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The NSW economy will be stuck in the slow lane for at least three years as Treasurer Daniel Mookhey says lacklustre growth could turn negative if the Reserve Bank gets interest rate settings wrong.
In an interview ahead of Tuesday’s state budget, Mookhey said the rate hikes in February, March and May had been taking a disproportionate toll because new mortgages in NSW were far bigger than in other parts of the country.
The rate rises were also “by far the biggest turning point in our state’s finances in the last 12 months”.
The treasurer also played down the prospect of a budget surplus previously predicted for 2028 surviving the economic turmoil, refusing to confirm whether it and another forecast for 2029 had survived. Choppy economic forecasts had increased uncertainty despite the government taking “meaningful steps forward” towards repair after a string of budget deficits stretching back to the COVID-19 pandemic, he said.
Mookhey used a pre-budget speech in May to reveal the NSW economy is forecast to grow by only 1 per cent in the next year ahead, a significant drop from only six months ago, when Treasury predicted growth of 2.5 per cent in 2026-27.
The Herald can reveal sluggish growth will continue. Growth of 1 per cent is also predicted in 2027-28, down from the 2.25 per cent forecast in December.
Treasury is not forecasting growth to contract in NSW, but Mookhey said the government was “alive to the risks” of that outcome.
“The real question for us is, ‘does the RBA calibrate its interest rate settings correctly?’ The risk of a contraction is proportionate to whether or not the RBA calls the interest rate cycle correctly,” he said.
“All I’ll observe is it’s a finely balanced judgment the RBA has to apply and if they get it wrong, the consequences are serious.”
The recent spike in fuel prices triggered by conflict in the Middle East will also be a drag on the state’s economic activity. Mookhey said the disruptions of the war, in tandem with higher interest rates, had “changed the trajectory of the NSW economy.”
Analysis by NSW Treasury, to be published in the budget, shows why the NSW economy is more sensitive to interest rate increases than other states, something Mookhey says is the biggest driver for the state’s slowdown.
A NSW family buying a new home today borrows an average of $860,000. But a family taking out a mortgage in Victoria – Australia’s next most populated state – will borrow about $674,000. In Queensland, the average is $741,000.
The share of household earnings needed to service a new mortgage was 28.6 per cent in NSW, 24.5 per cent in Queensland and 21.3 per cent in Victoria.
“When you’re having to borrow about $150,000 extra than someone in the next biggest state, higher interest rates will obviously affect households more here in NSW than elsewhere,” Mookhey said.
The rate rises have also hit the state’s bottom line. Mookhey used the same pre-budget speech in May to warn that weaker conditions in the property market meant the state’s take in stamp duty from housing, previously expected to be worth about $43.8 billion by 2029, had been downgraded by $5 billion. Land tax revenue is predicted to be down by $3 billion in the same period.
The treasurer told the Herald the government had those figures “on a watch list” along with oil prices and wages.
“It’s fair to say … we have got them on a watch list of all the things that we’ll be watching like a hawk after the budget,” he said. “They are the ... forecasts that we are certainly intending to sweat the most.”
The budget on Tuesday will be the last before the NSW election next March, and although there will be cost-of-living relief, the government will not use big spending measures to win over voters. Instead, Mookhey will make a virtue of his spending restraint in a turbulent economy.
Labor inherited a significant debt after COVID and expense growth of 24 per cent in the Coalition’s last year in power. Since then, it has reined in spending significantly while also delivering a series of wage increases to frontline workers. The budget will show while employee-related expenses grew by 5.2 per cent in the four years to 2026-27, that is lower than 2022-23 in part because of reforms to workers’ compensation and cuts to senior executives in the public service.
However, after the previous budget predicted a return to surplus of $1.1 billion in 2028 and 2029, Mookhey would not be drawn on whether those forecasts had survived, saying forecasts had been “choppy”.
“People will see that we have made meaningful steps forward at returning, taking NSW closer to a surplus, but also lowering debt. When people look at our accounts next week, they will see the progress we have made,” he said.
Mookhey backed comments by Premier Chris Minns last month when he urged the Commonwealth to cut federal income taxes and address bracket creep, saying he wanted people in NSW “to earn more and keep more of what they earn”.
However, he said he did not believe changes to capital gains tax benefits on property would be a significant factor in exacerbating the slowdown in the housing market and he welcomed changes that he said “reward work, not just wealth”.
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