This report does not constitute a rating action.
MELBOURNE (S&P Global Ratings) June 18, 2024--Budget repair remains a bumpy ride for the Australian state of New South Wales (NSW). We expect NSW's cash operating balance to return to surplus in fiscal 2025 (ending June 30), after a dip in fiscal 2024, by our measures. This should support the creditworthiness of the state (AA+/Stable/A-1+). Operating surpluses are likely to grow in subsequent years, albeit at a slower pace than previously budgeted. The state delivered cash operating deficits across the nonfinancial public sector accounts for four out of the last five years.
NSW's 2024-25 budget expects goods and services tax (GST) grant revenue to be about A$6.2 billion weaker from 2025 to 2028. This is largely due to distribution changes announced by the Commonwealth Grants Commission. Additional revenue pressure because of softer payroll tax receipts is likely as unemployment starts to rise. The government is responding by not extending any of last year's cost-of-living measures or rebates. On the other hand, a hot property market means property tax revenues (from transfer duties and land tax) may be A$10 billion higher across 2025-2028.
A large capital program will keep NSW in a sizeable cash deficit of more than 10% of total revenues for the next four years. This is weak compared with 'AA+' domestic and internationally rated peers. Today's annual state budget announced a four-year capital expenditure program of A$114 billion, in cash terms. Relative to last year's budget and half year economic and fiscal update, it incorporates a new A$5.1 billion social housing package and funding for Parramatta Light Rail.
The state's gross debt to revenue ratio continues to rise, though slightly less than our previous expectations. NSW is introducing new policy to no longer borrow to contribute to the NSW Generations Fund, which will save A$16.3 billion of gross borrowings across the four years.
The 'AA+' rating on New South Wales derives support from its wealthy and diverse economy in a global context. Further, NSW is on track to achieve A$13 billion of savings targets outlined in the last budget, keep major projects broadly in line with costings, and ensure liquidity coverage remains comprehensive.
Pressure on the rating could build if financial management wanes. This could occur if policy decisions constrain its budget, leading the government to borrow regularly to fund operating expenses.
Related Research
- Institutional Framework Assessment: Australian States And Territories' Strong Fiscal Autonomy Is Double-Edged Sword, March 6, 2024
- Subnational Debt 2024: Australian States' Debt Rift Deepens, Feb. 28, 2024
- New South Wales, Feb. 11, 2024
- Credit FAQ: How New South Wales' Generations Fund Is Influencing State Credit Quality, Aug. 5, 2021
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