Australia’s most populous state on track for surplus
NSW has lowered its growth outlook and dampened stamp duty revenue hopes due to a softer housing market.
But the Labor government still expects to achieve an elusive budget surplus in the financial year after the 2027 state election.
Australia’s most populous state is the state most reliant on transfer income from housing transactions; This makes it vulnerable to rising rates and recent federal tax changes linked to the housing market.
According to the NSW budget released on Tuesday, the state will see a decline of nearly $2 billion to $12.6 billion in 2026/27, with a further $5.3 billion falling over the next four years.
“This reflects a weaker outlook for the property market following the significant change in the cash rate since the 2025/26 half-year review due to stronger than expected inflation,” the report said.
“This dampened sentiment and put downward pressure on property prices and transaction volumes.”
The Reserve Bank of Australia has raised the cash rate to 4.35 per cent three times since February, adding hundreds of dollars a year to mortgage payments across the country.
NSW residents have larger mortgages than borrowers in other regions, so they are more exposed to rate movements, which affects disposable income.
The government sees some light at the end of the tunnel, but not until the second half of calendar 2027, when it believes interest rates will begin to fall.
Meanwhile, the state’s economic growth will slow to one per cent in the new financial year, reflecting the war in the Middle East and its impact on energy prices, as well as the rate impact on household budgets and sentiment.
But Finance Minister Daniel Mookhey remained optimistic, saying NSW was still growing and heading for a two per cent growth rate over the next few years thanks to increased investment in data centers and energy projects.
“In fact, private investment is now the leading source of economic growth in NSW,” he said in his budget speech to the NSW parliament.
“No other state can say the same (and) much of that investment is driven by the transition to renewable energy.”
But NSW still faces a high debt burden; the state’s liabilities reach $193.8 billion in 2026/27, or 20.5 percent of the state’s gross domestic product, rising to $219.4 billion over the next three years.
As a result, the government’s interest bill will rise to $9 billion in the new year as the Treasury warns the government will likely be subject to debt refinancing next year at higher interest rates than it originally borrowed.
Yet NSW remains on track for what it hopes will be a final budget deficit of $2.3 billion in 2026/27, ahead of three surpluses by 2029/30.
Assuming Labor returns to government in March 2027, a first surplus of $1.1 billion is expected to be released in 2027/28.
“We have put the budget in a much stronger position by containing the increase in spending,” Mr Mookhey said.
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