed or implied, is made or provided as to accuracy, reliability or completeness of any statement made.

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