NSW budget deficit likely to be around $19bn in FY22, $7.5-$10bn better than December's $30bn forecast

Kieran Davies

Coolabah Capital

Last night NSW released its budget data for the month of April, which reaffirmed that the state's general government cash deficit for 2021-22 (FY22) will end up remarkably closer to the June 2021 (pre-lockdown) forecast of $19bn rather than NSW's December 2021 revised forecast for a $30bn deficit.  Based on the new April budget data, NSW's deficit in the first ten months of the FY22 year totalled $18bn on a seasonally-adjusted basis, or $19bn using unadjusted data. This means that the deficit for FY2022 looks like it will come in between $7.5 billion and $10 billion below the government's $30 billion forecast as of the December 2021. This helps explain why NSW's debt issuance agency, TCorp, has issued materially less debt than the market expected in FY2022. 

The budget, which will be delivered on June 21, should include estimates of the cost of the tragic floods in northern NSW, where the Commonwealth will eventually reimburse the state for 75% of its direct disaster expenses.  NSW has not yet had any of the benefits of the Commonwealth's compensation, which will presumably arrive in FY23. 

We had been assuming that total flood-related costs could add $5-6bn to the budget bottom-line, but the still-low monthly budget deficit in April suggests that the total costs will come in both materially lower than this and/or will be spread well into the future (i.e., over FY2023 and possibly beyond given there is already a very large backlog of infrastructure investment).  

The improved budget bottom-line should carry over to FY23, where the government may spend some of the better starting point on public services ahead of the March 2023 election.  Counterbalancing this will be the potential for pragmatic infrastructure deferrals/delays, with the SMH reporting today that NSW has been given the go-ahead to pause key projects due to prohibitive costs:

The NSW government has been given the green light to delay several of its high-profile megaprojects, including the Beaches Link and the second stage of the Parramatta light rail, amid surging construction costs and global labour shortages.
Instead, the state government’s independent infrastructure body has recommended the state’s $27 billion infrastructure spend be diverted to smaller projects that will provide “high returns and faster paybacks with less budget and delivery risks”.     

A final important unknown is how much of the circa $15bn remaining in NSW's Debt Retirement Fund will be used by Treasurer Matt Kean for debt reduction. NSW has already committed $11bn of the $26bn in the DRF for debt retirement, approximately $7.6bn of which has been used to date. This leaves $3.5bn of remaining money plus the residual $15bn left in the DRF. 

NSW's public debt has increased from about $38bn in 2018 when the DRF was established by Premier Dominic Perrottet to over $110bn today. Prepaying $26bn of debt could in theory save NSW taxpayers more than $1bn pa in annual interest repayments assuming this debt was issued as 10-yr bonds at a 4% pa interest rate, which the state's current cost of capital.

The NSW budget is in much better shape than had been expected
The NSW budget is in much better shape than had been expected

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Kieran Davies
Chief Macro Strategist
Coolabah Capital

Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...

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