NSW: Good management or just good luck?

New South Wales’ stellar financial position has been well publicised, having outperformed the Commonwealth and other states in recent years. Now, Mike Baird leaves office and Gladys Berejiklian arrives, having acquired reputations as fiscal miracle workers.

However, their achievements are a result of serendipitous events as well as effective financial management — and the new team will need to steer the state’s finances through the risks that lie ahead.

New South Wales recorded a net operating surplus of $4.7 billion in 2015–16. That is, revenue was in excess of operating expenses such as employee expenses, interest on debt and depreciation of assets. While the result benefited from several years’ tighter control of operating expenses, the improvement has also come from an enormous increase in state tax revenue.

With the state’s property market soaring, the government collected over $9 billion in stamp duty. Yet the state can enjoy buoyant stamp duty revenue for only so long. With growth of stamp duty set to slow, estimates show a decline in the net operating surplus to $0.9 billion in 2019–20. The bigger risk is boom giving way to slump, and revenue falling much more than allowed for.

Net debt has been reduced from $13.2 billion in 2011–12 to close to zero. But the elimination of net debt is only temporary, thanks to proceeds from public enterprise privatisations and long-term leases. As these proceeds are reinvested in a huge infrastructure splurge over the next few years, net debt is projected to rise rapidly to over $19 billion by June 2020. The splurge may be warranted, but large, lumpy projects always carry the risk of cost over-runs. In comparison, Victoria’s debt will increase by only $2 billion over the same period to $24 billion.

New South Wales’ spectacular performance in 2015–16 has been a mix of good luck and good management — and is unlikely to be repeated. There are some serious challenges ahead as the property market inevitably cools and as large infrastructure projects are implemented.

However, provided the Berejiklian team keeps a tight rein on operating expenses, the state should be able to manage the risks…and avoid an embarrassing hole in its finances.

Lily Havers is an intern in the Economics Program at the Centre for Independent Studies