NSW budget must be adult in the room on sensible spending

When NSW Treasurer Daniel Mookhey hands down his second state Budget on 24 June, he has the opportunity to position the Minns government as a fiscally prudent state government — especially compared with its spendthrift counterparts in Victoria and Tasmania.

His government has promised some positive moves, including changes to the workers’ compensation scheme that aim to improve its sustainability after years of cost blowouts and operational inefficiencies.

Those reforms signal a welcome return to discipline. But that does not mean NSW is out of the fiscal woods.

The state’s debt levels remain high, with net debt currently around $110 billion and projected to grow to $137 billion by June 2028. Without stronger spending restraint, it will only grow.

That means holding the line on recurrent spending and resisting pressure from vested interests for endless expansions to programs the state cannot afford to fund sustainably.

At the heart of the fiscal challenge lies a larger political and cultural problem: the public’s insatiable demand for public spending, and its simultaneous reluctance to pay for it.

NSW’s infrastructure and social services are straining under the weight of the rising expectations of a growing population. While growth brings long-term benefits, the short-term cost pressures are real and must be absorbed — either through taxes, borrowing, or reductions in other services.

Another burden (looming over all state budgets) is the National Disability Insurance Scheme (NDIS). The federal government is pushing the states to shoulder more of the load through so-called “foundational supports” that are meant to reduce the number of people entering the more costly NDIS system.

Whether the upcoming budget sets aside meaningful funds or structures to manage this shift will be telling.

On the capital works front, the potential for cost blowouts cannot be ignored. Major projects like the Sydney Metro West have already faced scrutiny over delays and spiralling costs.

If the budget reveals further blowouts or hidden liabilities, it will cast doubt on the Minns government’s grip on project management.

Transparency and rigour are essential if public confidence in large-scale infrastructure investment is to be maintained.

One regrettable step backward under this government has been the reversal of the previous Coalition government’s land tax swap for stamp duty.

That reform, though modest and limited to first homebuyers, pointed NSW in the right direction: away from economically-damaging transactional taxes and towards a more stable and efficient tax base. Scrapping it was a short-sighted move that places politics ahead of policy.

The government will no doubt be hoping that rising property prices, encouraged by anticipated interest rate cuts, will lift stamp duty revenue and patch up the budget.

But depending on cyclical gains from volatile taxes like stamp duty is a risky game. A more sustainable strategy would involve serious engagement with broader tax reform — not just at the state level, but nationally.

On that front, NSW has a leadership role to play. For too long, Australia’s tax system has leaned heavily on inefficient state taxes and distorting Commonwealth arrangements.

Any credible national tax reform agenda must deal with the vertical fiscal imbalance between Canberra and the states, and NSW should push for reforms that give it more control over its revenue sources in return for greater accountability.

That includes reviewing the opaque horizontal fiscal equalisation system to ensure all states are treated fairly, and NSW isn’t carrying an unfair share of the load.

Unfortunately, things will get worse before they get better. After 2029-30, the burden of the deal struck by former prime minister Scott Morrison to buy political peace with Western Australia — which locks in WA’s GST share far above the level it would otherwise be — will be borne by the other states, chiefly NSW.

Finally, beyond tax and budget repair, NSW must also contribute to addressing the stagnant national productivity growth.

While many of the policy levers lie with Canberra, states control critical areas such as planning, regulation, and vocational training.

Every state budget should be scrutinised through the lens of productivity enhancement — not just political messaging.

The 2025-26 NSW budget will not be a landmark document, but it does offer a chance to lay the groundwork for longer-term reform.

If Mookhey continues to resist the populist urge to spend his way out of every problem, and instead focuses on sound policy, disciplined spending, and a clear plan for the future, NSW can retain its place as the adult in the room — especially in contrast to its southern neighbour.

However, it’s a long road back to structural surplus, and the real test will be whether this government can stick to the hard choices when political winds inevitably shift.

Sensibility is not enough. Resolve is what will matter.

Gene Tunny is an Adjunct Fellow at the Centre for Independent Studies and the founder of Adept Economics.