Australia: New South Wales 2018 Budget – One eye on an election, the other on a rainy day

NSW Treasurer Dominic Perrottet's second budget, the last before the next NSW election in March 2019, ticks all the voter friendly boxes: families with new babies and school-age children, grey nomads, road and public transport users and residents of Western Sydney to name just some.

One of the centrepieces of the budget is the use of balance sheet reserves to create the NSW Generations Fund (NGF) for a rainy day. Growth in the NGF – from investment earnings and future contributions – is intended to help NSW to "maintain sustainable debt levels consistent with a triple-A credit rating". The Treasurer says that 50% of investment returns from the NGF will be available for community projects, through the so-called My Community Dividend initiative.

Reflecting in part the royalty windfall from stronger than expected coal prices, the net operating balance was a surplus of $3.9 billion in 2017-18, which is $600 million higher than the forecast surplus in the Half-Yearly Review issued in December 2017. The net operating balance will be a more modest $1.4 billion in 2018-19, as the NSW Government opens the purse strings in the lead-up to an election. Surpluses of around $1.6 billion are projected over the forward estimates. Budget revenues are estimated to grow by less than 1% in 2018-19, but budget spending grows by 4.1%.

After accounting for capital expenditure (net of asset sales proceeds), the so-called fiscal balance involves net borrowing of $10.3 billion in 2018-19 and $33 billion over the forward estimates.

The NSW economy is forecast to grow by 2.75% in 2018-19, with growth drivers shifting from dwelling construction and household consumption, towards business investment and more broad-based strength in exports. Jobs growth is forecast to slow to 1.75% and the unemployment rate steady at 4.75% in 2018-19.

Tourism continues to be a strong contributor to growth, especially education-related travel. NSW Treasury says that the rebalancing of China's economy towards consumption rather than export will continue to provide opportunities for the tourism sector and stimulate demand for accommodation and services. Short-term overseas arrivals to New South Wales continue to grow strongly, increasing by around 30% from 2014 to 2017, with year to March 2018 growth at 8.3%. China was the largest source of international visitors to New South Wales in 2017.

KEY BUDGET MEASURES

Revenue measures and aggregates

NSW own-source budget revenue sources will remain virtually unchanged at just under $49 billion in 2018-19. In line with the forecast dwelling investment slowdown and a softening Sydney property market, transfer duty revenue is expected to fall by $1 billion to $7.7 billion. There is however expected to be growth in receipts from gambling taxes, land tax and payroll tax.

Dividend receipts are expected to be up by 20% to over $1.8 billion in 2018-19.

Resource royalties are expected to be $1.9 billion in 2018-19 to be 21% higher than two years earlier. Over the four years of the forward estimates royalties are expected to contribute $7.4 billion to NSW Government revenues.

The State's overall revenue position in 2018-19 is helped by an $800 million increase in GST receipts to $18.4 billion.

Revenue measures included in the budget:

  • the payroll tax threshold, the point at which companies start paying payroll tax, will rise to $850,000 in 2018-19, $900,000 in 2019-20, $950,000 in 2020-21 and $1 million in 2021-22. Nearly 40,000 businesses will save up to $5,450 each in 2018-2019 and up to $13,625 per business in 2021-22. The NSW Government is also conducting a Review of Payroll Tax Administration, and
  • a 10% "point of consumption tax" targeting online gambling organisations licensed to operate in Australia. The tax will commence on 1 January 2019 and be applied to the net wagering revenue earned from bets placed by customers in NSW. The recent Queensland budget included a similar tax but at a 15% rate.

Capital works and infrastructure

The 2018-19 Budget delivers record overall NSW public sector capital expenditure of $87.2 billion projected over the four years to 2021-22, including $21.5 billion from government-owned corporations and $65.7 billion from the general government (budget) sector. The Treasurer points out that the NSW government's asset recycling program (most recently featuring the sale of its share in Snowy Hydro) together with budget surpluses has enabled this record capital expenditure without adding to debt levels or threatening the Triple A credit rating.

General government capital expenditure in 2018-19 is estimated to lift by a whopping 41% to $17.3 billion.

The standout highlight of the capital budget is planned expenditure on public transport and roads of $51 billion over four years including $9.8 billion in 2018-19, or 56.5% of total capital expenditure.

Big ticket transport infrastructure items include $3 billion over four years for the planning and implementation of Sydney Metro West, $1.2 billion additional funding over four years to progress stage one of the F6 Extension and $556.2 million over four years for planning and early works for the Western Harbour Tunnel and Beaches Link. There is also an $880 million investment in technology improvements to modernise the Sydney Trains network which will then allow greater train frequency.

The capital program also includes $6 billion over 4 years for new and upgraded schools and $8 billion in health sector capital works over 4 years.

The budget maintains its focus on increasing social and affordable housing and developing the plan for the future of Western Sydney. The Government maintains its commitment to implementing the second phase of the Social and Affordable Housing Fund which is projected to deliver up to 1,200 additional social and affordable homes.

Similarly, as the 'epicentre' of the state's housing construction, planning towards Western Sydney's expansion continues to be geared towards the new Western Sydney Airport so that the region can grow in supporting industries and infrastructure, jobs and quality of life.

Leaving aside gimmicks such as gift hampers for families with new babies and reduced caravan registration charges for grey nomads, the budget highlights include a mix of enhanced core State Government service delivery and some small ticket but innovative initiatives:

  • $15 billion in recurrent education funding including funding for 900 additional teachers, $500 million over five years to install air-conditioning in school classrooms and nearly $200 million over 4 years to extend universal access to pre-school for three year olds
  • $23 billion in recurrent funding for health including funding for an additional 950 nurses and midwives, 300 extra doctors and 120 more allied health workers
  • a six year $285 million package to subsidise 100,000 apprenticeships in selected trades
  • $50 million for the State's primary industries research stations
  • $59 million over 4 years for an additional 100 child protection workers
  • $10 million will be available through the NSW Office of Social Impact Investment for "innovative community-led initiatives to improve Aboriginal employment outcomes, wealth creation and well-being"
  • a dedicated $10 million fund to expand trials of driverless vehicles and involving a partnership between government, universities and private sector start ups
  • $20 million over four years for Boosting the NSW Government's capability and preparedness against cyber security threats
  • $4 million for a 'one click energy switch' service through Service NSW, allowing consumers to shop around online for the best alternative energy deals
  • $115 million for medical and scientific innovations to combat diseases, including new initiatives involving $15 million for cardiovascular disease research capacity development $5 million for technology to support treatment of childhood cancer and other genetic disorders
  • $52.6 million over four years to implement the National Facial Biometric Matching Capability in New South Wales, increasing the capability to identify suspects and victims of terrorism and other criminal activity, and
  • in a budget that is mostly about winners, funding for NSW local government councils via grants and subsidies will be reduced by $32 million. However, local councils will be receiving $31 million over 10 years for low interest loans to invest in infrastructure, as well as $100 million over four years to fund the acquisition of green and open space in the Greater Sydney area.

WHAT THE BUDGET MEANS FOR BUSINESS

Business in New South Wales has had to play second fiddle to the understandable pre-election focus on 'voter land'. The one exception is the progressive lift in the payroll tax threshold.

However, business can be satisfied that NSW Government finances remain in good shape (and the Triple A credit rating safe) despite the splurge on pre-election goodies and a huge lift in capital works expenditure. In fact the latter will be an important offset to the dwelling sector slowdown.

With unemployment expected to remain below 5% over the next few years, tighter labour market conditions may see some upward pressure on wages.

Finally, it is to be hoped that the huge investment in public infrastructure is being well targeted to pull through a strengthening in private sector business investment in the State.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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