Why the NSW Budget could be $9.5bn better off after Commonwealth flood support

Kieran Davies

Coolabah Capital

The NSW budget remarkably remained close to balance in February, as yesterday's data release shows, providing welcome news for NSW Treasurer Matt Kean. The budget deficit is likely to come in $5 billion better than the full-year government forecast for 2021-22 (i.e., FY22), even allowing for conservative estimates of the potential costs of recent tragic flooding and assuming that the Commonwealth's reimbursement of 75% of the cost of this natural disaster does not arrive until next financial year. 

If the Commonwealth reimbursed NSW for its 75% share of the floods this financial year, via an advance, the budget could be as much as $8.5-$9.5bn better off.  While it is more likely that the Commonwealth payments are made in the next financial year or later, there is a possibility that an advance is made due to the pending federal election in May. 

These upside budget surprises should reduce NSW's debt funding task by a similar quantum in 2022-23 (or FY23). Further outperformance over the remainder of 2021-22 (or FY22) could potentially reduce NSW's debt funding needs by more than $5bn in the next financial year before accounting for the very substantial impact of infrastructure delays, which we previously analysed here.    

The NSW budget has been very volatile over recent months even after seasonal adjustment, but the omicron outbreak has not had a measurable effect on the bottom line, contrasting with the large deficits posted during the delta outbreak. This contrast reflects more targeted assistance to the community during omicron and a more limited impact of the outbreak on the economy. 

The general NSW government budget on a cash basis was broadly in balance in trend terms in February (i.e., close to surplus), although this will very likely be revised to a modest deficit as more data become available given how trend estimates are calculated. 

This is clear from the seasonally adjusted estimates, which showed the deficit widened from about $500 million in January, when the budget was similarly close to surplus, to almost $1 billion in February, while flood-related costs will add to the deficit over the coming months (subject to the timing of the Commonwealth's reimbursement of 75% of these costs). 

The improvement in the NSW budget over the financial year to date mainly reflects stronger revenue, particularly grants and subsidies, but payments have fallen and are back at pre-delta levels, with a large fall in financial assistance payments to households/businesses.

The budget is likely to come in about $5bn better than government expectations for this financial year, even allowing for the economic and fiscal cost of the tragic floods in northern NSW and ignoring the fact that the Commonwealth will pay for 75% of the cost of the floods. 

The government has forecast a deficit of $30bn for 2021-22 (FY22) as a whole, but the rolling annual sum of the monthly numbers shows the deficit over the past twelve months has narrowed from $25bn in October/November to $21bn in January/February. 

Conservatively allowing for about $5-6bn in New South Wales government assistance and economic fall-out from the floods – where payments could well end up being spread into 2022-23 – the deficit for this financial year is on track to come in about $5bn better than the government’s full-year estimate of $30bn. This is an improvement on Coolabah's previous estimate using NSW's monthly budget data for January, where we assumed $5bn in flood costs, which implied the deficit could come in $4-5bn better than expectations. 

The Commonwealth will reimburse 75% of NSW's direct disaster costs, which means that the NSW budget will improve further when those payments are made in arrears, where the Commonwealth has said that these costs are currently unquantifiable. Net of the Commonwealth's reimbursements for flood expenses, the NSW budget could be about $8.5-9.5bn better off, although this is more likely to be realised next financial year after the state has applied for a reimbursement.

The pending federal election in May raises a possibility that the Commonwealth makes an advance on these payments, as it did in 2010-11 with the floods and cyclone in Queensland. 

For next financial year, NSW should benefit from a materially reduced debt funding task in the order of $8.5-$9.5bn if reimbursement is made that year. If TCorp issues debt in line with its official funding task for FY22, which was last updated in December, it would be effectively pre-funding something like this amount for FY23. 

Given the state of the economy, it is reasonable to assume that all states and territories are also experiencing some degree of outperformance of their official deficit forecasts, which paves the way for lower debt issuance in FY23 given the states will have done a lot of pre-funding by sticking to their official debt issuance tasks. Victoria is a stand-out because it is running more than $5bn ahead of its official debt issuance task in FY22, which means that it might have unwittingly done significant pre-funding for FY23, much as it had done in FY21 (this FY21 pre-funding ended up having to be used for to pay for the cost of the COVID lockdowns).

Separate to the tracking of budget performance, in recent research we have quantified the impact of delays to infrastructure spending on state issuance, which the empirical data suggests will lag government forecasts by 10% to 20%. Given the currently very tight labour market and supply-chain blockages, where New South Wales is reportedly considering delaying a number of "mega-projects", we estimate this could reduce the states' debt funding needs in FY23 by another $8bn (assuming 10% delays) to $16bn (assuming 20% delays).

Investment Disclaimer Past performance does not assure future returns. All investments carry risks, including that the value of investments may vary, future returns may differ from past returns, and that your capital is not guaranteed. This information has been prepared by Coolabah Capital Investments Pty Ltd (ACN 153 327 872). It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The Product Disclosure Statement (PDS) for the funds should be considered before deciding whether to acquire or hold units in it. A PDS for these products can be obtained by visiting www.coolabahcapital.com. Neither Coolabah Capital Investments Pty Ltd, Equity Trustees Ltd (ACN 004 031 298) nor their respective shareholders, directors and associated businesses assume any liability to investors in connection with any investment in the funds, or guarantees the performance of any obligations to investors, the performance of the funds or any particular rate of return. The repayment of capital is not guaranteed. Investments in the funds are not deposits or liabilities of any of the above-mentioned parties, nor of any Authorised Deposit-taking Institution. The funds are subject to investment risks, which could include delays in repayment and/or loss of income and capital invested. Past performance is not an indicator of nor assures any future returns or risks. Coolabah Capital Investments (Retail) Pty Limited (CCIR) (ACN 153 555 867) is an authorised representative (#000414337) of Coolabah Capital Institutional Investments Pty Ltd (CCII) (AFSL 482238). Both CCIR and CCII are wholly owned subsidiaries of Coolabah Capital Investments Pty Ltd. Equity Trustees Ltd (AFSL 240975) is the Responsible Entity for these funds. Equity Trustees Ltd is a subsidiary of EQT Holdings Limited (ACN 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT). Forward-Looking Disclaimer This presentation contains some forward-looking information. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking statements. Although forward-looking statements contained in this presentation are based upon what Coolabah Capital Investments Pty Ltd believes are reasonable assumptions, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Coolabah Capital Investments Pty Ltd undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to place undue reliance on forward-looking statements.

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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