NSW budget tracking up to $7.5bn - $10bn better than expected this financial year

Kieran Davies

Coolabah Capital

The NSW budget remained close to balance in March and is likely to undershoot the full-year government forecast for 2021-22 (FY2022) by between $7.5 billion and $10 billion, even allowing for the costs of recent tragic flooding and assuming zero Federal government disaster support this financial year (i.e., NSW pays for everything). This helps explain why TCorp has done $5.4 billion less debt issuance than it planned in December (i.e, it is $5.4 billion behind its official run rate). Allowing for the Federal government to pick up 75% of the direct state cost of the floods, which it is committed to doing, the NSW deficit would be reduced materially further again. 

Ahead of the release of the NSW budget on 21 June, the state's public finances remain in very good shape with the cash budget for the general government sector remaining close to balance. 

The seasonally adjusted deficit narrowed to less than half a billion dollars in March, with the Omicron outbreak having little impact compared with Delta thanks to more targeted financial assistance and less effect on the economy. Revenue is still holding at a high level, while total payments are trending lower, mainly on lower grants and subsidies and slightly less CAPEX. The charts below summarise these developments.

This means that the NSW budget is likely to come in significantly better than government expectations for this financial year, even allowing for the economic and fiscal cost of the tragic floods in northern NSW (and assuming no Federal government support this year). 

Previously, we had assumed about $5-6 billion in NSW government assistance and economic fall-out from the floods, such that the deficit for 2021-22 could come in about $5 billion better than the government’s latest forecast of $30 billion in December. 

However, with the financial year almost over and the deficit totalling $22 billion over the twelve months to March, it looks as if the deficit could come in about $7½-$10 billion better than the government had expected, particularly given the clear risk that flood-related costs are spread out over time and/or total less than we had assumed. Note that state-related disaster spending has little long-term effect on the budget because the Commonwealth will eventually reimburse 75% of the state’s direct disaster costs. (Accounting for Commonwealth support, the NSW deficit would in theory be up to $3¾-4bn lower again.) 

Based on this analysis, the NSW deficit will end up closer to the initial government forecast deficit of $19 billion published in last year’s June 2021 budget. Put another way, the NSW economic recovery has been so strong that it has been able to almost entirely offset the combined costs of the July to November COVID-19 lockdown effects plus the omicron wave in January and the recent floods.

This will likely drive material reductions in NSW Treasurer Matt Kean's forecast deficit for FY2023, which combined with the gains in FY2022 will in turn significantly reduce NSW's debt issuance needs next year. At this juncture, it is unclear how much NSW will reduce its debt needs with one known unknown being whether NSW decides to further draw down on its Debt Retirement Fund.

This analysis helps explain why TCorp is currently $5.4 billion behind its official debt issuance run-rate for FY2022; even lagging by this margin, TCorp is currently pre-funding for FY2023 given our expectations for a $7½-10bn smaller deficit in FY2022, which is at least $3¾bn smaller again once we allow for Commonwealth support for the floods flowing in future years.

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Kieran Davies
Chief Macro Strategist
Coolabah Capital

Based in Sydney, Kieran Davies joined Coolabah Capital in 2020, an asset manager than runs over $7 billion in fixed-income strategies, and is responsible for macroeconomic research and investment strategy, contributing to the investment decisions...

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